Deepak R. Shah, Accountant Member - (1.) THESE three appeals by the assessee are arising out of the orders of CIT(A)-I, Bangalore dated 1-1-2002 against the assessees order under Section 143(3) of the Income-tax Act (The Act) as well as penalty order under Section 271(1)(c) of the Act and Section 271 B of the Act pertaining to assessment year 1998-99. ITA No. 536 (Bang.)/02
(2.) We shall first take up the assessee's appeal in quantum proceedings under Section 143(3) of the Act. The only issue in this appeal relates to taxability of a sum of Rs. 27,89,216 which as per the assessee should be taxed in the year 1997-98, whereas the Assessing Officer has treated the same as taxable for the assessment year 1998-99. He facts of tHe case are as under : THe assessee an advocate filed his return of income for tHe assessment year 1998-99 on 26-10-1998. THe return was processed under Section 143(1)(a) on 31-8-1999. A notice under Section 143(2) was issued and in response to this assessee's representative Sri Srinath, CA appeared from time to time and furnisHed details called for. He was Heard. Written and oral submissions made by tHe assessee and his representations were carefully considered. One of tHe main issues which came up for consideration during this proceedings related to a receipt of Rs. 27,89,216 from abroad in foreign exchange for professional services rendered by tHe assessee outside India to M/s. Ham, Dredging Rivium, Rotterdam, NetHerlands during tHe previous year 1996-97. THe bills in respect of tHe services rendered were slated to be raised on 11-2-1997 relevant for assessment year 1997-98. However, tHe assessee received tHe fees in respect of this bill in two instalments as under:- JUDGEMENT_7504_TLIT0_20020.htm THe receipts are received during tHe previous year 1997-98 relevant to assessment year 1998-99. THe short question for consideration is in which year this income is taxable, taking into consideration tHe method of accounting followed by tHe assessee. For tHe assessment year 1997-98, tHe assessee filed his return of income on 29-10-1997 admitting a total income of Rs. 3,96,160. In this return He did not admit tHe above professional income of Rs. 27.89 Lakhs. A revised return was filed on 16-12-1997 admitting an income of Rs. 3,86,160. In this return also He did not admit tHe above income. Yet anotHer revised return was filed on 18-3-1997 admitting an income of Rs. 17,86,160. In this second revised return He admitted tHe income of Rs. 28 Lakhs and claimed a deduction of Rs. 14 Lakhs being 50 per cent of tHe gross receipts under Section 80-O. THe tax on tHe revised total income was also paid. This return was processed under Section 143(1)(a). THe case was not taken up for scrutiny. Section 80-O had undergone an amendment by Finance Act, 1997 with effect from tHe assessment year 1998-99. THe effect of this amendment was quite drastic in that tHe deduction was no longer available in respect of "income by way of royalty, commission, fees or any similar payment received by tHe assessee from Government of a foreign State or a foreign enterprises...in consideration of technical or professional services rendered outside India to such Government or foreign enterprise." From 1 -4-1998, this deduction is confined to income received in consideration for tHe use outside India of any patent, invention, design or registered trade mark. 3.2 THe Assessing Officer came to a conclusion that tHe second revised return was filed by tHe assessee on 18-3-1998 which was tHe result of an afterthought with tHe sole subject of claiming tHe deduction under Section 80-O which tHe assessee would not have been eligible for if tHe income was offered in tHe assessment year 1998-99 in tHe light of tHe amendment Herein above mentioned. THe assessee had not filed tHe report under Section 44AB for tHe assessment years 1997-98 and 1998-99. THese reports were called for and tHey were filed on 30-10-2000. In both tHese reports tHe assessee's CA Sri Srinath stated in Col. 11 (a) in Form 3CD relating to "Method of accounting employed by tHe assessee" as cash system. If tHe assessee was following cash system of accounting as certified by tHe Chartered Accountant, this income ought to have been offered for tHe assessment year 1998-99 on receipt basis. In tHe course of discussion assessee's representative was asked as to why this income should not be treated as tHe income of tHe assessment year 1998-99 since tHe income was received only during tHe previous year relevant to assessment, year 1998-99 and tHe assessee was following cash system of accounting. THe assessee in his letter dated 19-12-2000 stated that He had changed tHe method of accounting from tHe assessment year 1997-98 to mercantile system instead of cash system followed earlier. He also filed revised reports under Section 44AB from his auditor wHerein against column 11 (a) of Form 3CD tHe auditor stated that tHe assessee was following mercantile system of accounting during tHe previous year relevant to assessment years 1997-98 and 1998-99. 3.3 THe Assessing Officer asked tHe assessee to produce tHe books of account which tHe assessee's representative did on 29-12-2000. In tHe course of Hearing, it was pointed out by tHe Assessing Officer to tHe representative that as on 31-3-1997, tHe amount of Rs. 28 Lakhs being tHe fees due from abroad should have appeared as "receivable" if tHe assessee was following mercantile system of accounting. As per tHe Balance SHeet filed, this is not shown as a receivable which clearly shows tHe fact that tHe claim made by tHe assessee that He was following mercantile system of accounting is not tenable. THe books produced were for tHe period 1-4-1997 to 31-3-1998 only. In tHese books, as on 1-4-1997, a credit entry was made showing a receivable of Rs. 28 Lakhs which was closed later on during tHe year itself, by debiting tHe account. Admittedly, this receivable is not a carried forward item. THe Balance SHeet as on 31-3-1997 filed by tHe assessee alongwith tHe audit report does not show this amount, as a "receivable". THe Assessing Officer also reproduced in this connection tHe order sHeet entry made on 29-12-2000 which is accepted by tHe assessee's representative as below : Shri Srinath, CA appears. Please see letter filed. It has been pointed out to him that as on 31-3-1997 tHe amount of Rs. 28 Lakhs should have appeared as a receivable had tHe assessee been following mercantile system of accounting from 1-4-1996 to 31-3-1997 and subsequently. Admittedly, this does not appear as a receivable as on 31-3-1997. THe books produced for tHe accounting period 1-4-1997 to 31-3-1998 shows a receivable of Rs. 28 Lakhs as on 1-4-1997 in tHe day book and ledger. Admittedly this is not a brought forward entry. 3.4 THe Assessing Officer tHereafter concluded that tHe assessee's claim of having changed tHe method of accounting is false and Hence tHe assessee's claim that He changed his method of accounting from cash to mercantile is incorrect and against facts. THe second revised return filed for tHe assessment year 1997-98 was an afterthought with tHe only objective of availing tHe deduction of Rs. 14 lakhs under Section 80-O. 3.5 In appeal before tHe CIT(A), it was contended that tHe assessee has raised a bill dated 11-2-1997 for tHe work to be carried out at Rotterdam from 15-2-1997 to 19-2-1997. It was argued that since tHe revised return was filed due to change in method of accounting, much earlier to tHe filing of regular return for tHe assessment year 1998-99. Such change in method should be considered bona fide and Hence tHe income which has been taxed for tHe assessment year 1997-98 should not be taxed again for tHe assessment year 1998-99. THe CIT(A), confirmed tHe action of tHe Assessing Officer holding that tHe change was only an afterthought to claim deduction under Section 80-O as tHe same relief was not available in tHe subsequent assessment year i.e., 1998-99. THe CIT(A) furtHer Held that even as per in mercantile system of accounting tHe amount of Rs. 28.00 Lakhs was not taxable in tHe assessment year 1997-98, since tHe income has never accrued to tHe assessee. THe bill dated 11-2-1997 is at tHe best an advance and not a final bill. WHen tHe assessee received short payment from tHe said sum of Rs. 28.00 Lakhs a reminder was sent to tHe client of tHe assessee asking for tHe payment as per tHe bills sent earlier. THe CIT(A), asked for tHe copy of such bills for short payment which was not furnisHed by tHe assessee and Hence an adverse inference was drawn. He tHerefore, concluded that tHe income, even on mercantile system of accounting is taxable in assessment year 1998-99 only. THe assessee is tHerefore, in appeal before us.
(3.) 1 The learned counsel for the assessee Mr. Khincha, argued that the original return for the assessment year 1997-98 was filed on 29-10-1997. Thereafter, a revised return was filed for the assessment year 1997-98 on 18-3-1998, which is within the time limit prescribed under Section 139(5). The said revised return was filed due to change in method of accounting in respect of professional services rendered by the assessee in his individual capacity. Since the assessee changed his method of accounting from cash system to mercantile system, a change was necessitated in recognising the income in respect of professional services rendered. The return for the assessment year 1998-99 was filed on 26-10-1998 i.e., under Section 139(1). In the said return the income which accrued in earlier year was not declared. However, the income which accrued during the relevant assessment year amounting to Rs. 19.00 Lakhs was also offered. Subsequently also on the basis of accrual of income, the income of Rs. 15.00 Lakhs and 4.00 Lakhs were offered for taxation in the assessment years 1999-2000 and 2000-2001 respectively. He went on to argue that since the change in method is bona fide which has been consistently followed thereafter such change should be accepted and the income needs to be taxed only in the assessment year 1997-98. He also submitted that when the same income was offered for taxation in the assessment year 1997-98, the Assessing Officer has taxed the same income in the assessment year 1997-98 also. Even the request for rectification has been turned down. He submitted that the assessee is legally entitled to change the method of accounting regularly employed by him. When the assessee bona fide changed his method of accounting and satisfied the department that he intends to adopt the changed method of accounting thereafter, that satisfies the requirement of Section 145. Neither principle nor authority bars an assessee from substituting one method of account for another at his choice. For this proposition, he relied upon the decision of the Hon'ble Supreme Court in the case of CIT v. Mahendra Mills [2000] 243 ITR 56' for the proposition that just as the assessee has right to claim or not to claim depreciation benefit. Similarly, the assessee has the right to choose a particular method of accounting. 4.2 The other limb of his argument was that there is no change in the method at all and all the while the assessee was following the mercantile system of accounting only. Till the assessment year 1997-98, the assessee was receiving remuneration from the partnership firm which was offered for taxation on accrual basis only. His income from other sources included certain dividend which is taxable as per the relevant provision to Section 55. The remuneration from the firm is first credited to his capital account and the same is offered for taxation in the year of credit. This action of assessee shows that he is following only mercantile system of account in respect of his professional income. 4.3 One more argument was placed before us for the proposition that Section 80-O itself pre-supposes mercantile system of accounting. It was submitted that the income accrued needs to be brought into India in convertible foreign exchange within six months from the end of relevant previous year. Therefore, if the income was brought within the stipulated period, the benefit under Section 80-O is still available irrespective of method of accounting employed by the assessee. As regards the mistake in mentioning the cash system of accounting in audit report, it was submitted that the same is inadvertent mistake on the part of the auditor concerned. What is to be seen is the correct fact and not what is inadvertently mentioned by the auditor. He also drew our attention to the letter of auditor addressed to the Assessing Officer stating that there was an inadvertent mistake in mentioning the method of accounting as cash system for the assessment year 1997-98 and subsequent years. To sum up the argument, it was mentioned that the professional income of Rs. 28.00 Lakhs which accrued to the assessee as per his bill dated 11-2-1997 should be taxed only in the assessment year 1997-98 and not 1998-99.;