The Tax Publishers2019 TaxPub(DT) 7614 (Mum-Trib)

INCOME TAX ACT, 1961

Section 143(3)

Since expense recognition is simultaneous with a decrease in an asset or an increase in a liability, therefore, reversal of profits declared in earlier years on account of estimated loss expected in WIP for the relevant assessment year by assessee upset the applecart of mercantile system of accounting, the matching principles.

Assessment - Additions to income - Reversal of profits declared in earlier years on account of estimated loss in WIP -

Issue was as regards addition made by AO for reversal of profits declared in earlier years on account of estimated loss expected. Revenue challenged order of CIT(A) deleting addition by holding that an enterprise may choose to apply certain guide note from an earlier date provided it applies that guidance note to all transactions which commenced or were entered into on or after such earlier date. Case of revenue was that no documentary evidence was placed before AO during scrutiny proceedings, which suggested that same principle was applied to transactions, which commenced or were entered into on or after such earlier date. Held: The matching principle requires recording expenses in the same accounting period in which revenues were earned as a result of expenses. Expense recognition, similar to revenue recognition, has a balance sheet effect. In this view, expense recognition is simultaneous with a decrease in an asset or an increase in a liability. In such a scenario, reversal of profits declared in earlier years on account of estimated loss expected in WIP for the relevant assessment year by assessee upset the applecart of mercantile system of accounting, the matching principles. Therefore, no reliance can be placed on workings of total estimated loss arrived at by assessee, which were nothing but bald statements. As the order passed by CIT(A) was not based on proper appreciation of facts and law, same was set aside and order of AO was restored.

REFERRED : CIT v. Virtual Soft Systems Ltd. (2018) 404 ITR 409 (SC) : 2018 TaxPub(DT) 1996 (SC); Morvi Industries Ltd. v. CIT (1971) 82 ITR 835 (SC) : 1971 TaxPub(DT) 0397 (SC); CIT v. A. Gajapathy Naidu (1964) 53 ITR 114 (SC) : 1964 TaxPub(DT) 0323 (SC); TNK Govindarajulu Chetty v. CIT (1973) 87 ITR 22 (Mad) : 1973 TaxPub(DT) 0166 (Mad-HC); CIT v. Associated Commercial Corporation (1963) 48 ITR 1 (Bom) : 1963 TaxPub(DT) 0183 (Bom-HC); ACIT v. M/s. ITD Cementation India Ltd. (I.T.A. No. 3669/Mum/2011, dt. 17-5-2013) : 2014 TaxPub(DT) 0437 (Mum-Trib); Dredging International NV v. Asstt. DIT (2011) 48 SOT 430 (Mumbai) : 2012 TaxPub(DT) 0314 (Mum-Trib); CIT v. TNK Govindarajulu Chetty (1987) 165 ITR 231 (SC) : 1987 TaxPub(DT) 1260 (SC)

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