DCIT vs. Stup Consultants Pvt Ltd (ITAT Mumbai)

Despite s. 209(3) of the Co’s Act, company can follow cash system for tax purposes

The assessee, a company, followed, in accordance with s. 209(3) of the Companies Act, 1956, the mercantile system of accounting according to which the profits were Rs. 7.48 crores. However, for income-tax purposes, it followed the cash system of accounting according to which the profits were Rs. 4.76 crores and offered that sum to tax. The AO rejected the claim on the ground that u/s 209(3) of the Co’s Act, a company is obliged to follow the mercantile system and that is its’ “regular method” for purposes of s. 145. However, the CIT (A) upheld the assessee’s claim. On appeal by the department, HELD upholding the assessee’s plea:

The assessee has regularly employed the cash system of accounting in recording its day today business transactions. It is not a case where the assessee has been maintaining its accounts of day to day business under the mercantile system of accounting and thereafter prepares accounts in accordance with cash system of accounting for income tax purposes. Section 209(3) of the Companies Act, 1956 does not override s. 145 of the Income-tax Act. There was also no valid basis for the AO’s action in rejecting the books of account and system of accounting followed by the assessee. Further, since the department has accepted the assessee’s system for the past several years, the principles of consistency apply and there should be finality and certainty in litigation in the absence of fresh facts to show that the assessee’s system of accounting is arbitrary or perverse (Amarpali Mercantile 45 ITD 386 (Del) distinguished, Chennai Finance 81 ITD 7 (Hyd) followed).