One can account for income from choreography on cash basis and income from production on accrual basis

Facts

a)    Assessee was a professional dance director for cinematographic films. He was also producing films under a proprietorship concern.

b)    Assessee followed cash system of accounting in respect of his professional receipts whereas he was following mercantile system of accounting for computing income from production of films.

c)    Assessing Officer (AO) took a view that assessee was following hybrid system of accounting which was not permissible in view of amendment made to section 145 of the Income-tax Act by the Finance Act, 1995.

d)    The CIT(A) upheld the order of the AO. Aggrieved by the order of the CIT(A), the assessee filed the instant appeal before the tribunal.

Recognition of revenue by developer only on registration of sale deeds wasn't a valid method under sec. 145

Section 145 makes it mandatory on the part of the assessee to follow either cash or mercantile system of accounting.Recognizing the revenue by developer (i.e., assessee) only when the sale deedswould be registered in favour of the buyerscould not be regarded to be either cash or mercantile system of accounting. This method was neither project completion method nor percentage of completion method, thus, this was not a recognized method to recognize revenue under AS-7 too.

Facts:

a)Assessee was engaged in the business of real estate activities, such as construction of residential-cum-commercial project, developing of plots, etc. It had completed development work of plots on 31.3.2009, but it did not showthe sale proceeds in the profit and loss account even after receiving 70-80% of the sale proceeds.

b)The Assessing Officer (‘AO’) was of the view that development had already been completed, therefore, he re-computed the profit relating to these projects.

c)Assessee contended that he was following project completion method as per AS-7 and it was showing the sales when the registration of the sale deed would be carried out.

d)On appeal,theCIT(A) deleted the additions on the ground that the AO had changed the profit recognition method from project completion to percentage completion. The aggrieved revenue filed the instant appeal before Tribunal.

The Tribunal held in favour of revenue as under:

1)The CIT(A) had agreed with assessee’s contention that he was following the project completion method but assesseewas not recognizing the revenue on the basis of the project completion method.

2)Registration of the sale deed represents only the transfer of the title in favour of the buyer once development work on the plots had been completed.

3)Assessee was recognizing the revenue only when the sale deeds would be registered in favour of the buyers. Under AS-7 this was not a recognized method of recognizing the revenue. This method of revenue recognition followed by assessee was neither project completion method nor percentage of completion method.

4)Section 145 makes it mandatory on the part of the Assessee to follow either cash or mercantile system of accounting regularly. This method of recognizing the revenue when the sale deedswould be registered in favour of the buyerscould not be regarded as either cash or mercantile system of accounting.

5)Thus, the method adopted by the assessee was notin compliancewith the ingredients as laid down underSection 145.Consequently,the order of AO was to berestored–ACIT. v.Alcon Developers[2015] 54 taxmann.com 54 (Panaji - Trib.)

Higher salary bill couldn't be disallowed on pretext of odd trend if it was genuinely incurred for business

Genuine hike in salary expense incurred for the purpose of business couldn’t be disallowed merely on pretext of odd trend

Facts

a)   The assessee filed its return of income claiming certain expenditure in respect of payment of salaries.

b)   The Assessing Officer issued show-cause notice with reference to inflation in salary expenditure, which the assessee had justified by furnishing relevant details.

c)   Without any further notice, AO disallowed a part of salary expense by applying the ratio of salary expense to domestic turnover in earlier year.

d)   The CIT (A) confirmed disallowance made by AO to a substantial extent. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)   The backward calculation made by AO to disallow salary expenditure couldn’t be accepted in the absence of any allegation against assessee about non-maintenance of books, non-furnishing of vouchers, non-compliance of the notices, as section145 could be applied only when conditions specified therein were satisfied.

2)   Expenditure under section 37(1) could be disallowed only when Assessing Officer could show that expenditure was not incurred wholly and exclusively for the purpose of business. There was no such finding in this order as assessee had justified the expenditure by explaining the change of business profile and also by furnishing necessary statements and vouchers before the authorities.

3)   Without examining these relevant documents, Assessing Officer and Commissioner (Appeals) had erred in resorting to mathematical jugglery so as to deny the expenditure claimed by the assessee. There was no basis for disallowance of the so-called inflated expenditure. Commissioner (Appeals) also did not apply his mind in restricting the amount of disallowance on an ad hoc basis. At least, he should have examined the contentions made by the assessee and proved that they were not correct.

4)   This sort of disallowance of expenditure claimed by the assessee could not be accepted or justified. There should have been no hesitation in cancelling the so-called disallowance of expenditure resorted by the Assessing Officer- IIC Systems (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle -2(1), Hyderabad [2014] 44 taxmann.com 169 (Hyderabad - Trib.)