Completed-contract accounting may be rejected where it fails to disclose true yearly profits under the Income-tax Act.

The proviso to Section 13 of the Income-tax Act applies where the assessee's regular method of accounting does not disclose the true profits of the year, or where proper regular accounts have not been maintained. In that situation, the Income-tax Officer may reject the method adopted and compute income on such basis and in such manner as he thinks fit. A completed-contract system that defers profit recognition until final completion does not necessarily reflect yearly profits when substantial work and receipts arise within the accounting year. On the Tribunal's findings that earlier-year accounts were not properly kept and did not reflect true yearly profits, estimated assessment under the proviso was justified.

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Issues: Whether the proviso to Section 13 of the Income-tax Act applied to contract accounts kept open until completion of the contract, so that the Income-tax Officer could reject the assessee's method and compute profits on an estimated basis for the relevant previous year.

Analysis: The accounting scheme under the Act treats each previous year as the unit of assessment, and income, profits and gains must ordinarily be computed according to the method of accounting regularly employed by the assessee. Where that method does not disclose the true profits of the year, or where no regular method has in fact been maintained, the proviso to Section 13 empowers the Income-tax Officer to determine computation on such basis and in such manner as he thinks fit. A completed-contract system that postpones recognition of profit until the entire contract ends does not necessarily reflect the profits accruing in an earlier accounting year, especially where substantial work has been done and receipts have been realised within that year. The Tribunal's findings that no proper accounts were maintained for earlier years and that the accounts produced did not correctly reflect the yearly profits justified application of the proviso.

Conclusion: The proviso to Section 13 was applicable, and the Income-tax Officer was entitled to discard the assessee's method and estimate the profits for the accounting year. The question referred was answered in the affirmative, against the assessee and in favour of the Revenue.

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