Revenue authorities bound by assessee's chosen accounting method; High Court affirms consistency principle

The High Court of Bombay upheld the Tribunal's decision, dismissing the appeal and emphasizing that revenue authorities cannot impose a different accounting method on an assessee who has consistently followed a particular method. The judgment reaffirms that the choice of accounting method is within the assessee's discretion, and revenue authorities must demonstrate distortion of profits to justify changing the method.

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Issues:
1. Jurisdiction of CIT under Section 263 of the Income Tax Act, 1961
2. Method of accounting - Project Completion Method vs. Percentage Completion Method

Analysis:

Issue 1: Jurisdiction of CIT under Section 263 of the Income Tax Act, 1961
The appeal challenges the order of the Income Tax Appellate Tribunal (Tribunal) dated 6 February 2013, concerning the Assessment Year 2007-08. The Commissioner of Income Tax (CIT) exercised revision powers under Section 263, setting aside the Assessing Officer's order and directing a recomputation of income for the respondent-assessee. The CIT specifically targeted the adoption of Percentage Completion Method for the Link Corner Project, while not disturbing the Project Completion Method used for the Gym View Project. The Tribunal, in its impugned order, emphasized that the method of accounting chosen by the assessee cannot be arbitrarily replaced by the revenue authorities. It held that the issue of the appropriate method of accounting is debatable and falls within the domain of the assessee's choice. Therefore, the Tribunal set aside the CIT's order, asserting that the CIT lacked jurisdiction to dictate a specific accounting method under Section 263.

Issue 2: Method of accounting - Project Completion Method vs. Percentage Completion Method
The respondent-assessee, engaged in construction projects, consistently followed the Project Completion Method for both the Link Corner Project and Gym View Project. The Assessing Officer completed the assessment for A.Y. 2007-08 under Section 143(3) of the Act, accepting the Project Completion Method. However, the CIT, through revision powers, sought to impose the Percentage Completion Method for the Link Corner Project only. The Tribunal upheld the respondent's consistent use of the Project Completion Method, highlighting that the revenue's acceptance of this method over the years signifies its appropriateness. The Tribunal emphasized that the choice of accounting method lies with the assessee, and the revenue cannot arbitrarily substitute a preferred method. Citing legal precedent, the Tribunal concluded that the CIT's attempt to change the accounting method lacked merit and fell outside the scope of Section 263. The Tribunal's decision to dismiss the appeal was based on the settled principle that issues of accounting method preference are not suitable for revisional jurisdiction under the Income Tax Act.

In conclusion, the High Court of Bombay upheld the Tribunal's decision, dismissing the appeal and emphasizing that the revenue authorities cannot impose a different accounting method on an assessee who has consistently followed a particular method. The judgment reaffirms the principle that the choice of accounting method is within the assessee's discretion, and revenue authorities must demonstrate distortion of profits to justify changing the method.

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