2008 (5) TMI 6 - SC - Income Tax

Appeal dismissed, finding revenue department failed to justify changing assessee's accounting method under Section 145 requirements

SC dismissed the civil appeal, upholding the HC and Tribunal's conclusion that the Department failed to justify changing the assessee's method of ... Income accrued on registration of the sale deed in favour of the third party Or accrued at the time of execution of the tripartite agreement - Method of accounting u/s 145 - rule of consistency - HELD THAT:- Under the Income Tax Act, under Section 145, it is always open to the Department to insist on the change in the method of accounting followed by the assessee over the years (which is the case herein) if the impugned method of accounting results in under estimation of profits/net income. In this case, no allegation of that nature was ever made by the Department. In fact, the chart annexed at page 29 (Assessment Order) also does not indicate whether the impugned method of accounting followed by the assessee results in under estimation of the profits/net income. Therefore, though we do not agree with the reasons given by the High Court in its impugned judgment, since the Department has not gone into the above vital aspect regarding method of accounting under Section 145 of the Income Tax Act, we see no reason to interfere with the impugned judgment. We may state that the High Court has proceeded on the basis of 'rule of consistency'. We do not agree with the view taken by the High Court on that count. In cases where the Department wants to tax an assessee on the ground of the liability arising in a particular year, it should always ascertain the method of accounting followed by the assessee in the past and whether change in method of accounting was warranted on the ground that profit is being under estimated under the impugned method of accounting. If the AO comes to the conclusion that there is under estimation of profits, he must give facts and figures in that regard and demonstrate to the Court that the impugned method of accounting adopted by the assessee results in under estimation of profits and is therefore rejected. Otherwise, the presumption would be that the entire exercise is Revenue neutral. In this case, that exercise has never been undertaken. The AO was required to demonstrate both the methods, one adopted by the assessee and the other by the Department. In the circumstances, we see no reason to interfere with the conclusion given by the High Court and the Tribunal. Civil Appeal is, accordingly, dismissed. Issues:- Interpretation of income accrual on registration of sale deed vs. execution of tripartite agreement- Method of accounting under Section 145 of the Income Tax Act- Application of 'rule of consistency' in tax assessmentsInterpretation of Income Accrual:The case revolved around determining whether income accrued to the assessee on the registration of the sale deed or at the time of execution of the tripartite agreement. The Department argued that income accrued when the tripartite agreement was executed, while the assessee contended that income did not accrue until the date of conveyance. The AO's assessment included calculations based on the sale price, cost per Sq.Mtr., and profits from the sale of individual plots. The Supreme Court noted that the transaction's genuineness was not challenged, focusing on the year in which tax liability arose. Although the Court disagreed with the High Court's reasoning, it found no reason to interfere due to the Department's failure to address the method of accounting under Section 145 of the Income Tax Act.Method of Accounting under Section 145:The Court emphasized that under Section 145 of the Income Tax Act, the Department could request a change in the assessee's accounting method if it led to an underestimation of profits. However, in this case, the Department did not allege underestimation of profits or provide evidence to support a change in the accounting method. The Court highlighted the importance of the AO demonstrating both the assessee's method and the Department's proposed method to justify any adjustments. Since this exercise was not undertaken, the Court upheld the High Court's decision and dismissed the Civil Appeal.Application of 'Rule of Consistency':Regarding the 'rule of consistency,' the Court disagreed with the High Court's reliance on it. The Court stressed that when taxing an assessee based on liability arising in a specific year, the Department must consider the assessee's past accounting practices. If a change in the accounting method is warranted due to underestimation of profits, the AO must provide factual evidence to support this claim. As the Department failed to demonstrate underestimation of profits or compare the two accounting methods, the Court upheld the High Court's decision based on the lack of evidence supporting a change in accounting method.In conclusion, the Supreme Court dismissed the Civil Appeal, maintaining the High Court's judgment due to the Department's failure to address the method of accounting and demonstrate underestimation of profits. The Court highlighted the importance of factual evidence and comparison of accounting methods when challenging an assessee's profit estimation, emphasizing the need for a detailed assessment before altering the accounting method.