AI Drafter 
TaxTMI 
TaxTMI 
2017 (11) TMI 1423
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....acts and circumstances of the case the ITAT was justified in law in rejecting the application of percentage completion method adopted by the Assessing Officer, when this rejection means acceptance of loss returns of the assessee engaged in construction and sale of residential/commercial project in contravention of accounting standard 7 and 9 issued by ICAI. 3. Whether in the facts and circumstances of the case the ITAT was justified in law in ignoring the fact that the two brothers who are partners either themselves or through their families were actively engaged jointly in the business of the assessee firm and therefore ignoring the acceptance of 'on money' and specific seized documents. 4. Whether in the facts and circumstances of the case the ITAT was justified in law in confirming the order of CIT(A) allowing the claim of assessee u/s. 80IB(10) despite of the facts that the assessee was not having certificate of approval in its name. 5. Whether in the facts and circumstances of the case the ITAT was justified in law in confirming the order of CIT(A) in relaxing the conditions u/s. 80IB(10) despite of the fact that the CIT(A) has no power to relax stat....
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....nclusion that merely because qualitative record was not maintained and on this premise, the books of account could not have been rejected. It is also an admitted fact that mustard seed is only single commodity used by the assessee for manufacturing of mustard oil and the Tribunal noticed that the assessee filed yield percentage for two months before the AO in which no discrepancy was found by the AO. The Tribunal has found that the production of mustard oil is a continuous process and the seeds are put into the milling for continuous oil production. The Tribunal has further found that 8096 of its mustard oil is by way of trading sale and neither discrepancies were noticed by the AO in either purchase or sale nor any sale or purchase, found unrecorded. The Tribunal also found that the books of account had been maintained in the same manner as in the past and the assessee cannot be expected to stop the plant as and when the new lot of mustard seed is subjected to crushing as manufacturing of mustard oil is a continuous process. The Tribunal has also found as a finding of fact that except quality, quantity wise stock details has been maintained but no other defect was noticed by the A....
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....aytick Intermediates (P.) Ltd. Vs. Assistant Commissioner of Income Tax, (2016) 73 Taxmann.com 195 (Gujarat) wherein in para 8 to 10 it is observed as under: "8. It will not be out of place to mention here that the assessee is a manufacturing unit and it has to pay the excise duty. It is the specific contention of the assessee that the books of accounts maintained by it are tallying and the excise duty is paid on that basis. The stock register is not tallying with the other books of account only because some of the items were not deleted from the stock register. Taking into account the decision of this Court, not maintaining the day-today stock register is not a ground to reject the books of account. In Commissioner of Income-tax-IV v. Symphony Comfort Systems Ltd. (supra), it is observed as under:-- "Question No. 1 pertains to the addition made by the Assessing Officer on the basis of low gross profit. The Commissioner (Appeals) as well as the Tribunal, however, deleted such addition after examining the material on record. In particular, the Tribunal while upholding the order of the Commissioner (Appeals) in this respect, made following observations: "4.....
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....as to which of the expenses incurred by the assessee was not connected with the business activity of the assessee. The AO has not pointed out which of the expenditure were not admissible in law. In the absence of any pointing out inadmissible expenses, the AO cannot make addition merely by comparing the expenditure with the preceding year's expenditure. The learned CIT(A) on proper appreciation of the facts and material on record rightly deleted the addition. This ground of appeal of the revenue is accordingly dismissed." The entire issue is based on appreciation of evidence. No question of law arises. When the Commissioner (Appeals) as well as the Tribunal concurrently held that on the basis of the evidence, addition as made by the Assessing Officer was not justified, we are not inclined to interfere." 9. In Commissioner of Income-tax-XII v. Smt. Poonam Rani (supra), it is observed as under:-- "10. During the course of arguments before us, it was submitted by the learned counsel for the appellant that the assessee was not maintaining the Daily Stock Register. We, however, find no such finding in the assessment order. On the other hand, we note that t....
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....against the revenue. Accordingly, Tax Appeal No. 1196 of 2007 is allowed." 9. Therefore, he has contended that the rejection of books of accounts for non maintenance of stock register is not a ground under Section 145(3) of the Act. 10. He has relied upon following decisions: Manjusha Estates Pvt. Ltd. vs. The Income Tax Officer Tax Appeal No.828/2007 [Gujrat High Court], decided on 12.08.2016: 4.1 Learned Counsel for the department has taken this Court to Section 145(3) of the IT Act which relates to rejection of the books of accounts and contended that the CIT(A) as well as the Tribunal has rightly come to the conclusion after considering the material placed before them. After making the aforesaid submissions he has contended that the appeal may be dismissed. 5. Having heard the learned Counsel for the parties and having gone through the order passed by the authorities below, as well as, considering the fact that the assessee has followed the method which is consistent considering the decision in case of Shivalik Buildwell (P.) Ltd. (supra) and Umang Hiralal Thakkar (supra) and therefore this Court is of the opinion that the view taken by the t....
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....termination that notified accounting standards have not been regularly followed by the Assessee. As pointed out by the CIT (A) in the order dated 2nd July, 2010, the AS of the ICAI did not have any statutory recognition under the Act although it was binding under the Companies Act, 1956. The method of accounting followed by the Assessee in the present case i.e. project completion method was certainly one of the recognized methods and has been consistently followed by it. Lunar Electricals vs. Assistant Commissioner of Income Tax [2012] 2010 Taxman 69 (Delhi): The next aspect relates to rejection of books of accounts because the assessee was following completed contract method. We do not think completed contract method is contrary and cannot be adopted and applied when an assessee follows mercantile system of accounting. This issue was examined by the Madras High Court in Commissioner of Income Tax versus SAS Hotels and Enterprises Limited, MANU/TN/3098/2010 : (2011) 334 ITR 194 (Mad.) and it has been held that the said method confirms and can be adopted by an assessee. In fact, we find that there is a contradiction in the orders of both the CIT(Appeals) and the tr....
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....pread over a period of time, sometimes exceeding 12 months. We have examined computation of tax effect in these cases and we find that the entire exercise is revenue neutral, particularly when the scheme is read as one integrated scheme spread over a period of time. 20. As stated above, we are concerned with assessment years 1991-1992 to 1997-1998. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessees, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from completed contract method to deferred revenue expenditure, is revenue neutral. Therefore, we do not wish to interfere with the imp....
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.... convenience to book income was baseless. A further finding recorded by the CIT (A) is that there was no manipulation in the books of accounts. So far as the method of accounting is concerned, the CIT (A) held that the project completion method is a wellrecognized and accepted method of accounting and was the only method suitable for any developer who has to deliver a completed product to the buyer. Ultimately the CIT (A) held as under: Thus on overall perusal of the assessment order it is seen that neither any defect has been pointed out by the assessing officer in the method of accounting followed by the appellant nor any finding has been given that true and fair profits cannot be deduced following the said method of accounting. No evidence was found during the course of search to show that the books of account are not properly maintained by the appellant. The main thrust of the assessing officer in making the addition is that the assessee is deferring the payment of taxes. But this allegation of the assessing officer cannot be accepted as the assessee is consistently following a method of accounting which is well recognized in development business and has been accepted ....
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....ries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under this method is determined by reference to the stage of completion of the contract. The stage of completion can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract. The above indicates the difference between the completed contract method and the percentage of completion method." (underlining ours) 9. After the above judgments of the Supreme Court it cannot be said that the project completion method followed by the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the Income Tax Act. Accounting Standards 7 (AS7) issued by the Institute of Chartered Accountants of India also recognize the position that in the case of construction contracts, the assessee can follow either the project completion method or the percentage completion method. In view of the judgments of the Supreme Court (Supra), the finding of the CIT (A), upheld by the Tribunal, does not give rise to any substantial question of law.....
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....dly, the particular work control were not completed and it comes under the category of work in progress. There is also no dispute that the ultimate liability of the Assessee as regards tax will be dependant upon in total (fixed) amount received by the Assessee against the particular work control. 12. We, therefore, hold that the Income tax authority has no option/ jurisdiction to muddle in the matter either by directing the assessee to maintain the account in a particular manner or adopt a different method for valuing the work in progress. We reiterate the decision in Doom Dooma India Ltd. (supra) and hold that an assessee has as the option/liberty to adopt any recognized method of account for his business and the income shall be computed in accordance with such regularly maintained accounting system. CIT vs. V.S. Dempo & CO. Pvt. Ltd. [1996] 131 CTR 203 (Mum): 4. We have carefully considered the rival submissions. We find that the controversy in this case is basically a finding of fact which has to be decided by the authorities concerned on the facts and circumstances of each case. In the instant case, the Tribunal has come to a conclusion that the metho....
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....l be no overlapping in the materials used for applying both processes. The initial step of rejecting the accounts will be justified when the account books are found for valid reasons unreliable, incorrect or incomplete. The assessee at this stage has to be given reasonable opportunity for offering explanations regarding the defects in the accounts and on his failure to satisfactorily explain the defects, the department will be justified in rejecting the accounts. The subsequent step of assessment to the best of judgment, as has been uniformly recognised by the courts, involves some guess-work and necessarily has to be done on the materials available in each case. The Privy Council had occasion to consider the exact import of the expression "to the best of his judgment" occurring in Section 23(4) of the Indian Income Tax Act, 1922 (see Commissioner of Income Tax v. Laxminarain Badridas [1937] 5 I.T.R. 170, 180 (P.C.)). The Privy Council made the following observation in that judgment: "He (the assessing authority) must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair esti....
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....lue is lower, it was to be shown separately in brackets. Now, the question would be when such a Bank is submitting its statutory return of income, whether it can disclose in its return its real profit and/or loss on the basis of market value of securities and shares? It has been pointed out that the balance sheet or the audited accounts maintained on the basis of the investment in shares at cost would not disclose the real profit or loss of the Bankin view of the fact that depreciation in the value of the shares or fall in the market value of the shares and securities is not provided in the audited accounts. Learned Counsel for the appellant submitted that even though in the balance sheet maintained by the assessee, market price of the shares and securities is not mentioned, yet for determining the real income of the assessee Bank, the said price is required to be taken into account. And, for that purpose since years, the assessee Bank was submitting income tax returns after taking into account the market price of such shares and securities which has been accepted by the Department without any objection. He also submitted that not making of proper entries in the balance sheet could....
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.... less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure.... From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question." (extracted in paragraph 281 of the Report of the Committee on the Taxation of Trading Profits presented to British Parliament in April, 1951). While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever....
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....ssing Officer must necessarily decide is whether or not the method of accounting followed by the assessee discloses true income and observed thus: It is a well recognised principle of commercial accounting to enter in the profit and loss account the value of the stock- in-trade at the beginning and at the end of the accounting year at cost or market price, whichever is the lower. 22. The Court further considered Section 145 of the Act and observed that what is to be determined by the officer in exercise of the power is a question of fact, that is, whether or not income chargeable under the Act can be properly deduced from the books of accounts and the question must be decided with reference to the relevant material and in accordance with the correct principles. The Court also observed: Where the market value has fallen before the date of valuation and, on that date, the market value of the article is less than its actual cost, the assessee is entitled to value the articles at market value and thus anticipate the loss which he will probably incur at the time of the sale of the goods. Valuation of the stock-in-trade at cost or market value, whichever is the....
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....nce sheet required to be maintained as per the statutory form. But as the assessee was maintaining its accounts on mercantile system, he was entitled to show his real income by taking into account market value of such investments in arriving at real taxable income. On that basis, therefore, Assessing Officer has taxed the assessee. 24. From the decisions discussed above, it can be held: (1) That for valuing the closing stock, it is open to the assessee to value it at the cost or market value, whichever is lower; (2) In the balance sheet, if the securities and shares are valued at cost but from that no firm conclusion can be drawn. A taxpayer is free to employ for the purpose of his trade, his own method of keeping accounts, and for that purpose, to value stock-in-trade either at cost or market price; (3) A method of accounting adopted by the tax payer consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation; (4) The concept of real income is certainly applicable in judging whether there has income or not, but in every case....
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....: "5. It could be seen from the facts that the housing projects were developed during the years prior to Assessment Year 2004-05. The search was conducted on 18.06.2003 wherein the loose papers or the documents were seized. The material seized in form of loosepaper was qua one flat No. A/204 only in respect of which taking of 'on-money' could be alleged. It was on the basis of such loose papers, the addition on On-money account was sought to be made. That material could not have been used for the subsequent years for making addition on the same count. The addition in the Assessment Year 2004-05 was not sustained by the Tribunal in the appeal before it on the ground that the Assessing Officer ought to have confined himself in respect of sale transaction of one particular flat and he could not have on that basis calculated the addition for all flats. Accordingly, in respect of previous Assessment Year 2004-05, it was held by the Tribunal that the addition for On-money, made in the said year was not proper inasmuch as such addition could have been made only in respect of the flat in respect of which the evidence of On-money was found at the time of search. The said de....