TaxTMI 
TaxTMI 
2018 (3) TMI 313
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....ction 145(2) of the Act? ii) Whether on the facts and circumstances of the case, the Tribunal was justified in holding that the Assessing Officer rejected the accounts on the sole ground that the assessee has not followed Accounting Standard-7 and AS-9 for recognition of revenue, though the AO had examined actual allotment agreement and had then reached the conclusion that revenue could be reliably recognized on the basis of Percentage Completion Method? iii) Whether on the facts and circumstances of the case the tribunal has erred in confirming deletion the disallowance made under Section 40(a)(ai) on the ground that assessee has followed project completion method and expenses have not been claimed ignoring the fact that said expenses were included in work- in-progress, to be claimed as revenue expenses subsequently?" 3.2 Appeal No.4/2018 "i) Whether on the facts and circumstances of the case, the Tribunal was justified in deleting the addition made by the Assessing Officer by applying Percentage Completion Method, without appreciating that the actual receipts on sale of flats could be ascertained on the basis of sale/allotment agreements entered by the assessee and the ass....
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....the appellant has relied upon the decision of Supreme Court in the case of S.N. Namasivayam Chettiar vs. The Commissioner of Income Tax, Madras AIR 1960 SCC 729 where the Supreme Court has observed as under: "10. It was then urged that the four reasons given, which we have out above, could not make s. 13 applicable. For the rejection of accounts several reasons were given by the Appellate Tribunal; one these reasons was the non-production of stock registers and manufacturing accounts This reason was given by the Income-tax Officer and adopted by the Appellate Tribunal. It was submitted that the non-production of stock account was not such a defect as to entitle the Taxing Authorities to reject the books and apply the proviso to S. 13. Reliance was placed on the judgment of the Punjab High Court in Pandit Brothers v. Commissioner of Income-tax, Delhi, MANU/PH/0015/1955. The facts in that case were very different. The income-tax Officer there added a certain sum to the assessee's profits on the ground that the expense ratio was too high and the profits disclosed were too low and there was no stock register. The finding in that case was that the assessee maintained regular accou....
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....anies Act, Accounting Standards ("AS") enacted by the Institute of Chartered Accountants havenow been adopted [see: judgment of this Court in J.K. Industries case (supra)]. Shri Tripathi, learned counsel for the Department, has placed reliance on AS 22 as the basis of his argument that the completed contract method should be substituted by deferred revenue expenditure (spreading the said expenditure on proportionate basis over a period of time). He also relied upon the concept of timing difference introduced by AS 22. It may be stated that all these developments are of recent origin. It is open to the Department to consider these new accounting standards and concepts in future cases of chit transactions. We express no opinion in that regard. Suffice it to state that, these new concepts and accounting standards have not been invoked by the Department in the present batch of civil appeals." 4.5 He has further relied upon the decision in the case of (2008) 15 SCC 112 wherein it has been held as under: "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 t....
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....f the assessee by application of provisions of section 145(3) of the Act as they failed to depict the complete picture of accounts and moreover do not follow the method of accounting standard as specified under section 145(2) of the Act. The Assessing Officer has drawn support from few judgments rendered by the Appellate Tribunal and also by the judgment in the case of Kachwala Gems vs. JCIT, MANU/SC/8797/2006MANU/SC/8797/2006 : 288 ITR 10 (SC) for invoking provisions of section 145(3) of the Act. "12.1. Section 145 as is relevant in the year under appeal is reproduced as under:- Sec. 145(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub- section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the me....
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....rchases of materials and direct expenses were charged to this account. The books of account stood seized as a result of search on assessee-appellant and the same were available with the Assessing Officer. The assessee had also produced requisite vouchers and other documents as were demanded by the Assessing Officer from time to time. It was, therefore, his own duty to verify quantity of each quality of goods purchased by the assessee and correctness of valuation disclosed in the accounts. For the remissness on the part of the Assessing Officer, assessee cannot be blamed. The Assessing Officer also appears to have casually stated that as per AS-2 it is essential that the details of both quality as well as quantity of different items of stocks including details of direct expenses and costs are required to be maintained meticulously. In fact, the AS-2 notified by the CBDT relates to disclosure of prior period and extra ordinary items and change of accounting policies. The accounts maintained by the assessee- appellant conform to the commercially accepted accounting standards and true profits of assessee's business could be deduced therefrom. The findings reached by the Assessing O....
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....cer has taken the reasoning that the search proceedings revealed incriminating documents which contained nothings of receipt of cash "out of books" by the members of Unique Group of which the assessee is an important member. The Ld. CIT (A) in paras 13.1 to 13.3 of the impugned order has supported the findings reached by assessing authority by stating that the group is owned and controlled by two brothers, namely, Shri Ajay Pal Singh and Shri Ajit Singh and their sons. During the search and seizure operation evidence of "on money" received on sale of different flats of this firm were found and were also admitted by the partners of the firm Shri Ravinder Singh/Shri Ajit Singh. Moreover, the "on-money" so received was also included as undisclosed income in the return of income so filed by one of the partners. We, therefore, required the Ld. D/R to produce such material and evidence so as to test the correctness of the veracity of the authorities below as the appellant has categorically denied of receipt of any "on-money" in the joint business carried with his separated brother Shri Ajit Singh and his son. The separation had occasioned in the year 2006 which is a date much prior to th....
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....s and surmises or by taking note of the 'notorious trade practices' prevailing in trade circles has been disapproved. Having considered the aforesaid view, the finding of "on-money transactions" in the appellant's case by the authorities below is found without any basis and found perverse on facts. It, therefore, could not be a reason for rejecting the books of account maintained by the assessee in regular course of business. 12.10. The last reasoning taken by the assessing authority as also stood confirmed by the Ld. CIT (A) is that the assessee has not followed Accounting Standards 9 & 7 which tantamount to not following Accounting Standard-1 as prescribed under section 145(2) of the Act in view of the exercise undertaken by the Assessing Authority to apply percentage of project method that gave a different and positive results revealing more profits taxable in the years under consideration. The Assessing Officer, therefore, changed the method to percentage completion method as against the project completion method regularly employed by the assessee. The admitted position and also the fact is that the appellant has regularly employed project completion method from y....
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.... by the Institute of Chartered Accounts of India in 2011 are mandatory. The completed contract method followed by the appellant, therefore, could not be faulted with by the revenue and the assumptions made by the Assessing Officer that by not following AS- 9 & 7 the same tantamount to not following prescribed AS-1 under section 145(2) of the Act are found misplaced, unnecessary and uncalled for besides being contrary to principles ofinterpretation of the statutory provisions. The same, therefore, could not be taken a valid basis for change of method regularly employed by the appellant. The Income-tax Authority, therefore, has no option or jurisdiction to meddle in the matter either by directing the assessee to maintain its account in a particular manner or adopting a different method for valuing work-in- progress. It also cannot recompute income by adopting any method other than that regularly employed by the assessee- appellant in a case like this nor make the same as basis to reject its accounts. 12.11. The Apex Court in the case of CIT vs. McMillan & Co. 33 ITR 182 (SC) at page 188 has also entertained this opinion which is evident from the following passage:- The section en....
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.... is found to have entertained a view that 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 of accounts or of valuation. The Revenue's reliance upon the decision in CIT vs. British Paints India Ltd. (supra) in no way advanced the case of the revenue. The Apex court while dealing with the contention of the assessee in that case for valuation of the raw material without taking into account any portion of the cost of manufacture, held that:- the question of fact which the Assessing Officer must necessarily decide is whether or not the method of accounting followed by the assessee discloses the true income and observed thus (page 51): 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, which-ever is the lower. 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, wh....
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....at there could be a better system of accounting is no reason to the application of the provisions of s. 145 of the I.T. Act, especially in view of the fact that this system of accounting is followed by the assessee uniformly and regularly for the past several years, and was accepted by the Department without quarrel. It is not open to the ITO to intervene and substitute a system of accounting different from the one which is followed by the assessee, on the ground that the system which commends to the ITO is better. Attention may be invited to the decisions in: (i) CIT & EPT v. Chari and Rant MANU/TN/0427/1948MANU/TN/0427/1948 : [1949] 17 ITR 1 (Mad); (ii) CIT v. Srimati Singari Bai MANU/UP/0354/1954MANU/UP/0354/1954 : [1945] 13 ITR 224 (All); (iii) CIT v. K. Doddabasappa MANU/KA/0021/1963MANU/KA/0021/1963 : [1964] 54 ITR 221 (Mys); and (iv) Juggilal Kamlapat, Bankers v. CIT MANU/UP/0226/1973MANU/UP/0226/1973 : [1975] 101 ITR 40 (All). These are all decisions which lend support to the proposition that the Department is bound by the assessee's choice of accounting regularly employed unless it can be said that the method of accounting followed by the assessee does not ....
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....st for ascertaining profit for contracts, namely, "completed contract method" and "percentage of completion method". To know the results of his operations, the contractor prepares what is called a contract account which is debited with various costs and which is credited with revenue associated with a particular contract. However, the rules of recognition of cost and revenue depend on the method of accounting. Two methods are prescribed in Accounting Standard No. 7. They are "completed contract method" and "percentage of completion method". Thus, as both the methods of accounting are recognized methods of accounting, the assessee is at liberty to choose any of the above and if any one of the method of accounting is consistently followed by the assessee, the assessing officer cannot change the method of accounting to the "percentage of completion method. 12.16. The Hon'ble Delhi High Court while dealing with the similar situation in the case of CIT vs. Manish Buildwell Pvt. Ltd. in ITA No. 928/2011 dated 15.11.2011 held that 'after the above judgment of Supreme Court in CIT vs. Bilahari Investment Pvt. Ltd., 299 ITR 1, it cannot be said that the project completion method f....
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....re, set aside the decision in this regard and allow ground nos. 2 & 3 raised in appeal by the assessee in assessment year 2003-04." 6. He has contended that all the issues are required to be answered in favour of the Department and against the assessee. 7. Counsel for the respondent Mr. Jhanwar has contended that the first issue is squarely covered by the decision of this Court in the case of Pr. Commissioner of Income-tax Vs. Bhawani Silicate Industries, (2016) 65 taxmann.com 106 (Rajasthan) wherein the Division Bench of this Court in para 9 & 10 has observed as under: "8. We have heard and considered the arguments advanced by counsel for the Revenue and in our view, the Tribunal, which is the ultimate final fact finding authority, after analyzing the material again placed before it and having gone into the issue once again has come to the conclusion 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 m....
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....rn of income of the assessee. As noticed earlier, even the AO estimated the income by making estimated addition by applying a particular GP Rate so also the CIT(A) reduced it further. Therefore, these two authorities even while resorting to best judgment had no basis for coming to the conclusion reached and even in a case of estimated/ad hoc addition, prima-facie, some material is required to be brought on record. The revenue has ample powers under the Act, if an assessee avoids or evades to unearth of tax evasion, this observation is on the contention of counsel for the Revenue that except resorting to rejection of books of account, Revenue possibly has no other alternative and come to make estimated addition after resorting to provisions of Sec. 145(3)."8. He has also relied upon the decision of Gujarat High Court in the case of Jaytick 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 account....
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.... of the assessee. Issue No. 2 pertains to the additions made by the Assessing Officer on account of excessive expenses. The Commissioner (Appeals) as well as the Tribunal, however were of the opinion that such additions were not justified. The Tribunal while upholding the view of the Commissioner (Appeals), made following observations: "6. On consideration of the rival submissions, we do not find any merit in this ground of appeal of the revenue. The AO merely made comparative study of the expenses for the year under consideration with the preceding assessment year and found that expenses incurred in the preceding assessment year were 2.89% on turnover but in the assessment year under appeal it was 4.78% on the turnover. The expenses were, therefore, found excessive without pointing out 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 appreciat....
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.... were not correct. But, a low rate of gross profit, in the absence of any material pointing towards falsehood of the accounts books, cannot by itself be a ground to reject the account books under Section 145(3) of the Act." 10. In view of above observations and considering the facts of the case, we are of the opinion that the view taken by CIT (Appeals) is required to be accepted by setting aside the impugned order of the Tribunal. Accordingly, the question posed for our consideration is answered in favour of the assessee and it is held that the Tribunal has erred in upholding the action of the Respondent in rejecting the books of accounts of the Assessee under Section 145 (2) of the Act and further erred in confirming the part of the addition on estimated basis 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 f....
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....profession' shall be computed in accordance with either cash or mercantile system of accounting "regularly employed by the Assessee". It is only with effect from 1st April 2015 that a change has been brought about in Section 145(2) which permits the central government to notify in the Official Gazette from time to time the income computation and disclosure standards to be followed by any class of Assesses or in respect of any class of income. That change is prospective and in any event does not apply to the case on hand. 19. The settled legal position as far as Section 145 of the Act is concerned is that it is not open to an AO to reject the accounts of an Assessee unless he comes to a determination 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 v....
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....method. 19. In the judgment of the Bombay High Court in Taparia Tools Ltd. (supra) it has been held that in every case of substitution of one method by another method, the burden is on the Department to prove that the method in vogue is not correct and it distorts the profits of a particular year. Under the mercantile system of accounting based on the concept of accrual, the method of accounting followed by the assessees is relevant. In the present case, there is no finding recorded by the AO that the completed contract method distorts the profits of a particular year. Moreover, as held in various judgments, the Chit Scheme is one integrated scheme spread 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, particul....
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....of the occupancy certificate and till the date of the assessment order, possession of almost 75% of the developed area was handed over to the buyers who made full payment and the sale deeds were also executed. Thereafter, possession of 20% of the remaining area was handed over to the buyers. The possession of the balance 5% of the developed area could not be handed over to the remaining buyersbecause they could not make full payment and take possession. On these findings the CIT (A) held that the allegation of the assessing officer that the assessee was adopting a method of accounting namely the project completion method, to suit its 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 asses....
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....ne such method. Similarly, the percentage of completion method is another such method. Under the completed contract method, the revenue is not recognized until the contract is complete. Under the said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the contract is completed. This method leads to objective assessment of the results of the contract. On the other hand, the percentage of completion method tries 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 comp....
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....2007] 294 ITR 655 (Gau HC): 11. As stated above, the accounting system AS 7 is an approved system of accounting by the Institute of Chartered Accountants and as such the authenticity of the said accounting system is not under challenge. The assessing firm/appellant being a Private Limited Company was maintaining the account following the said system and the account were duly audited by qualified Chartered Accountant, maintenance of the accounts as well as the valuation of works in progress will not prejudice either side. Admittedly, 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 ad....
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.... the accounts should be considered as unreliable or incorrect. The accounts could be rejected as unreliable if important transactions are omitted therefrom or if proper particulars and vouchers are not forthcoming or if they do not include entries relating to one particular class of business. In this connection, it has to be pointed out that the rejection of accounts and assessment to the best of judgment are two distinct and separate processes and should not be confused as one, although there will 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 occa....
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....stified. 6. We accordingly set aside the order of the Tribunal and direct that the assessment be modified accepting the assessee's accounts. In the circumstances, however, there will be no order as to costs. United Commercial Bank vs. CIT [1999] 240 ITR 355 (SC): 11. From the aforesaid form of the prescribed balance sheet, it is evident that Scheduled Nationalised Banks were directed to put the value of shares and securities at cost and if the market value 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 ....
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....ng the profit or loss actually realised on the year's trading. As pointed out in paragraph 8 of the Report of the Committee on Financial Risks attaching to the holding of Trading Stocks, 1919, As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or 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 P....
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....e decision in Commissioner of Income-Tax v. British Paints India Ltd. : [1991]188ITR44(SC) . In our view, the said decision would not in a way advance the contention raised by the respondent. The Court while dealing with the contention of the assessee for valuation of the raw material without taking into account any portion of the cost of manufacture, held that the question of fact which the Assessing 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: ....
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....he books of account be decisive or conclusive in the matter. In the present case, the question is slightly different. For reasons, Central Government, in exercise of the powers conferred by Section 53 of the Banking Regulation Act, and on the recommendation of the Reserve Bank of India, permitted the assessee not to disclose the market value of its investment in the balance 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 m....
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....ivision Bench on the question of own money, in para 9 has observed as under: "9. So far as second question is concerned, we find that the same is covered by decision of this Court in case of CIT v. Amar Corporation (supra). This Court while considering the same issue held and observed as under: "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 previo....