TaxTMI 
TaxTMI 
2018 (3) TMI 313
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....hich tantamount to not following AS-1 provided in Section 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....
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....elopers Jpr) decided on 19.5.2017 wherein it has been observed as under:- "4.3 Counsel for 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 l....
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....uired to be substituted by any other method of accounting.21. Before concluding, we may point out that under section 211(2) of the Companies 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 wa....
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....t true and complete picture of its accounts and financial transactions. The Assessing Officer after making elaborate discussion has rejected the books of account of 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 a....
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....t to correctness and completeness of the accounts maintained by the assessee or the method of valuation adopted by him. The appellant has valued the stock of project in process at cost as all the purchases 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 maintaine....
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....una in the books of account of the assessee and take the same as a reason for rejecting the books of account that were maintained by assessee in regular course of its business. 12.5. Thirdly, the Assessing Officer 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 ....
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.... MANU/SC/0081/1959MANU/SC/0081/1959 : 37 ITR 288 (SC) and also by Hon'ble Delhi High Court in the case of CIT vs. Discovery Estate Pvt. Ltd. 2013 TIOL 139 High Court DEL-IT in which the practice of making additions in the assessment on mere suspicions 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 Offi....
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....e case of CIT vs. Manish Buildwell (P) Ltd. in ITA No. 928/2011 dated 15.11.2011 is relevant. Neither the revised Guidance Notes 2012 issued by Institute of Chartered Accountants of India nor the Exposure Draft for Guidance Note on Recognition of Revenue issued 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- appell....
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....nited Commercial Bank vs. CIT MANU/SC/0623/1999MANU/SC/0623/1999 : 1999 240 ITR 355 (SC) after considering the judgment in the case of British Paints India Ltd. MANU/SC/0729/1990MANU/SC/0729/1990 : 188 ITR 44 (SC) which is also relied upon by the authorities below against the appellant before us 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 va....
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.... did not find any justification in the entertainment of the view by the Assessing Officer that there could be a better system of accounting. This is no reason to the application of the provisions of section 145 of the Act. The relevant passage as contained at page 447 of the report is reproduced as under:- The ITO's view that 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] ....
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....ing into consideration the proportion that costs incurred to date bears to the estimated total costs of contract. The Apex Court again in the case of CIT vs. Hyundai Heavy Industries Co. Ltd., 291 ITR 482 (SC) took the similar view and held at page 495 as under:- Lastly, there is a concept in accounts which called the concept of contract accounts. Under that concept, two methods exist 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 me....
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....he assessee from Project Completion Method to Percentage Completion Method on irrelevant considerations. We are, therefore, satisfied that provisions of section 145(3) are not attracted in this case. The Ld. CIT (A), is found to have erred in upholding the decision of Ld. Assessing Authority to invoke section 145(3) of the Act and making assessment in the manner provided under section 144 of the Act. We, therefore, 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....
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....letion in the income. Best judgment is also based on the material available on record and therefore, while making an addition something more is to be collected by the AO who makes assessment of an assessee. As pointed out above, merely because there is some deficiency of quality wise record in the books of account, or merely because of rejection of the books of account, it does not mean that it must necessarily lead to addition in the return 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.....
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....maintained on computer, the AO was not justified in rejecting the books results, or to enhance the gross profit rate. Accordingly, there is no merit in this ground of appeal of the revenue. The same is accordingly, dismissed." From the above, it can be seen that the entire issue is based on appreciation of evidence on record. No question of law, therefore, arises particularly when the Commissioner (Appeals) as well as the Tribunal concurrently held in favour 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 4.7....
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....does not amount to such a material as would lead to the conclusion that the account books were incomplete or inaccurate. Similarly, if the rate of gross profit declared by the assessee in a particular period is lower as compared to the gross profit declared by him in the preceding year, that may alert the Assessing Officer and serve as a warning to him, to look into the accounts more carefully and to look for some material which could lead to the conclusion that the accounts maintained by the assessee 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)....
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....ommitted no error. If as per the accounting standard available, the assessee was entitled to claim the entire income on completion of the project and if such accounting standard was accepted by the revenue in the earlier years, in the present year, the Assessing Officer could not have taken a different stand and that too, without hearing the assessee. Paras Buildtech India Private Limited & anr. vs. CIT & Anr. [2016] 382 ITR 630 (Delhi): 18. Section 145(1) of the Act states that the income chargeable under the heads 'Profits and gains of business or 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 ....
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....l to examine the other aspects relating to computation of taxable income on the basis of completed contract method. Question No. 2 is accordingly answered partly affirmative and partly in negative. Commissioner of Income Tax vs. Bilahari Investment (P) Ltd [2008] 299 ITR 1 SC: 15.Recognition/ identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. Completed contract method is one such method. Similarly, percentage of completion method is another such 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. More....
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....tely demand possession and the entire sale consideration could be received by the assessee only on completion of the project. On these facts it was noted by the CIT (A) that unless the buyer makes full payment the assessee could not hand over possession nor get the sale transaction registered. A further finding recorded by the CIT (A) was that the impugned project was completed only in the accounting period relevant to the assessment year 2008-09 and in support of this finding, he noted that a copy of the completion/occupancy certificate was placed on the record of the Assessing Officer. He further recorded a finding that after the issue 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 assesse....
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....ociated 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. This view was reiterated by the Supreme Court in Commissioner of Income-Tax v. Balearic Investment P. Ltd. MANU/IG/5001/2007 : (2008) 299 ITR 1 (SC) with the following observations: Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. The completed contract method is one 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 res....
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.... must necessarily express his dissatisfaction about the correctness or completeness of the accounts of the Assessee and also note that such system of accounting was not regularly followed by the Assessee, in which event alone, the Assessing Officer can exercise his jurisdiction and make an assessment as provided under Section 144 of the Act. 9. We fully concur with the conclusion of the Tribunal in having interfered with the orders of the Assessing Authority as well as that of the Commissioner of Income-tax (Appeals). We are, therefore, not inclined to entertain the substantial question of law, as we do not find any need for the same. The appeal fails and the same is dismissed. No costs. MKB (Asia) (P) Ltd. vs. CIT [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 account....
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....ge works out to 12 units per quintal. On behalf ofthe revenue it was urged that the rejection of the accounts was justified since there was very wide divergence in the consumption of electricity and that it was indicative of the unreliability of the petitioner's accounts. The proposition is well-settled that accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The department has to prove satisfactorily that the account books are unreliable, incorrect or incomplete before it can reject the accounts. The rejection of accounts is not a matter to be done light- heartedly, though it may not be possible to lay down in general terms the exact circumstances in which 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 t....
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....usual voltage and on such occasions the output will necessarily be much lower than the normal rate. The efficiency of the crushing machine as also the moisture content in the copra would also be relevant factors to be taken into account in arriving at the output. It is, therefore, unsafe to uphold the rejection of the accounts purely on the ground that there has been divergence in the consumption of electricity. In this case, there is also the additional circumstance that the department itself has admitted variations ranging from 10 to 12 units per quintal; and the petitioner's consumption of electricity is 12 units per quintal, which cannot be said to be wide off the accepted consumption. We are of the opinion that in these circumstances the rejection of the accounts is not legally justified. 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 Ba....
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.... established rule of commercial practice and accountancy that closing stock can be valued at cost or market price whichever is lower. In Chainrup Sampatram v. Commissioner of Income Tax, West Bengal MANU/SC/0046/1953 : [1953]24ITR481(SC) , this Court explained the underlying reasons for the said practice thus: 'It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing 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 hav....
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....lose of the year he is permitted to treat these goods or stocks as of their market value. 18. Even applying the aforesaid tests laid down by this Court, what is taxable under the Act is the really accrued or arisen income. On the basis of the method of accountancy regularly employed by the assessee, the real income is pointed out in the income-tax return submitted by the assessee. This cannot be ignored by holding that in a balance sheet which is required to be statutorily maintained in a particular form, market value of the shares and securities is not mentioned or is mentioned in brackets. The decision in the case of State Bank of Travancore does not lay down any rule that whatever is not mentioned in the prescribed statutory balance sheet is not to be taken into account for deciding real taxable income. 21. The learned Counsel for the Revenue further relied upon the 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 i....
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.... to be maintained in the statutory form, may not be decisive or conclusive. In such cases, it is open to the Income Tax Officer as well as the assessee to point out the true and proper income while submitting the income tax return. In Kedamath Jute Mfg. Co. Ltd. v. Commissioner of Income Tax (Central), Calcutta MANU/SC/0438/1971 : [1971]82ITR363(SC) , this Court has negatived the contention that "if an assessee under misapprehension or mistake fails to make an entry into the books of account and although, under the law, a deduction must be allowed by the Income-Tax Officer, assessee will loss the right of claiming or will be debarred from being allowed that deduction." The Court held that whether the assessee is entitled to the particular deduction or not will depend upon the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the 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 Re....
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.... of account adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that assessee was maintaining balance sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the Bank was required to prepare balance sheet in the prescribed form and it had no option to charge it. For the purpose of income tax as stated earlier, what is to be taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case." 11. Counsel for the respondent has contended that even the second issue is covered by the aforesaid decisions. 12. So far as issue No.(iii) is concerned, where it has been relied upon the decision of Gujarat High Court reported in Tax appeal No.1250/2011 wherein the Division 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 ....