Principal Commissioner of Income-tax, Jaipur-2, Jaipur v. Unique Builders & Developers
[Citation -2017-LL-1109-5]

Citation 2017-LL-1109-5
Appellant Name Principal Commissioner of Income-tax, Jaipur-2, Jaipur
Respondent Name Unique Builders & Developers
Court HIGH COURT OF RAJASTHAN
Relevant Act Income-tax
Date of Order 09/11/2017
Judgment View Judgment
Keyword Tags mercantile system of accounting • rejection of books of accounts • deferred revenue expenditure • project completion method • rejection of accounts • computation of income • method of accounting • sale consideration • gross profit rate • yield percentage • trading addition • local authority • trading receipt • seized document • taxable income • stock-in-trade • closing stock • market price • market value • tax evasion • on money
Bot Summary: If the rate of gross profit declared by the assessee in a particular period is lower as compared to thegross 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. 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. 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. In order to invoke Section 145(3) of the Act and disturb the existing system of accounting, the Assessing Officer must necessarily express his dissatisfaction about the correctness or completeness of the accounts of the Assessee and also note that such system of accounting ITA-292/2017 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. 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. 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 ITA-292/2017 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.


HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 292 / 2017 Principal Commissioner of Income Tax, Jaipur-2, Jaipur. ----Appellant Versus M/s. Unique Builders & Developers (Ajit) UDB Tower, SB-59, 3rd Floor, Opp. Jaipur Nagar Nigam, Tonk Road, Jaipur. ----Respondent For Appellant(s) : Mr. K.D. Mathur for Mr. R.B. Mathur HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 09/11/2017 1. By way of this appeal, appellant has assailed judgment and order of tribunal whereby tribunal has allowed appeal preferred by assessee and dismissed appeal of department. 2. Counsel for department has framed following substantial question of law:- 1. Whether in facts and circumstances of case ITAT was justified in law and has erred in rejecting books of accounts of assessee u/s.145(3) of Act and thereby reversing finding given by Assessing Officer as well as CIT(A), ignoring undisputed facts that assessee failed to maintain quantitative and qualitative stock registers and vouch expenses incurred by it and on money received by it has not been disclosed. 2. Whether in facts and circumstances of case ITAT was justified in law in (2 of 29) [ITA-292/2017] rejecting application of percentage completion method adopted by Assessing Officer, when this rejection means acceptance of loss returns of assessee engaged in construction and sale of residential/commercial project in contravention of accounting standard 7 and 9 issued by ICAI. 3. Whether in facts and circumstances of case ITAT was justified in law in ignoring fact that two brothers who are partners either themselves or through their families were actively engaged jointly in business of assessee firm and therefore ignoring acceptance of on money and specific seized documents. 4. Whether in facts and circumstances of case ITAT was justified in law in confirming order of CIT(A) allowing claim of assessee u/s. 80IB(10) despite of facts that assessee was not having certificate of approval in its name. 5. Whether in facts and circumstances of case ITAT was justified in law in confirming order of CIT(A) in relaxing conditions u/s. 80IB(10) despite of fact that CIT(A) has no power to relax statutory conditions. 3. facts of case that assessee is partnership firm engaged in business of real estate and Developers of commercial/residential buildings. During assessment proceedings, it was observed by Assessing Officer that assessee has adapted Project Completion Method for purpose of accounting of its income from building development activity. 3.1 Further, during assessment proceedings, assessee could not produce stock register and vouchers of some direct expenses also remained unverifiable. Therefore, Assessing (3 of 29) [ITA-292/2017] Officer rejected books of account u/s. 145(3) of Act and profit of project Southern heights was calculated by adopting percentage completion method at Rs.29265090/-. Further on basis of seized records, which was found from laptop of Shri Naveen Bhutani, working of profit was also worked out which comes to Rs.28917000/-. Although, percentage completion method is logical way to arrive at true profits of real estate project, but seized papers mentioning complete details of project from commencement to completion also could not be ignored. profit as per seized document was taken at Rs.28917000/-, however, no separate addition of Rs.28917000/- was made by Assessing Officer on total income of assessee. Further, assessee claimed deduction u/s. 80IB of Rs.48000415/-. Assessing Officer disallowed claim of assessee as certificate of approval of project by local authority was in name of partner Sh. Ajit Singh and not in name of firm. 4. However, in view of decision of this court in case of same assessee in Income Tax Appeal No.23/2013 decided on 19.5.2017 wherein it has been held as under:- 7. Counsel for respondent Mr. Jhanwar has contended that first issue is squarely covered by decision of this Court in case of Pr. Commissioner of Income-tax Vs. Bhawani Silicate Industries, (2016) 65 taxmann.com 106 (Rajasthan) wherein Division Bench of this Court in para 9 & 10 has observed as under: 8. We have heard and considered arguments advanced by counsel for Revenue and in our view, Tribunal, which is ultimate final fact finding (4 of 29) [ITA-292/2017] authority, after analyzing material again placed before it and having gone into issue once again has come to conclusion that merely because qualitative record was not maintained and on this premise, books of account could not have been rejected. It is also admitted fact that mustard seed is only single commodity used by assessee for manufacturing of mustard oil and Tribunal noticed that assessee filed yield percentage for two months before AO in which no discrepancy was found by AO. Tribunal has found that production of mustard oil is continuous process and seeds are put into milling for continuous oil production. Tribunal has further found that 8096 of its mustard oil is by way of trading sale and neither discrepancies were noticed by AO in either purchase or sale nor any sale or purchase, found unrecorded. Tribunal also found that books of account had been maintained in same manner as in past and assessee cannot be expected to stop plant as and when new lot of mustard seed is subjected to crushing as manufacturing of mustard oil is continuous process. Tribunal has also found as finding of fact that except quality, quantity wise stock details has been maintained but no other defect was noticed by AO in quantitative details and after noticing above fact, has come to conclusion that books of account ought not to have been rejected. In our view, such finding of fact which has been reached by Tribunal is after appreciating material and evidence on record and such finding has been arrived at by Tribunal after analyzing material and in our view, no substantial question of law can be said to arise out of order of Tribunal. Once stock register has been held to be properly maintained and has been held to be proper, no trading addition could have been made and rightly so, even otherwise, minor discrepancies cannot result into rejection of books of account. 9. Leave apart above, in our view, what conclusions are to be reached is independent of results shown in books of account if any maintained by (5 of 29) [ITA-292/2017] assessee. Section 145 only provides basis on which computation of income is to be made for purpose of determining amount of tax payable by assessee. provision by itself does not deal with addition or deletion in income. Best judgment is also based on material available on record and therefore, while making addition something more is to be collected by AO who makes assessment of assessee. As pointed out above, merely because there is some deficiency of quality wise record in books of account, or merely because of rejection of books of account, it does not mean that it must necessarily lead to addition in return of income of assessee. As noticed earlier, even AO estimated income by making estimated addition by applying particular GP Rate so also CIT(A) reduced it further. Therefore, these two authorities even while resorting to best judgment had no basis for coming to conclusion reached and even in case of estimated/ad hoc addition, prima-facie, some material is required to be brought on record. revenue has ample powers under Act, if assessee avoids or evades to unearth of tax evasion, this observation is on contention of counsel for 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 decision of Gujarat High Court in 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 assessee is manufacturing unit and it has to pay excise duty. It is specific contention of assessee that books of accounts maintained by it are tallying and excise duty is paid on that basis. stock register is not tallying with other books of account only because some of items were not deleted from stock register. Taking into account decision of this Court, not maintaining day-today stock register is not ground to (6 of 29) [ITA-292/2017] reject 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 addition made by Assessing Officer on basis of low gross profit. Commissioner (Appeals) as well as Tribunal, however, deleted such addition after examining material on record. In particular, Tribunal while upholding order of Commissioner (Appeals) in this respect, made following observations: "4. On consideration of rival submissions, we do not find any justification to interfere with order of learned CIT(A) in deleting addition. AO merely gone by fact that there was fall in gross profit rate as compared to preceding assessment year which itself is no ground to reject books of accounts of assessee. No specific defect in maintenance of books of accounts by assessee has been pointed out AO. AO further noted that day to day stock and inward and outward registers are maintained on computer. Perhaps, this was sale reason which swayed AO to reject books of accounts and make addition. Now-a-days it is common knowledge that all records are maintained on computer including by government and semi government organizations. Even if, records are maintained on computer is not ground to reject explanation of assessee. AO should have verified entries from computerized records also to point out any defect thereon. In absence of any specific defect pointed out in books of accounts and records maintained on computer, AO was not justified in rejecting books results, or to enhance gross profit rate. Accordingly, there is no merit in this ground of appeal of revenue. same is accordingly, dismissed." From above, it can be seen that entire issue is based on appreciation of evidence on record. No question of law, therefore, arises particularly when Commissioner (Appeals) as well as (7 of 29) [ITA-292/2017] Tribunal concurrently held in favour of assessee. Issue No. 2 pertains to additions made by Assessing Officer on account of excessive expenses. Commissioner (Appeals) as well as Tribunal, however were of opinion that such additions were not justified. Tribunal while upholding view of Commissioner (Appeals), made following observations: "6. On consideration of rival submissions, we do not find any merit in this ground of appeal of revenue. AO merely made comparative study of expenses for year under consideration with preceding assessment year and found that expenses incurred in preceding assessment year were 2.89% on turnover but in assessment year under appeal it was 4.78% on turnover. expenses were, therefore, found excessive without pointing out as to which of expenses incurred by assessee was not connected with business activity of assessee. AO has not pointed out which of expenditure were not admissible in law. In absence of any pointing out inadmissible expenses, AO cannot make addition merely by comparing expenditure with preceding year's expenditure. learned CIT(A) on proper appreciation of facts and material on record rightly deleted addition. This ground of appeal of revenue is accordingly dismissed." entire issue is based on appreciation of evidence. No question of law arises. When Commissioner (Appeals) as well as Tribunal concurrently held that on basis of evidence, addition as made by 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 course of arguments before us, it was submitted by learned counsel for appellant that assessee was not maintaining Daily Stock Register. We, however, find no such finding in assessment order. On other hand, we note that Assessee had submitted (8 of 29) [ITA-292/2017] before Commissioner of Income Tax (Appea ls) that Form 3CD containing all quantitative details in respect of raw materials as well as finished goods, duly audited by Certified Accountant had been placed on record, but, Assessing Officer ignored those actual figures enclosed with return. In any case, no statutory provision under Income Taxregime requiring assessee to maintain Daily Stock Register has been brought to our notice. Hence, even if no such register was being maintained by assessee as is contended by learned counsel for appellant, that by itself does not lead to inference that it was not possible to deduce true income of assessee from accounts maintained by her, nor accounts can be said to be defective or incomplete for this reason alone. If stock register is not maintained by assessee that may put Assessing Officer on guard against falsity of return made by assessee and persuade him to carefully scrutinize account books of assessee. But absence of one register alone does not amount to such material as would lead to conclusion that account books were incomplete or inaccurate. Similarly, if rate of gross profit declared by assessee in particular period is lower as compared to thegross profit declared by him in preceding year, that may alert Assessing Officer and serve as warning to him, to look into accounts more carefully and to look for some material which could lead to conclusion that accounts maintained by assessee were not correct. But, low rate of gross profit, in absence of any material pointing towards falsehood of accounts books, cannot by itself be ground to reject account books under Section 145(3) of Act." 10. In view of above observations and considering facts of case, we are of opinion that view taken by CIT (Appeals) is required to be accepted by setting aside impugned order of Tribunal. Accordingly, question posed for our consideration is (9 of 29) [ITA-292/2017] answered in favour of assessee and it is held that Tribunal has erred in upholding action of Respondent in rejecting books of accounts of Assessee under Section 145 (2) of Act and further erred in confirming part of addition on estimated basis against revenue. Accordingly, Tax Appeal No. 1196 of 2007 is allowed. 9.Therefore, he has contended that rejection of books of accounts for non maintenance of stock register is not ground under Section 145(3) of Act. 10. He has relied upon following decisions: Manjusha Estates Pvt. Ltd. vs. Income Tax Officer Tax Appeal No.828/2007 [Gujrat High Court], decided on 12.08.2016: 4.1 Learned Counsel for department has taken this Court to Section 145(3) of IT Act which relates to rejection of books of accounts and contended that CIT(A) as well as Tribunal has rightly come to conclusion after considering material placed before them. After making aforesaid submissions he has contended that appeal may be dismissed. 5. Having heard learned Counsel for parties and having gone through order passed by authorities below, as well as, considering fact that assessee has followed method which is consistent considering decision in case of Shivalik Buildwell (P.) Ltd. (supra) and Umang Hiralal Thakkar (supra) and therefore this Court is of opinion that view taken by tribunal and CIT(A) is not correct. Since issue involved in this appeal is identical to decision cited by learned Counsel for assessee while adopting such reasons, we allow this appeal and accordingly answer issue raised in this appeal in favour of assessee and against department. CIT-IV vs. Shivalik Buildwell (P.) Ltd. [2013] 40 Taxman.com 219 (Guj.): 3. On revenue s appeal, Tribunal confirmed view of CIT (Appeals), however, on slightly different ground, namely, that assessee being developer of project, profit in his case, will arise on transfer of title of property and receipt of (10 of 29) [ITA-292/2017] any advances or booking amount cannot be treated as trading receipt of year under consideration. tribunal further noted that such method of accounting followed by assessee had been accepted by revenue in earlier years. Tribunal was, therefore, of opinion that Assessing Officer s decision to reject book results during year under consideration was not justified. 4. WE are of opinion that Tribunal committed no error. If as per accounting standard available, assessee was entitled to claim entire income on completion of project and if such accounting standard was accepted by revenue in earlier years, in present year, Assessing Officer could not have taken different stand and that too, without hearing assessee. Paras Buildtech India Private Limited & anr. vs. CIT & Anr. [2016] 382 ITR 630 (Delhi): 18. Section 145(1) of Act states that income chargeable under heads 'Profits and gains of business or profession' shall be computed in accordance with either cash or mercantile system of accounting "regularly employed by Assessee". It is only with effect from 1st April 2015 that change has been brought about in Section 145(2) which permits central government to notify in Official Gazette from time to time 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 case on hand. 19. settled legal position as far as Section 145 of Act is concerned is that it is not open to AO to reject accounts of Assessee unless he comes to determination that notified accounting standards have not been regularly followed by Assessee. As pointed out by CIT (A) in order dated 2nd July, 2010, AS of ICAI did not have any statutory recognition under Act although it was binding under Companies Act, 1956. method of accounting followed by Assessee in present case i.e. project completion method was certainly one of recognized methods and has been consistently followed by it. (11 of 29) [ITA-292/2017] Lunar Electricals vs. Assistant Commissioner of Income Tax [2012] 2010 Taxman 69 (Delhi): next aspect relates to rejection of books of accounts because assessee was following completed contract method. We do not think completed contract method is contrary and cannot be adopted and applied when assessee follows mercantile system of accounting. This issue was examined by 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 said method confirms and can be adopted by assessee. In fact, we find that there is contradiction in orders of both CIT(Appeals) and tribunal on said aspect. With regard to NBCC contract, both of them have held that receivables and expenses should be excluded as contract was incomplete. But, at same time they have held that completed contract method cannot be adopted for purpose of accounts/computing taxable income as assessee is following mercantile system of accounting. We may notice here that while examining question of rejection of books of accounts, CIT(Appeals) in his finding, which have been quoted above, was ambivalent and did not deal with real issue and question whether or not completed contract method is permitted and can be adopted by assessee following mercantile system of accounting. tribunal also went on certain other aspects relating to service of notice in first proviso to Section 145 and did not deal with issue and question accordingly. On second question, therefore, we hold and observe that completed contract method can be adopted under Section 145 of Act when assessee follows mercantile system of accounting. However, we remand matter to tribunal to examine other aspects relating to computation of taxable income on basis of completed contract method. Question No. 2 is accordingly answered partly affirmative and partly in negative. (12 of 29) [ITA-292/2017] Commissioner of Income Tax vs. Bilahari Investment (P) Ltd [2008] 299 ITR 1 SC: 15.Recognition/ identification of income under 1961 Act is attainable by several methods of accounting. It may be noted that same result could be attained by any one of accounting methods. Completed contract method is one such method. Similarly, percentage of completion method is another such method. 19. In judgment of Bombay High Court in Taparia Tools Ltd. (supra) it has been held that in every case of substitution of one method by another method, burden is on Department to prove that method in vogue is not correct and it distorts profits of particular year. Under mercantile system of accounting based on concept of accrual, method of accounting followed by assessees is relevant. In present case, there is no finding recorded by AO that completed contract method distorts profits of particular year. Moreover, as held in various judgments, Chit Scheme is one integrated scheme spread over period of time, sometimes exceeding 12 months. We have examined computation of tax effect in these cases and we find that entire exercise is revenue neutral, particularly when scheme is read as one integrated scheme spread over period of time. 20. As stated above, we are concerned with assessment years 1991-1992 to 1997-1998. In past, Department had accepted completed contract method and because of such acceptance, assessees, in these cases, have followed same method of accounting, particularly in context of chit discount. Every assessee is entitled to arrange its affairs and follow method of accounting, which Department has earlier accepted. It is only in those cases where Department records finding that method adopted by assessee results in distortion of profits, Department can insist on substitution of existing method. Further, in present cases, we find from various statements produced before us, that entire exercise, arising out of change of method from completed contract method to deferred revenue expenditure, is revenue (13 of 29) [ITA-292/2017] neutral. Therefore, we do not wish to interfere with impugned judgment of High Court. CIT vs. Manish Build Well (P) Ltd. [2011] 63 DTR 369(Delhi): 6. Questions Nos. 2 and 3 are connected. They assail decision of Tribunal rendered in paragraph 20 of its order. addition of Rs.28,21,000/was made by assessing officer on footing that assessee was adopting project completion method or completed contract method, which was not proper and profits of business should be computed on basis of percentage completion method under which profits of development and construction business of assessee get assessed over period of years, keeping pace with progress in construction/development of project. CIT (A) however held that assessee had no reason to withhold handing over of possession of space to purchaser in respect of project which is completed and that wherever possession was not handed over to purchaser, it was for reason that project was not completed. He further found that buyer who has paid entire sale consideration would immediately demand possession and entire sale consideration could be received by assessee only on completion of project. On these facts it was noted by CIT (A) that unless buyer makes full payment assessee could not hand over possession nor get sale transaction registered. further finding recorded by CIT (A) was that impugned project was completed only in accounting period relevant to assessment year 2008-09 and in support of this finding, he noted that copy of completion/occupancy certificate was placed on record of Assessing Officer. He further recorded finding that after issue of occupancy certificate and till date of assessment order, possession of almost 75% of developed area was handed over to buyers who made full payment and sale deeds were also executed. Thereafter, possession of 20% of remaining area was handed over to buyers. possession of balance 5% of developed area could (14 of 29) [ITA-292/2017] not be handed over to remaining buyersbecause they could not make full payment and take possession. On these findings CIT (A) held that allegation of assessing officer that assessee was adopting method of accounting namely project completion method, to suit its convenience to book income was baseless. further finding recorded by CIT (A) is that there was no manipulation in books of accounts. So far as method of accounting is concerned, CIT (A) held that project completion method is wellrecognized and accepted method of accounting and was only method suitable for any developer who has to deliver completed product to buyer. Ultimately CIT (A) held as under: Thus on overall perusal of assessment order it is seen that neither any defect has been pointed out by assessing officer in method of accounting followed by appellant nor any finding has been given that true and fair profits cannot be deduced following said method of accounting. No evidence was found during course of search to show that books of account are not properly maintained by appellant. main thrust of assessing officer in making addition is that assessee is deferring payment of taxes. But this allegation of assessing officer cannot be accepted as assessee is consistently following method of accounting which is well recognized in development business and has been accepted by assessing officer also in other group cases. Thus addition is here by deleted. 7. aforesaid finding of CIT (A) was approved by Tribunal with observation that department has accepted assessee's method of accounting namely, project completion method and therefore there was no justification for adopting percentage completion method for one year on selective basis. 8. It is well settled that project completion method is one of recognized methods of accounting. In Commissioner Income-Tax And Another v. Hyundai Heavy Industries Co. Ltd. MANU/SC/7731/2007 : (15 of 29) [ITA-292/2017] (2007) 291 ITR 482 (SC) Supreme Court held as follows: Lastly, there is concept in accounts which is called 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 results of his operations, contractor prepares what is called contract account which is debited with various costs and which is credited with revenue associated with particular contract. However, rules of recognition of cost and revenue depend on 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 Supreme Court in Commissioner of Income-Tax v. Balearic Investment P. Ltd. MANU/IG/5001/2007 : (2008) 299 ITR 1 (SC) with following observations: Recognition/identification of income under 1961 Act is attainable by several methods of accounting. It may be noted that same result could be attained by any one of accounting methods. completed contract method is one such method. Similarly, percentage of completion method is another such method. Under completed contract method, revenue is not recognized until contract is complete. Under said method, costs are accumulated during course of contract. profit and loss is established in last accounting period and transferred to profit and loss account. said method determines results only when contract is completed. This method leads to objective assessment of results of contract. On other hand, percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. amount of revenue recognized under this method is determined by reference to stage of completion of contract. stage of completion can be looked at under this method by taking into consideration proportion that costs (16 of 29) [ITA-292/2017] incurred to date bears to estimated total costs of contract. above indicates difference between completed contract method and percentage of completion method." (underlining ours) 9. After above judgments of Supreme Court it cannot be said that project completion method followed by assessee would result in deferment of payment of taxes which are to be assessed annually under Income Tax Act. Accounting Standards 7 (AS7) issued by Institute of Chartered Accountants of India also recognize position that in case of construction contracts, assessee can follow either project completion method or percentage completion method. In view of judgments of Supreme Court (Supra), finding of CIT (A), upheld by Tribunal, does not give rise to any substantial question of law. Further, Tribunal has also found that there was no justification on part of assessing officer to adopt percentage completion method for one year (the year under appeal) on selective basis. This will distort computation of true profits and gains of business. For these reasons, we are of view that no substantial question of law arises. We, therefore, decline to admit question Nos. 2 and 3. CIT vs. SAS Hotels & Enterprises Ltd. [2011] 334 ITR 194 (Madras): 7. In this context, when we apply Section 145(3) of Income Tax Act, it specifically stipulates that where Assessing Authority is not satisfied about correctness or completeness of accounts of Assessee, or where method of accounting provided in Sub-section (1) or accounting standards as notified under Sub- section (2), have not been regularly followed by Assessee, Assessing Authority may make assessment in manner provided in Section 144. Therefore, in order to invoke Section 145(3) of Act and disturb existing system of accounting, Assessing Officer must necessarily express his dissatisfaction about correctness or completeness of accounts of Assessee and also note that such system of accounting (17 of 29) [ITA-292/2017] was not regularly followed by Assessee, in which event alone, Assessing Officer can exercise his jurisdiction and make assessment as provided under Section 144 of Act. 9. We fully concur with conclusion of Tribunal in having interfered with orders of Assessing Authority as well as that of Commissioner of Income-tax (Appeals). We are, therefore, not inclined to entertain substantial question of law, as we do not find any need for same. appeal fails and same is dismissed. No costs. MKB (Asia) (P) Ltd. vs. CIT [2007] 294 ITR 655 (Gau HC): 11. As stated above, accounting system AS 7 is approved system of accounting by Institute of Chartered Accountants and as such authenticity of said accounting system is not under challenge. assessing firm/appellant being Private Limited Company was maintaining account following said system and account were duly audited by qualified Chartered Accountant, maintenance of accounts as well as valuation of works in progress will not prejudice either side. Admittedly, particular work control were not completed and it comes under category of work in progress. There is also no dispute that ultimate liability of Assessee as regards tax will be dependant upon in total (fixed) amount received by Assessee against particular work control. 12. We, therefore, hold that Income tax authority has no option/ jurisdiction to muddle in matter either by directing assessee to maintain account in particular manner or adopt different method for valuing work in progress. We reiterate decision in Doom Dooma India Ltd. (supra) and hold that assessee has as option/liberty to adopt any recognized method of account for his business and income shall be computed in accordance with such regularly maintained accounting system. (18 of 29) [ITA-292/2017] CIT vs. V.S. Dempo & CO. Pvt. Ltd. [1996] 131 CTR 203 (Mum): 4. We have carefully considered rival submissions. We find that controversy in this case is basically finding of fact which has to be decided by authorities concerned on facts and circumstances of each case. In instant case, Tribunal has come to conclusion that method of accounting followed by assessee was correct and resort to s. 145(1) was not called for. We do not find any infirmity in said finding. We, therefore, refuse to interfere with same. ST. Teresa s Oil Mills vs. State of Kerala [1970] 76 ITR 0365 (Ker): 4. learned counsel for petitioner brought to our notice decision of Ahdhra Pradesh High Court in N. Raja Pullaiah v. Deputy Commercial Tax Officer, [1969] MANU/AP/0166/1969 : 73 I.T.R. 224 and contended that consumption of electricity by itself cannot form reliable test for determining yield of oil, that yield depends upon various factors like condition of machine, quality of copra--whether it was dried or moist--the nature of electric supply and other similar factors and that consumption of electricity is affected by these and various other factors. It was also contended that no test-crushing had been done in this case and department itself had accepted in other cases figures varying from 10 to 12 units per quintal of copra. In petitioner's case, average works out to 12 units per quintal. On behalf ofthe revenue it was urged that rejection of accounts was justified since there was very wide divergence in consumption of electricity and that it was indicative of unreliability of petitioner's accounts. proposition is well-settled that accounts regularly maintained in course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. department has to prove satisfactorily that account books are unreliable, incorrect or incomplete before it can reject accounts. rejection of accounts is not matter to be done light- (19 of 29) [ITA-292/2017] heartedly, though it may not be possible to lay down in general terms exact circumstances in which accounts should be considered as unreliable or incorrect. 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 rejection of accounts and assessment to best of judgment are two distinct and separate processes and should not be confused as one, although there will be no overlapping in materials used for applying both processes. initial step of rejecting accounts will be justified when account books are found for valid reasons unreliable, incorrect or incomplete. assessee at this stage has to be given reasonable opportunity for offering explanations regarding defects in accounts and on his failure to satisfactorily explain defects, department will be justified in rejecting accounts. subsequent step of assessment to best of judgment, as has been uniformly recognised by courts, involves some guess-work and necessarily has to be done on materials available in each case. Privy Council had occasion to consider exact import of expression "to best of his judgment" occurring in Section 23(4) of Indian Income Tax Act, 1922 (see Commissioner of Income Tax v. Laxminarain Badridas [1937] 5 I.T.R. 170, 180 (P.C.)). Privy Council made following observation in that judgment: "He (the assessing authority) must not act dishonestly or vindictively or capriciously because he must exercise judgment in matter. He must make what he honestly believes to be fair estimate of proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to assessee's circumstances, and his own knowledge of previous returns by and assessments of assessee, and all other matters which he thinks will assist him in arriving at fair and proper estimate; and though there must necessarily be guess-work in matter, it must be honest guess-work." (20 of 29) [ITA-292/2017] 5. In case on hand, only circumstance relied on by authorities below for rejection of accounts is that there was wide disparity in consumption of electricity. In our opinion, this factor by itself without any other supporting circumstance does not justify rejection of accounts. Such variation in consumption of electricity can be due various factors outside control of assessee. It is unsafe to categorically say that because there is variation in consumption of electricity accounts are incorrect or unreliable. It sometimes happens that current supply falls far below usual voltage and on such occasions output will necessarily be much lower than normal rate. efficiency of crushing machine as also moisture content in copra would also be relevant factors to be taken into account in arriving at output. It is, therefore, unsafe to uphold rejection of accounts purely on ground that there has been divergence in consumption of electricity. In this case, there is also additional circumstance that department itself has admitted variations ranging from 10 to 12 units per quintal; and petitioner's consumption of electricity is 12 units per quintal, which cannot be said to be wide off accepted consumption. We are of opinion that in these circumstances rejection of accounts is not legally justified. 6. We accordingly set aside order of Tribunal and direct that assessment be modified accepting assessee's accounts. In circumstances, however, there will be no order as to costs. United Commercial Bank vs. CIT [1999] 240 ITR 355 (SC): 11. From aforesaid form of prescribed balance sheet, it is evident that Scheduled Nationalised Banks were directed to put value of shares and securities at cost and if market value is lower, it was to be shown separately in brackets. Now, question would be when such Bank is submitting its statutory return of income, whether it can disclose in its return its real profit and/or loss on basis of market value of securities and shares? It has been pointed out that balance sheet or audited accounts maintained on basis of investment in shares at cost would not disclose (21 of 29) [ITA-292/2017] real profit or loss of Bankin view of fact that depreciation in value of shares or fall in market value of shares and securities is not provided in audited accounts. Learned Counsel for appellant submitted that even though in balance sheet maintained by assessee, market price of shares and securities is not mentioned, yet for determining real income of assessee Bank, said price is required to be taken into account. And, for that purpose since years, assessee Bank was submitting income tax returns after taking into account market price of such shares and securities which has been accepted by Department without any objection. He also submitted that not making of proper entries in balance sheet could hardly be ground for not assessing real income. 12. For reasons, Central Government had issued Notification dated 12th May, 1982 permitting assessee bank not to disclose in brackets market value of investment under sub-heads in inner column against any of sub-heads (ii), (iii), (iv) and (v) of Item 4 of assets side of prescribed form. It is also undisputed that: (a) appellant is Nationalised Bank and therefore is governed by Banking Regulation Act, 1949. (b) appellant follows mercantile systems of accounting both for Book keeping purpose as well as for tax purposes. (c) appellant consistently and for over 30 years prior to assessment year in dispute (1982-83) has been valuing its stock- in-trade (investments) 'at cost' in balance sheet whereas for same period of time appellant has been valuing very same investment 'at cost or market value whichever is lower' for income tax purposes. 13. In background of aforesaid facts, we would state that it is 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 underlying reasons for said practice thus: (22 of 29) [ITA-292/2017] 'It is wrong to assume that valuation of closing stock at market rate has, for its object, bringing into charge any appreciation in value of such stock. true purpose of crediting value of unsold stock is to balance cost of those goods entered on other side of account at time of their purchase, so that cancelling out of entries relating to same stock from both sides of account would leave only transactions on which there have been actual sales in course of year showing profit or loss actually realised on year's trading. As pointed out in paragraph 8 of Report of Committee on Financial Risks attaching to holding of Trading Stocks, 1919, As entry for stock which appears in trading account is merely intended to cancel charge for goods purchased which have not been sold, it should necessarily represent cost of goods. If it is more or less than cost, then effect is to state profit on goods which actually have been sold at incorrect figure.... From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., adoption of market value at date of making up accounts, if that value is less than cost. It is of course anticipation of loss that may be made on those goods in following year, and may even have effect, if prices rise again, of attributing to following year's results greater amount of profit than difference between actual sale price and actual cost price of goods in question." (extracted in paragraph 281 of Report of Committee on Taxation of Trading Profits presented to British Parliament in April, 1951). While anticipated loss is thus taken into account, anticipated profit in shape of appreciated value of closing stock is not brought into account, as no prudent trader would care to show increased profit before its actual realisation. This is theory underlying rule that closing stock is to be valued at cost or market price whichever is lower, and it is now generally accepted as established rule of commercial practice and accountancy. As profits for income tax purposes are to be (23 of 29) [ITA-292/2017] computed in conformity with ordinary principles of commercial accounting, unless, of course, such principles have been superseded or modified by legislative enactments, unrealised profits in shape of appreciated value of goods remaining unsold at end of accounting year and carried over to following year's in business that is continuing are not brought into charge as matter of practice, though as already stated, loss due to fall in price below cost is allowed even if such loss has not been actually realised. As truly observed by one of learned Judges in Whimster & Co. v. Commissioner of Inland Revenue 12 Tax Cas. 813, Under this law (Revenue Law) profits are profits realised in course of year. What seems exception is recognised where trader purchased and still holds goods or stocks which have fallen in value. No loss has been realised. Loss may not occur. Nevertheless, at close of year he is permitted to treat these goods or stocks as of their market value. 18. Even applying aforesaid tests laid down by this Court, what is taxable under Act is really accrued or arisen income. On basis of method of accountancy regularly employed by assessee, real income is pointed out in income-tax return submitted by assessee. This cannot be ignored by holding that in balance sheet which is required to be statutorily maintained in particular form, market value of shares and securities is not mentioned or is mentioned in brackets. decision in case of State Bank of Travancore does not lay down any rule that whatever is not mentioned in prescribed statutory balance sheet is not to be taken into account for deciding real taxable income. 21. learned Counsel for Revenue further relied upon decision in Commissioner of Income-Tax v. British Paints India Ltd. : [1991]188ITR44(SC) . In our view, said decision would not in way advance contention raised by respondent. Court while dealing with contention of assessee for valuation of raw material without taking into account any portion of cost of manufacture, held that question of fact which Assessing (24 of 29) [ITA-292/2017] Officer must necessarily decide is whether or not method of accounting followed by assessee discloses true income and observed thus: It is well recognised principle of commercial accounting to enter in profit and loss account value of stock- in-trade at beginning and at end of accounting year at cost or market price, whichever is lower. 22. Court further considered Section 145 of Act and observed that what is to be determined by officer in exercise of power is question of fact, that is, whether or not income chargeable under Act can be properly deduced from books of accounts and question must be decided with reference to relevant material and in accordance with correct principles. Court also observed: Where market value has fallen before date of valuation and, on that date, market value of article is less than its actual cost, assessee is entitled to value articles at market value and thus anticipate loss which he will probably incur at time of sale of goods. Valuation of stock-in-trade at cost or market value, whichever is lower, is matter entirely within discretion of assessee. But whichever method he adopts, it should disclose true picture of his profits and gains. If, on other hand he adopts system which does not disclose true state of affairs for determination of tax, even if it is ideally suited for other purposes of his business, such as creation of reserve, declaration of dividends, planning and like, it is duty of Assessing Officer to adopt any such computation as he deems appropriate for proper determination of true income of assessee. This is not only right but duty that is placed on officer, in terms of first proviso to Section 145, which concerns correct and complete account but which in opinion of officer, does not disclose true and proper income. 23. Hence, for purpose of income tax whichever method is adopted by assessee true picture of profits and gains, that is to say, real income is to be disclosed. For determining real income, entries in (25 of 29) [ITA-292/2017] balance sheet required to be maintained in statutory form, may not be decisive or conclusive. In such cases, it is open to Income Tax Officer as well as assessee to point out true and proper income while submitting 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 contention that "if assessee under misapprehension or mistake fails to make entry into books of account and although, under law, deduction must be allowed by Income-Tax Officer, assessee will loss right of claiming or will be debarred from being allowed that deduction." Court held that whether assessee is entitled to particular deduction or not will depend upon provision of law relating thereto and not on view which assessee might take of his rights nor can existence or absence of entries in books of account be decisive or conclusive in matter. In present case, question is slightly different. For reasons, Central Government, in exercise of powers conferred by Section 53 of Banking Regulation Act, and on recommendation of Reserve Bank of India, permitted assessee not to disclose market value of its investment in balance sheet required to be maintained as per statutory form. But as 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 assessee. 24. From decisions discussed above, it can be held: (1) That for valuing closing stock, it is open to assessee to value it at cost or market value, whichever is lower; (2) In balance sheet, if securities and shares are valued at cost but from that no firm conclusion can be drawn. taxpayer is free to employ for 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; (26 of 29) [ITA-292/2017] (3) method of accounting adopted by tax payer consistently and regularly cannot be discarded by departmental authorities on view that he should have adopted different method of keeping accounts or of valuation; (4) concept of real income is certainly applicable in judging whether there has income or not, but in every case, it must be applied with care and within their recognised limits; (5) Whether income has really accrued or arisen to assessee must be judged in light of reality of situation; and (6) Under Section 145 of Act, in case where accounts are correct and complete but method employed is such that in opinion of Income Tax Officer, income cannot be properly deduced therefrom, computation shall be made in such manner and on such basis as Income-Tax Officer may determine. 26. In our view, as stated above consistently for 30 years, assessee was valuing stock-in-trade at cost for purpose of statutory balance sheet, and for income tax return, valuation was at cost or market value whichever was lower. That practice was accepted by Department and there was no justifiable reason for not accepting same. Preparation of balance sheet in accordance with statutory provision would not disentitle assessee in submitting income tax return on real taxable income in accordance with method of account adopted by assessee consistently and regularly. That cannot be discarded by departmental authorities on ground that assessee was maintaining balance sheet in statutory form on basis of cost of investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because Bank was required to prepare balance sheet in prescribed form and it had no option to charge it. For purpose of income tax as stated earlier, what is to be taxed is real income which is to be deduced on basis of accounting system regularly maintained by assessee and that was done by assessee in present case. (27 of 29) [ITA-292/2017] 11. Counsel for respondent has contended that even second issue is covered by aforesaid decisions. 12. So far as issue No.(iii) is concerned, where it has been relied upon decision of Gujarat High Court reported in Tax appeal No.1250/2011 wherein Division Bench on question of own money, in para 9 has observed as under: 9. So far as second question is concerned, we find that same is covered by decision of this Court in case of CIT v. Amar Corporation (supra). This Court while considering same issue held and observed as under: "5. It could be seen from facts that housing projects were developed during years prior to Assessment Year 2004-05. search was conducted on 18.06.2003 wherein loose papers or documents were seized. 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 basis of such loose papers, addition on On-money account was sought to be made. That material could not have been used for subsequent years for making addition on same count. addition in Assessment Year 2004-05 was not sustained by Tribunal in appeal before it on ground that 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 addition for all flats. Accordingly, in respect of previous Assessment Year 2004-05, it was held by Tribunal that addition for On-money, made in said year was not proper inasmuch as such addition could have been made only in respect of flat in respect of which evidence of On-money was found at time of search. said decision dated 31.03.2011 of ITAT, Ahmedabad was relied on, on behalf of assessee. 5.1 Even as for year 2004-05 also, addition on account of on-money was held to be on basis of guess work and extrapolation, again in next year 2005-06 being year under consideration addition of Rs. 1,52,53,128/- was made repeating (28 of 29) [ITA-292/2017] same story. When in respect of previous Assessment Year 2004-05 also Tribunal had dismissed HC-NIC Department's appeal on ground that addition in that year also was based on extrapolation, it emerged beyond pale of doubt that for addition made for year 2005-06 there was no evidence whatsoever and same was presumptive in nature. 6. In above view, findings recorded by Tribunal were proper and legal flowing logically from facts on record. Tribunal has not committed any error in passing impugned order. appeal is devoid of merit, and raises no substantial question of law required to be considered. 7. Accordingly, appeal is dismissed." 13. In that view of matter, he has contended that issue No.(iii) is required to be answered in favour of assessee and against department. 14. We have heard counsel for parties. 15. In view of observations made in para 12, 12.1 onwards and 13, by Tribunal, we are of opinion that Tribunal while considering case has gone in detail and after considering facts on record has given finding. In our considered opinion Tribunal being fact finding authority, it will not be appropriate for us to re appreciate evidence which has already been appreciated by Tribunal. 16. Therefore, in view of decision of this Court and Gujarat High Court, referred to by Mr. Jhanwar, first issue is answered in favour of assessee. 17. In view of decision of Supreme Court referred hereinabove, second issue is also required to be answered in favour of assessee. 18. In view of decision of Gujarat High Court in case of S.A. Builders (supra), issue No.(iii) is answered in favour of assessee and against department. (29 of 29) [ITA-292/2017] 5. Hence, no substantial question of law arises. 6. appeal stands dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. Brijesh 55. Principal Commissioner of Income-tax, Jaipur-2, Jaipur v. Unique Builders & Developer
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