2004 (9) TMI 47 - HC - Income Tax

Assessing Officer did not accept the return and completed the assessment under section 143(3) by taking recourse to section 145 - Assessing Officer was of the view that the method of accounting employed by the assessee led to a fictitious profit being offered to tax and did not permit the correct income to be deduced. The Assessing Officer, therefore, adopted a different computation of income by exercising power under section 145 CIT holding that order of AO is prejudicial to interest of Revenue set aside the order of AO on ground that AO had failed to take notice of two relevant items while determining the value of the gross work i.e. value of opening stock and cost of land on which the flats/shops were constructed Held that Tribunal has rightly held that there was no error or prejudice to the interests of the Revenue in so far as non-inclusion of the cost of land appeal is allowed in part and modify the order of the revisional authority and restrict the direction for fresh assessment by adding only cost of opening stock, to arrive at the gross profit and consequential income

Summary

Issues involved:
Assessment under section 260A of the Income-tax Act, 1961 regarding the method of accounting adopted by the assessee, determination of gross value of work executed, revisional order under section 263 of the Act, challenge to revisional order before the Income-tax Appellate Tribunal, whether the order passed by the Assessing Officer was prejudicial to the interests of the Revenue, inclusion of opening stock and cost of land in the calculation of gross value of work, estimation of profit based on expenditure incurred, treatment of profit from the sale of undivided share of land.

Analysis:
The case involved an appeal by the Revenue challenging the order passed by the Income-tax Appellate Tribunal regarding the assessment year 1992-93. The assessee, a builder-cum-contractor, had adopted a specific method of accounting where the cost of land purchased for construction was treated as a capital expense, while construction costs were considered as revenue expenditure. The Assessing Officer, disagreeing with this method, determined the gross value of work executed and calculated the profit accordingly. The Commissioner of Income-tax issued a revisional order under section 263, directing the inclusion of opening stock and the cost of land in the assessment.

The Tribunal allowed the assessee's appeal, holding that the Assessing Officer's estimation of income based on expenditure incurred was not proper as no income accrues until the flats are sold. The Tribunal also noted that the Assessing Officer had failed to consider certain items while estimating income. The Tribunal found that the revisional authority was not justified in setting aside the assessment order as it was not prejudicial to the Revenue's interests. The Tribunal emphasized that the method of estimating income solely based on expenditure was incorrect.

The High Court analyzed the issues in detail, concluding that while the failure to include the opening stock amount in the calculation of gross value of work was indeed prejudicial to the Revenue, the direction to add the cost of land was unwarranted. The Court agreed with the Tribunal that the assessee's method of accounting, especially regarding the sale of undivided share of land, did not result in any error or prejudice to the Revenue. Therefore, the Court allowed the appeal in part, modifying the revisional authority's order by adding only the cost of opening stock to arrive at the gross profit and consequential income for the relevant year.