2006 (11) TMI 172 - HC - Income Tax

Method of accounting - business of execution of works contract - Whether the Tribunal was right in not accepting the valuation of closing work-in-progress in accordance with accounting standard (AS-7) as laid down by the ICAI and to work out the profit on the basis of the accounts maintained? - HELD THAT - The assessee-firm/appellant being a private Ltd. company was maintaining its accounts following the said system and the accounts were duly audited by a qualified chartered accountant maintenance of the accounts as well as the valuation of work-in-progress will not prejudice either side. Admittedly the particular work contract was not completed and it comes under the category of work-in-progress. There is also no dispute that the ultimate liability of the assessee as regards tax will be dependant upon the total (fixed) amount received by the assessee against the particular work contract. We therefore hold that the income-tax authority has no option/jurisdiction to meddle in the matter either by directing the assessee to maintain its accounts in a particular manner or adopt a different method for valuing the work-in-progress. We reiterate the decision in Doom Dooma India Ltd. 1992 (12) TMI 41 - GAUHATI HIGH COURT and hold that an assessee has as the option/liberty to adopt any recognized method of accounting for his business and the income shall be computed in accordance with such regularly maintained accounting system. In the result the substantial question of law is answered in favour of the appellant and against the Revenue. The impugned order passed by the Tribunal is set aside and that of the CIT(A) is restored.

Summary

Issues: Valuation of work-in-progress for income tax assessment under AS-7 accounting system

Analysis:

Issue 1: Valuation of work-in-progress under AS-7 accounting system
The appellant, a private limited company engaged in works contract business, followed AS-7 accounting system for determining the closing value of work-in-progress. The assessing authority disputed the method and assessed the income differently. The appellate authority, however, upheld the appellant's method citing compliance with commercial accounting principles and AS-7. The Income-tax Appellate Tribunal reversed the appellate authority's decision, leading to the present appeals.

Issue 2: Question of law on valuation of work-in-progress
The central question of law in all appeals was whether the Tribunal erred in rejecting the valuation of closing work-in-progress as per AS-7 and insisting on a different method. The appellant argued that the Income-tax Department cannot compel a specific accounting system, highlighting the flexibility allowed under AS-7 for valuing work-in-progress.

Issue 3: Legal precedent and authority on accounting methods
The court referred to the case of CIT v. Doom Dooma India Ltd., emphasizing the freedom of the assessee to choose a reasonable accounting method. It cited Supreme Court decisions supporting the regularity and consistency of the accounting method chosen by the taxpayer, unless it distorts income calculation. The court upheld the authenticity of AS-7 as an approved accounting system by the Institute of Chartered Accountants of India.

Issue 4: Jurisdiction of Income-tax authority
The court affirmed that the Income-tax authority has no jurisdiction to dictate the accounting method or valuation of work-in-progress to the assessee. It reiterated that the assessee has the liberty to adopt any recognized accounting method for business, and income should be computed based on the regularly maintained accounting system. Consequently, the court ruled in favor of the appellant, setting aside the Tribunal's order and restoring that of the Commissioner of Income-tax (Appeals).

In conclusion, the judgment clarifies the rights of the assessee in choosing accounting methods, upholding the validity of AS-7 and rejecting the Income-tax authority's interference in the valuation of work-in-progress.