2008 (5) TMI 6 - SC - Income Tax

Whether income accrued to the assessee on registration of the sale deed in favour of the third party or whether it accrued at the time of execution of the tripartite agreement? If the AO observes that there is under estimation of profits, he must give facts and figures in that regard that the impugned method of accounting adopted by the assessee results in under estimation of profits and is therefore rejected. Otherwise, the presumption would be that the entire exercise is Revenue neutral

Summary

Issues:
- Interpretation of income accrual on registration of sale deed vs. execution of tripartite agreement
- Method of accounting under Section 145 of the Income Tax Act
- Application of 'rule of consistency' in tax assessments

Interpretation of Income Accrual:
The case revolved around determining whether income accrued to the assessee on the registration of the sale deed or at the time of execution of the tripartite agreement. The Department argued that income accrued when the tripartite agreement was executed, while the assessee contended that income did not accrue until the date of conveyance. The AO's assessment included calculations based on the sale price, cost per Sq.Mtr., and profits from the sale of individual plots. The Supreme Court noted that the transaction's genuineness was not challenged, focusing on the year in which tax liability arose. Although the Court disagreed with the High Court's reasoning, it found no reason to interfere due to the Department's failure to address the method of accounting under Section 145 of the Income Tax Act.

Method of Accounting under Section 145:
The Court emphasized that under Section 145 of the Income Tax Act, the Department could request a change in the assessee's accounting method if it led to an underestimation of profits. However, in this case, the Department did not allege underestimation of profits or provide evidence to support a change in the accounting method. The Court highlighted the importance of the AO demonstrating both the assessee's method and the Department's proposed method to justify any adjustments. Since this exercise was not undertaken, the Court upheld the High Court's decision and dismissed the Civil Appeal.

Application of 'Rule of Consistency':
Regarding the 'rule of consistency,' the Court disagreed with the High Court's reliance on it. The Court stressed that when taxing an assessee based on liability arising in a specific year, the Department must consider the assessee's past accounting practices. If a change in the accounting method is warranted due to underestimation of profits, the AO must provide factual evidence to support this claim. As the Department failed to demonstrate underestimation of profits or compare the two accounting methods, the Court upheld the High Court's decision based on the lack of evidence supporting a change in accounting method.

In conclusion, the Supreme Court dismissed the Civil Appeal, maintaining the High Court's judgment due to the Department's failure to address the method of accounting and demonstrate underestimation of profits. The Court highlighted the importance of factual evidence and comparison of accounting methods when challenging an assessee's profit estimation, emphasizing the need for a detailed assessment before altering the accounting method.