2020 (7) TMI 285 - HC - Income Tax

Method of accounting - Completed contract method of accounts - scope of amendment to Section 145 of the Act w.e.f. 01.04.1997 and applicable to the current assessment year - HELD THAT - Assessee is following mercantile system of accounting and as per notes to the accounts, the assessee is following completed contract method of accounting for contracts. The aforesaid method of assessment has been accepted by the department in the past and therefore, in view of law laid down by the Supreme Court in BILAHARI INVESTMENTS PVT. LTD. 2008 (2) TMI 23 - SUPREME COURT the Commissioner of Income Tax (Appeals) as well as the tribunal has rightly held that there was no justification on the part of the assessing officer to change the earlier method adopted by the assessee and to determine the income on estimate basis. Assessee was following completed contract method which was accepted by the department in the past as well and therefore, there is no justification for the assessing officer to change the same. For the aforementioned reasons the submission made on behalf of the revenue cannot be accepted. By reading the order of the tribunal as a whole, it is evident that the tribunal has taken note of the effect of Section 145 of the Act. Therefore, the aforesaid submission made on behalf of the revenue also does not deserve acceptance.

Issues:
1. Interpretation of Section 260A of the Income Tax Act for an appeal.
2. Applicability of completed contract method of accounting for assessment year 1997-98.
3. Justification of assessing officer's addition based on estimated income.
4. Decision of Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal.
5. Compliance with directions of the High Court.
6. Comparison of completed contract method with percentage completion method.
7. Application of Section 145 of the Income Tax Act.
8. Precedents and legal principles regarding method of accounting.

Analysis:
1. The appeal under Section 260A of the Income Tax Act was preferred by the assessee concerning the adoption of the completed contract method of accounting for the assessment year 1997-98. The substantial question of law revolved around the correctness of adopting this method in light of an amendment to Section 145 of the Act.

2. The assessee, a company engaged in plot development and flat construction, followed the mercantile system of accounting and completed contract method. The assessing officer added an estimated income based on advances received, leading to disputes and appeals. The Commissioner of Income Tax (Appeals) held in favor of the assessee, emphasizing the accumulated balance nature of the advances.

3. The assessing officer's addition based on an 8% rate on advances was challenged, with subsequent appeals upholding the completed contract method consistently followed by the assessee. The tribunal referred to the Supreme Court's decision in 'CIT VS. BILAHARI INVESTMENTS PVT. LTD.' to support the assessee's method, leading to the dismissal of the appeal by the tribunal.

4. The High Court, in a previous appeal, set aside the tribunal's order, emphasizing the post-amendment scenario of Section 145(1) and remitted the matter for fresh consideration. The tribunal, in its subsequent order, reiterated the acceptance of the completed contract method by the department in the past, aligning with the Supreme Court's principles.

5. The revenue's contentions regarding non-compliance with court directions and comparison with other judgments were refuted, emphasizing the consistent application of the completed contract method and the lack of distortion in profits. The High Court upheld the decisions of the lower authorities and dismissed the appeal in favor of the assessee.

6. The comparison between completed contract and percentage completion methods was raised, with arguments for and against each approach. The High Court reiterated the acceptance of the completed contract method by the department, emphasizing the assessee's right to follow an accepted accounting method.

7. Section 145 of the Income Tax Act, dealing with the method of accounting, was central to the judgment. The High Court highlighted the non-retrospective nature of the amendment and the Supreme Court's stance on allowing an assessee to maintain an accepted accounting method unless distortion of profits is proven.

8. Precedents and legal principles, including the Supreme Court's decision in 'BILAHARI INVESTMENTS PVT. LTD.,' were crucial in establishing the validity of the completed contract method. The High Court's detailed analysis upheld the assessee's right to follow the accepted method and dismissed the revenue's appeal based on the established legal framework.

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