2003 (4) TMI 224 - AT - Income Tax

Summary

Issues Involved:
1. Method of accounting for income recognition.
2. Validity of AO's addition of 8% on work-in-progress.
3. Consistency and acceptance of the project completion method by the Department.

Summary:

1. Method of Accounting for Income Recognition:
The assessee, a private limited company engaged in property development, filed a return of income for the assessment year declaring Rs. 4,26,440. The AO observed that the assessee valued work-in-progress at Rs. 13,07,67,368 based on expenses incurred. The assessee followed the completed contract system, offering profits for taxation only upon project completion. The AO rejected this, adding 8% of the work-in-progress as income, referencing a prior Tribunal decision.

2. Validity of AO's Addition of 8% on Work-in-Progress:
The CIT(A) upheld the AO's decision, stating that the principle of res judicata or estoppel does not apply to income-tax proceedings. The CIT(A) noted that the assessee followed the mercantile method of accounting, where income is taxed on accrual. The CIT(A) justified the AO's action by referencing Supreme Court decisions and guidelines from the Institute of Chartered Accountants of India, which recognize both the percentage of completion method and the completed contract method.

3. Consistency and Acceptance of the Project Completion Method by the Department:
The assessee argued that the project completion method had been consistently followed and accepted by the Department in previous years. The assessee cited several legal precedents supporting the validity of this method. The Tribunal agreed with the assessee, emphasizing that u/s 145, the method of accounting regularly employed by the assessee should be accepted if it properly reflects income. The Tribunal noted that the Department had accepted this method in other years and found no defects in the assessee's accounts. The Tribunal referenced the Karnataka High Court's decision in Khoday Distillers Ltd., which supported the completed contract method.

Conclusion:
The Tribunal concluded that the Department's addition of 8% on work-in-progress was unjustified. The AO was directed to accept the assessee's method of accounting for the computation of income for the year in question. The appeal was allowed.