1986 (8) TMI 131 - AT - Income Tax

Summary

Issues Involved:
1. Legality of protective assessment.
2. Right to appeal against protective assessment.
3. Method of accounting and estimation of profits.
4. Validity of the Income Tax Officer's (ITO) acceptance of the assessee's income declaration.

Detailed Analysis:

1. Legality of Protective Assessment:
The primary issue revolves around whether the protective assessment made by the ITO is legally valid. The ITO completed the assessment on a protective basis, reasoning that the income should be assessed in the year the flats are sold. The Commissioner (Appeals) found this approach unjustified, stating that the ITO should either assess the income or reject it, but not keep the assessee in perpetual anxiety by making a protective assessment. The Commissioner (Appeals) ordered that the assessment should be treated as a regular assessment and that credit for the income assessed should be given when the sales of the flats are finally effected.

2. Right to Appeal Against Protective Assessment:
The revenue argued that no appeal lies against protective assessment under section 246(1)(c) of the Income-tax Act, 1961. They cited several cases, including Smt. Tara Devi Aggarwal v. CIT and CIT v. Kanpur Coal Syndicate, to support their contention. However, the assessee's counsel argued that the controversy was whether the income offered for assessment is assessable now or in the future, which falls under the purview of section 246(1)(c). The Tribunal agreed with the assessee, distinguishing the cited cases on the grounds that they involved multiple potential assessees, whereas the present case involved only one. The Tribunal held that the appeal against the protective assessment is valid and that the Commissioner (Appeals) had the requisite authority to entertain the appeal.

3. Method of Accounting and Estimation of Profits:
The ITO accepted the assessee's method of estimating gross profit at 9% of the total deposits, which the Commissioner (Appeals) also upheld. The assessee argued that their method of accounting, which involves estimating profits from advances received even before the completion of sales, is consistent with industry practice and has been accepted by the department in previous years and in other cases. The Tribunal cited various judgments, including CIT v. McMillan & Co., CIT v. A. Krishnaswami Mudaliar, and CIT v. Tata Iron & Steel Co. Ltd., to support the principle that the method of accounting regularly employed by the assessee should be the basis for computation unless it fails to reflect true income. The Tribunal found that the assessee's method was reasonable and consistent with industry practice.

4. Validity of the ITO's Acceptance of the Assessee's Income Declaration:
The revenue contended that the ITO should have set aside the assessment to determine the real profit earned by the assessee. However, the Tribunal found that the ITO had deliberately accepted the 9% gross profit after considering the assessee's explanation regarding increased costs and fixed sale prices. The Tribunal noted that the ITO had the option to reject the accounts if the real income could not be deduced, but chose to accept the 9% estimate. The Tribunal upheld the Commissioner (Appeals)'s decision to treat the protective assessment as a regular assessment, finding no merit in the revenue's appeal.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the Commissioner (Appeals)'s order to treat the protective assessment as a regular assessment and granting the assessee's right to appeal. The Tribunal affirmed the validity of the assessee's method of accounting and the ITO's acceptance of the 9% gross profit estimate.