2025 (1) TMI 1050 - AT - Income Tax

Undisclosed sale - difference in WIP stock account during the year - addition on account of undisclosed sales on the basis of figures as appearing in respect of opening and closing of WIP for this year vis- -vis the sales as disclosed in the P L account - HELD THAT - It is a settled position of law that once the method of accounting has been accepted by the Revenue in the earlier years it cannot be rejected in the subsequent year without bringing anything on record to show that the fact was different during that year. No such discrepancy was recognized and brought on record by the Revenue. The accounting method adopted by the assessee was a recognized method of accounting as per the Accounting Standards issued by ICAI and the percentage completion method was consistently followed by the assessee in all the years to recognize its revenue which was also accepted by the Revenue. AO was not correct in rejecting the method of accounting regularly followed by the assessee and in working out the income on the basis of actual sales made during the year. Revenue cannot be allowed to flip-flop the method of accounting regularly followed by the assessee without pointing out any defect in the accounts of the assessee. As rightly pointed by the assessee the profit out of the sales were already substantially accounted for by the assessee in the earlier years on the basis of percentage completion method and the addition made in the current year on the basis of actual sales had led to double addition. Hon ble Supreme Court has held in the case of Bilahari Investment P Limited 2008 (2) TMI 23 - SUPREME COURT that every assessee is entitled to arrange its affairs and follow the method of accounting which the Department has earlier accepted. CIT(A) has rightly upheld the method of accounting regularly followed by the assessee and has correctly deleted the addition as made by the AO. The addition made by the AO was not only incorrect but was based on wrong presumption which had led to double addition. As explained by the assessee the work-in-progress credited to P L account comprised of cost-plus profit on percentage completion method and the closing balance of WIP was accordingly disclosed in the accounts. Thus the profit was already disclosed in closing WIP every year and this fact has not been controverted by the Revenue. Therefore the Ld. CIT(A) has correctly deleted the addition made by the AO in the current year. Decided against revenue.

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

Whether the addition of Rs. 4,20,11,458/- made by the Assessing Officer (AO) on account of undisclosed sales was justified.
Whether the method of accounting consistently followed by the assessee, i.e., the percentage completion method, should have been rejected by the AO in favor of the project completion method.
Whether the Ld. Commissioner of Income Tax (Appeals) [CIT(A)] was correct in deleting the addition made by the AO without calling for a remand report.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of Addition on Account of Undisclosed Sales

Relevant Legal Framework and Precedents: The legal framework involves the principles of accounting methods accepted by the Income Tax Department and the requirement for consistency in accounting practices. The precedents cited include the Supreme Court decision in Bilahari Investment Pvt. Ltd. and the ITAT decisions in Unity Construction Co and Peninsula Land Ltd..
Court's Interpretation and Reasoning: The tribunal found that the AO's addition was incorrect as it failed to consider the sales already disclosed in the Profit & Loss (P&L) account. The AO did not allow the set-off for sales disclosed by the assessee, leading to an incorrect addition.
Key Evidence and Findings: The assessee consistently followed the percentage completion method, which was accepted by the Department in previous years. The tribunal noted that the AO did not identify any defects in the assessee's books or discrepancies in the submissions.
Application of Law to Facts: The tribunal applied the principle that once a method of accounting is accepted, it cannot be rejected without evidence of distortion of profits. The AO's failure to identify such distortion or defects invalidated the addition.
Treatment of Competing Arguments: The Revenue argued that the CIT(A) considered additional evidence without a remand report. The tribunal found this incorrect, as the evidence was part of the accounts filed in the Income Tax Returns (ITRs) for different years, not new evidence.
Conclusions: The tribunal concluded that the addition was unjustified and upheld the CIT(A)'s decision to delete it.

Issue 2: Rejection of Percentage Completion Method

Relevant Legal Framework and Precedents: The legal framework includes the recognition of accounting methods under the Accounting Standards issued by ICAI. The precedents emphasize the consistency of accounting methods.
Court's Interpretation and Reasoning: The tribunal emphasized the importance of consistency in accounting methods, noting that the percentage completion method was a recognized and accepted method for revenue recognition.
Key Evidence and Findings: The tribunal found no evidence of profit distortion or defects in the assessee's accounting method, which had been consistently followed and accepted in prior years.
Application of Law to Facts: The tribunal applied the principle of consistency and found that the AO's switch to the project completion method was unjustified without evidence of distortion.
Treatment of Competing Arguments: The assessee argued that the AO's change in accounting method led to double addition. The tribunal agreed, noting that the profit was already disclosed in the closing work-in-progress (WIP) each year.
Conclusions: The tribunal upheld the CIT(A)'s decision to maintain the percentage completion method and reject the AO's change.

Issue 3: Deletion of Addition Without Remand Report

Relevant Legal Framework and Precedents: The legal framework involves the procedural requirements for considering additional evidence in appellate proceedings.
Court's Interpretation and Reasoning: The tribunal found that the CIT(A) did not consider new evidence, but rather charts and figures already part of the assessee's accounts.
Key Evidence and Findings: The tribunal noted that the figures were part of the ITRs and were not new, thus not requiring a remand report.
Application of Law to Facts: The tribunal applied the procedural rules and found no error in the CIT(A)'s approach.
Treatment of Competing Arguments: The Revenue's argument regarding the need for a remand report was dismissed as the tribunal found no new evidence was considered.
Conclusions: The tribunal concluded that the CIT(A) acted correctly in deleting the addition without a remand report.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "Once the method of accounting has been accepted by the Revenue in the earlier years, it cannot be rejected in the subsequent year without bringing anything on record to show that the fact was different during that year."
Core Principles Established: The principle of consistency in accounting methods is crucial. A change in method requires evidence of distortion or defects. The percentage completion method is a recognized accounting method.
Final Determinations on Each Issue: The tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 4,20,11,458/-, maintained the percentage completion method, and found no error in the CIT(A)'s consideration of evidence without a remand report.

In conclusion, the tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision and emphasizing the importance of consistency in accounting practices and the proper application of legal standards in assessing tax liabilities.

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