2009 (7) TMI 708 - HC - Income Tax

Method of Accounting- Consistent Practice- The respondent-assessee is a registered firm. . It had entered into an agreement with the Reserve Bank of India for developing the property on commercial scale and thereafter to sell the land and property on package deal basis. The assessee had adopted a consistent practice of not disclosing the work-in-progress while working its profit and loss. The profits as disclosed during the previous assessment year, i.e., 1986-87 and the subsequent assessment year 1988-89 on this basis had been accepted by the Department. However, during the assessment years in question the Assessing Officer made an addition of Rs.5,47,000 being the value of the work-in-progress. The matter was taken up in appeal before the Commissioner of Income-tax (Appeals) who even though held that the value of the work-in-progress ought to be disclosed and taken into account while working out the profits, yet in the special circumstances of the present case as the trade results have been accepted both in the previous year and the subsequent year, it will disturb the entire method adopted by the assessee and would lead to reopening and adjustment in the opening and closing stock of the previous and subsequent year. The Commissioner of Income-tax (Appeals), therefore, accepted the claim of the assessee. Tribunal upheld the order of Commissioner(Appeals). Held that- The rate of profits shown by the assessee is more than 10 per cent. without retention money and the profits result of the year is fair and reasonable by any standard and the books of account have been regularly maintained and no fault has been found in them. Further the expenses allowed in the past had not been claimed against the money received this year and for the work done in the last year - Decided in favor of the assessee

Summary

Issues:
1. Whether the Income-tax Appellate Tribunal was justified in holding that the Assessing Officer was not justified in disturbing the system of accounting regularly adopted by the assessee?
2. Whether the Income-tax Appellate Tribunal was justified in not considering the full value of closing stock of work-in-progress for computing the correct income of the assessee?

Analysis:
1. The appeal pertains to the assessment year 1987-88, where the respondent-assessee, a registered firm engaged in real estate development, had consistently not disclosed work-in-progress while calculating profits. The Assessing Officer made an addition of Rs. 5,47,000 for the value of work-in-progress, which was contested by the assessee. The Commissioner of Income-tax (Appeals) acknowledged the need to disclose work-in-progress but refrained from disturbing the method due to accepted trade results in previous and subsequent years. The High Court upheld the decision, emphasizing that the method adopted by the assessee was fair and reasonable, with profits exceeding 10% and proper maintenance of accounts.

2. The Revenue challenged the Commissioner's decision before the Income-tax Appellate Tribunal, arguing that work-in-progress should have been considered for computing true profits. However, the Tribunal upheld the deletion of Rs. 5,47,000, stating that adjusting the value of work-in-progress would require modifications in opening stock. The High Court agreed with the Tribunal's reasoning, noting that the assessee's profit percentage was satisfactory, expenses were appropriately managed, and no discrepancies were found in the accounts. Consequently, the High Court dismissed the appeal, affirming the Tribunal's decision to exclude the value of work-in-progress while computing the assessee's income for the relevant assessment year.