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TMI Blog2017 (11) TMI 1423X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome in accordance with a method of account adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that assessee was maintaining balance sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the Bank was required to prepare balance sheet in the prescribed form and it had no option to charge it. For the purpose of income tax as stated earlier, what is to be taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case - Decided in favour of assessee. - D. B. Income Tax Appeal No. 292 / 2017 - - - Dated:- 9-11-2017 - K. S. Jhaveri And Vijay Kumar Vyas, JJ. For the Appellant : Mr. K. D. Mathur for Mr. R. B. Mathur JUDGMENT 1. By way of this appeal, the appellant has assailed the judgment and order of the tribunal whereby the tribunal has allowed the appeal preferred by the assessee and dismissed the appeal of the department. 2. Counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hern heights was calculated by adopting percentage completion method at ₹ 29265090/-. Further on the basis of seized records, which was found from the laptop of Shri Naveen Bhutani, the working of profit was also worked out which comes to ₹ 28917000/-. Although, the percentage completion method is logical way to arrive at true profits of the real estate project, but the seized papers mentioning the complete details of project from commencement to completion also could not be ignored. The profit as per seized document was taken at ₹ 28917000/-, however, no separate addition of ₹ 28917000/- was made by the Assessing Officer on total income of the assessee. Further, the assessee claimed deduction u/s. 80IB of ₹ 48000415/-. The Assessing Officer disallowed the claim of the assessee as the certificate of approval of project by the local authority was in the name of partner Sh. Ajit Singh and not in the name of the firm. 4. However, in view of the decision of this court in the case of same assessee in Income Tax Appeal No.23/2013 decided on 19.5.2017 wherein it has been held as under:- 7. Counsel for the respondent Mr. Jhanwar has contended that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot result into rejection of books of account. 9. Leave apart the above, in our view, what conclusions are to be reached is independent of the results shown in the books of account if any maintained by the assessee. Section 145 only provides the basis on which computation of income is to be made for the purpose of determining the amount of tax payable by an assessee. The provision by itself does not deal with the addition or deletion in the income. Best judgment is also based on the material available on record and therefore, while making an addition something more is to be collected by the AO who makes assessment of an assessee. As pointed out above, merely because there is some deficiency of quality wise record in the books of account, or merely because of rejection of the books of account, it does not mean that it must necessarily lead to addition in the return of income of the assessee. As noticed earlier, even the AO estimated the income by making estimated addition by applying a particular GP Rate so also the CIT(A) reduced it further. Therefore, these two authorities even while resorting to best judgment had no basis for coming to the conclusion reached and even in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is common knowledge that all the records are maintained on computer including by the government and semi government organizations. Even if, records are maintained on computer is not ground to reject the explanation of the assessee. The AO should have verified the entries from the computerized records also to point out any defect thereon. In the absence of any specific defect pointed out in the books of accounts and the records maintained on computer, the AO was not justified in rejecting the books results, or to enhance the gross profit rate. Accordingly, there is no merit in this ground of appeal of the revenue. The same is accordingly, dismissed. From the above, it can be seen that the entire issue is based on appreciation of evidence on record. No question of law, therefore, arises particularly when the Commissioner (Appeals) as well as the Tribunal concurrently held in favour of the assessee. Issue No. 2 pertains to the additions made by the Assessing Officer on account of excessive expenses. The Commissioner (Appeals) as well as the Tribunal, however were of the opinion that such additions were not justified. The Tribunal while upholding the view of the Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue income of the assessee from the accounts maintained by her, nor the accounts can be said to be defective or incomplete for this reason alone. If stock register is not maintained by the assessee that may put the Assessing Officer on guard against the falsity of the return made by the assessee and persuade him to carefully scrutinize the account books of the assessee. But the absence of one register alone does not amount to such a material as would lead to the conclusion that the account books were incomplete or inaccurate. Similarly, if the rate of gross profit declared by the assessee in a particular period is lower as compared to thegross profit declared by him in the preceding year, that may alert the Assessing Officer and serve as a warning to him, to look into the accounts more carefully and to look for some material which could lead to the conclusion that the accounts maintained by the assessee were not correct. But, a low rate of gross profit, in the absence of any material pointing towards falsehood of the accounts books, cannot by itself be a ground to reject the account books under Section 145(3) of the Act. 10. In view of above observations and considering the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration. The tribunal further noted that such method of accounting followed by the assessee had been accepted by the revenue in earlier years. The Tribunal was, therefore, of the opinion that the Assessing Officer s decision to reject the book results during the year under consideration was not justified. 4. WE are of the opinion that the Tribunal committed no error. If as per the accounting standard available, the assessee was entitled to claim the entire income on completion of the project and if such accounting standard was accepted by the revenue in the earlier years, in the present year, the Assessing Officer could not have taken a different stand and that too, without hearing the assessee. Paras Buildtech India Private Limited anr. vs. CIT Anr. [2016] 382 ITR 630 (Delhi): 18. Section 145(1) of the Act states that the income chargeable under the heads 'Profits and gains of business or profession' shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the Assessee . It is only with effect from 1st April 2015 that a change has been brought about in Section 145(2) which permits the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er aspects relating to service of notice in the first proviso to Section 145 and did not deal with the issue and question accordingly. On the second question, therefore, we hold and observe that completed contract method can be adopted under Section 145 of the Act when an assessee follows mercantile system of accounting. However, we remand the matter to the tribunal to examine the other aspects relating to computation of taxable income on the basis of completed contract method. Question No. 2 is accordingly answered partly affirmative and partly in negative. Commissioner of Income Tax vs. Bilahari Investment (P) Ltd [2008] 299 ITR 1 SC: 15.Recognition/ identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. Completed contract method is one such method. Similarly, percentage of completion method is another such method. 19. In the judgment of the Bombay High Court in Taparia Tools Ltd. (supra) it has been held that in every case of substitution of one method by another method, the burden is on the Department to prove that the method in v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason to withhold the handing over of possession of the space to the purchaser in respect of a project which is completed and that wherever possession was not handed over to the purchaser, it was for the reason that the project was not completed. He further found that a buyer who has paid the entire sale consideration would immediately demand possession and the entire sale consideration could be received by the assessee only on completion of the project. On these facts it was noted by the CIT (A) that unless the buyer makes full payment the assessee could not hand over possession nor get the sale transaction registered. A further finding recorded by the CIT (A) was that the impugned project was completed only in the accounting period relevant to the assessment year 2008-09 and in support of this finding, he noted that a copy of the completion/occupancy certificate was placed on the record of the Assessing Officer. He further recorded a finding that after the issue of the occupancy certificate and till the date of the assessment order, possession of almost 75% of the developed area was handed over to the buyers who made full payment and the sale deeds were also executed. Thereafter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r that concept, two methods exist for ascertaining profit for contracts, namely, completed contract method and percentage of completion method . To know the results of his operations, the contractor prepares what is called a contract account which is debited with various costs and which is credited with revenue associated with a particular contract. However, the rules of recognition of cost and revenue depend on the method of accounting. Two methods are prescribed in Accounting Standard No.7. They are completed contract method and percentage of completion method. This view was reiterated by the Supreme Court in Commissioner of Income-Tax v. Balearic Investment P. Ltd. MANU/IG/5001/2007 : (2008) 299 ITR 1 (SC) with the following observations: Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. The completed contract method is one such method. Similarly, the percentage of completion method is another such method. Under the completed contract method, the revenue is not recognized until the contract is complete. Under the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under Sub- section (2), have not been regularly followed by the Assessee, the Assessing Authority may make an assessment in the manner provided in Section 144. Therefore, in order to invoke Section 145(3) of the Act and disturb the existing system of accounting, the Assessing Officer must necessarily express his dissatisfaction about the correctness or completeness of the accounts of the Assessee and also note that such system of accounting was not regularly followed by the Assessee, in which event alone, the Assessing Officer can exercise his jurisdiction and make an assessment as provided under Section 144 of the Act. 9. We fully concur with the conclusion of the Tribunal in having interfered with the orders of the Assessing Authority as well as that of the Commissioner of Income-tax (Appeals). We are, therefore, not inclined to entertain the substantial question of law, as we do not find any need for the same. The appeal fails and the same is dismissed. No costs. MKB (Asia) (P) Ltd. vs. CIT [2007] 294 ITR 655 (Gau HC): 11. As stated above, the accounting system AS 7 is an approved system of accounting by the Institute of Chartered Accountants and as such the aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese and various other factors. It was also contended that no test-crushing had been done in this case and the department itself had accepted in other cases figures varying from 10 to 12 units per quintal of copra. In the petitioner's case, the average works out to 12 units per quintal. On behalf ofthe revenue it was urged that the rejection of the accounts was justified since there was very wide divergence in the consumption of electricity and that it was indicative of the unreliability of the petitioner's accounts. The proposition is well-settled that accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The department has to prove satisfactorily that the account books are unreliable, incorrect or incomplete before it can reject the accounts. The rejection of accounts is not a matter to be done light-heartedly, though it may not be possible to lay down in general terms the exact circumstances in which the accounts should be considered as unreliable or incorrect. The accounts could be rejected as unreliable if important transactions are omitted therefrom or if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors outside the control of the assessee. It is unsafe to categorically say that because there is variation in the consumption of electricity the accounts are incorrect or unreliable. It sometimes happens that current supply falls far below the usual voltage and on such occasions the output will necessarily be much lower than the normal rate. The efficiency of the crushing machine as also the moisture content in the copra would also be relevant factors to be taken into account in arriving at the output. It is, therefore, unsafe to uphold the rejection of the accounts purely on the ground that there has been divergence in the consumption of electricity. In this case, there is also the additional circumstance that the department itself has admitted variations ranging from 10 to 12 units per quintal; and the petitioner's consumption of electricity is 12 units per quintal, which cannot be said to be wide off the accepted consumption. We are of the opinion that in these circumstances the rejection of the accounts is not legally justified. 6. We accordingly set aside the order of the Tribunal and direct that the assessment be modified accepting the assessee's accounts. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant has been valuing the very same investment 'at cost or market value whichever is lower' for income tax purposes. 13. In the background of the aforesaid facts, we would state that it is an established rule of commercial practice and accountancy that closing stock can be valued at cost or market price whichever is lower. In Chainrup Sampatram v. Commissioner of Income Tax, West Bengal MANU/SC/0046/1953 : [1953]24ITR481(SC) , this Court explained the underlying reasons for the said practice thus: 'It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year's trading. As pointed out in paragraph 8 of the Report of the Committee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... What seems an exception is recognised where a trader purchased and still holds goods or stocks which have fallen in value. No loss has been realised. Loss may not occur. Nevertheless, at the close of the year he is permitted to treat these goods or stocks as of their market value. 18. Even applying the aforesaid tests laid down by this Court, what is taxable under the Act is the really accrued or arisen income. On the basis of the method of accountancy regularly employed by the assessee, the real income is pointed out in the income-tax return submitted by the assessee. This cannot be ignored by holding that in a balance sheet which is required to be statutorily maintained in a particular form, market value of the shares and securities is not mentioned or is mentioned in brackets. The decision in the case of State Bank of Travancore does not lay down any rule that whatever is not mentioned in the prescribed statutory balance sheet is not to be taken into account for deciding real taxable income. 21. The learned Counsel for the Revenue further relied upon the decision in Commissioner of Income-Tax v. British Paints India Ltd. : [1991]188ITR44(SC) . In our view, the said dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... picture of the profits and gains, that is to say, the real income is to be disclosed. For determining the real income, the entries in a balance sheet required to be maintained in the statutory form, may not be decisive or conclusive. In such cases, it is open to the Income Tax Officer as well as the assessee to point out the true and proper income while submitting the income tax return. In Kedamath Jute Mfg. Co. Ltd. v. Commissioner of Income Tax (Central), Calcutta MANU/SC/0438/1971 : [1971]82ITR363(SC) , this Court has negatived the contention that if an assessee under misapprehension or mistake fails to make an entry into the books of account and although, under the law, a deduction must be allowed by the Income-Tax Officer, assessee will loss the right of claiming or will be debarred from being allowed that deduction. The Court held that whether the assessee is entitled to the particular deduction or not will depend upon the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. In the present case, the question is slightly d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision would not disentitle the assessee in submitting income tax return on the real taxable income in accordance with a method of account adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that assessee was maintaining balance sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the Bank was required to prepare balance sheet in the prescribed form and it had no option to charge it. For the purpose of income tax as stated earlier, what is to be taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case. 11. Counsel for the respondent has contended that even the second issue is covered by the aforesaid decisions. 12. So far as issue No.(iii) is concerned, where it has been relied upon the decision of Gujarat High Court reported in Tax appeal No.1250/2011 wherein the Division Bench on the question of own money, in para 9 has observed as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be considered. 7. Accordingly, the appeal is dismissed. 13. In that view of the matter, he has contended that the issue No.(iii) is required to be answered in favour of the assessee and against the department. 14. We have heard counsel for the parties. 15. In view of the observations made in para 12, 12.1 onwards and 13, by the Tribunal, we are of the opinion that the Tribunal while considering the case has gone in detail and after considering the facts on record has given a finding. In our considered opinion the Tribunal being a fact finding authority, it will not be appropriate for us to re appreciate the evidence which has already been appreciated by the Tribunal. 16. Therefore, in view of the decision of this Court and the Gujarat High Court, referred to by Mr. Jhanwar, the first issue is answered in favour of the assessee. 17. In view of the decision of Supreme Court referred hereinabove, the second issue is also required to be answered in favour of the assessee. 18. In view of the decision of Gujarat High Court in the case of S.A. Builders (supra), the issue No.(iii) is answered in favour of the assessee and against the departme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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