PR COMMISSIONER OF INCOME TAX JAIPUR-II vs. M/S UNIQUE BUILDERS andDEVELOPERSAJIT

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 292 / 2017 Principal Commissioner of Income Tax, Jaipur-2, Jaipur. ----Appellant Versus M/s. Unique Builders & Developers (Ajit) UDB Tower, SB-59, 3rd Floor, Opp. Jaipur Nagar Nigam, Tonk Road, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. K.D. Mathur for Mr. R.B. Mathur _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 09/11/2017 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 department has framed following substantial question of law:- 1. Whether in the facts and circumstances of the case the ITAT was justified in law and has erred in rejecting the books of accounts of the assessee u/s.145(3) of the Act and thereby reversing the finding given by Assessing Officer as well as CIT(A), ignoring the undisputed facts that the assessee failed to maintain quantitative and qualitative stock registers and vouch expenses incurred by it and ‘on money’ received by it has not been disclosed. 2. Whether in the facts and circumstances

(2 of 29) rejecting the application of percentage completion method adopted by the Assessing Officer, when this rejection means acceptance of loss returns of the assessee engaged in construction and sale of residential/commercial project in contravention of accounting standard 7 and 9 issued by ICAI. 3. Whether in the facts and circumstances ignoring the fact that the two brothers who are partners either themselves or through their families were actively engaged jointly in the business of the assessee firm and therefore ignoring the acceptance of ‘on money’ and specific seized documents. 4. Whether in the facts and circumstances confirming the order of CIT(A) allowing the claim of assessee u/s. 80IB(10) despite of the facts that the assessee was not having certificate of approval in its name. 5. Whether in the facts and circumstances confirming the order of CIT(A) in relaxing the conditions u/s. 80IB(10) despite of the fact that the CIT(A) has no power to relax statutory conditions. 3. The facts of the case that the assessee is a partnership firm engaged in the business of real estate and Developers of commercial/residential buildings. During the assessment proceedings, it was observed by the Assessing Officer that the assessee has adapted the “Project Completion Method” for purpose of accounting of its income from building development activity. 3.1 Further, during the assessment proceedings, the assessee could not produce stock register and vouchers of some direct expenses also remained unverifiable. Therefore, the Assessing

(3 of 29) Officer rejected the books of account u/s. 145(3) of the Act and profit of the project “Southern heights” was calculated by adopting percentage completion method at Rs.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 Rs.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 Rs.28917000/-, however, no separate addition of Rs.28917000/- was made by the Assessing Officer on total income of the assessee. Further, the assessee claimed deduction u/s. 80IB of Rs.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 first issue is squarely covered by the decision of this Court in the case of Pr. Commissioner of Income-tax Vs. Bhawani Silicate Industries, (2016) 65 taxmann.com 106 (Rajasthan) wherein the Division Bench of this Court in para 9 & 10 has observed as under: “8. We have heard and considered the arguments advanced by counsel for the Revenue and in our view, the Tribunal, which is the ultimate final fact finding

(4 of 29) authority, after analyzing the material again placed before it and having gone into the issue once again has come to the conclusion that merely because qualitative record was not maintained and on this premise, the books of account could not have been rejected. It is also an admitted fact that mustard seed is only single commodity used by the assessee for manufacturing of mustard oil and the Tribunal noticed that the assessee filed yield percentage for two months before the AO in which no discrepancy was found by the AO. The Tribunal has found that the production of mustard oil is a continuous process and the seeds are put into the milling for continuous oil production. The Tribunal has further found that 8096 of its mustard oil is by way of trading sale and neither discrepancies were noticed by the AO in either purchase or sale nor any sale or purchase, found unrecorded. The Tribunal also found that the books of account had been maintained in the same manner as in the past and the assessee cannot be expected to stop the plant as and when the new lot of mustard seed is subjected to crushing as manufacturing of mustard oil is a continuous process. The Tribunal has also found as a finding of fact that except quality, quantity wise stock details has been maintained but no other defect was noticed by the AO in the quantitative details and after noticing the above fact, has come to the conclusion that the books of account ought not to have been rejected. In our view, such a finding of fact which has been reached by the Tribunal is after appreciating the material and evidence on record and such a finding has been arrived at by the Tribunal after analyzing the material and in our view, no substantial question of law can be said to arise out of the order of the Tribunal. Once the stock register has been held to be properly maintained and has been held to be proper, no trading addition could have been made and rightly so, even otherwise, minor discrepancies 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

(5 of 29) 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 a case of estimated/ad hoc addition, prima-facie, some material is required to be brought on record. The revenue has ample powers under the Act, if an assessee avoids or evades to unearth of tax evasion, this observation is on the contention of counsel for the Revenue that except resorting to rejection of books of account, Revenue possibly has no other alternative and come to make estimated addition after resorting to provisions of Sec. 145(3).” 8. He has also relied upon the decision of Gujarat High Court in the case of Jaytick Intermediates (P.) Ltd. Vs. Assistant Commissioner of Income Tax, (2016) 73 Taxmann.com 195 (Gujarat) wherein in para 8 to 10 it is observed as under: “8. It will not be out of place to mention here that the assessee is a manufacturing unit and it has to pay the excise duty. It is the specific contention of the assessee that the books of accounts maintained by it are tallying and the excise duty is paid on that basis. The stock register is not tallying with the other books of account only because some of the items were not deleted from the stock register. Taking into account the decision of this Court, not maintaining the day-today stock register is not a ground to

(6 of 29) reject

books

account. In Commissioner of Income-tax-IV

v. Symphony Comfort Systems Ltd. (supra), it is observed as under:-- "Question No. 1 pertains to the addition made by the Assessing Officer on the basis

low

gross

profit. The Commissioner (Appeals) as well as the Tribunal, however, deleted such addition after examining the material on record. In particular, the Tribunal while upholding the order of the Commissioner (Appeals) in this respect, made following observations: "4. On consideration of the rival submissions, we do not find any justification to interfere with the order of the learned CIT(A) in deleting the addition. The AO merely gone by the fact that there was a fall in the gross profit rate as compared to the preceding assessment year which itself is no ground to reject the books of accounts of the assessee. No specific defect in the maintenance of the books of accounts by the assessee has been pointed out AO. The AO further noted that day to day stock and inward and outward registers are maintained on computer. Perhaps, this was the sale reason which swayed the AO to reject the books of accounts and make the addition. Now-a-days 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

(7 of 29) 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 Commissioner (Appeals),

made following observations: "6. On consideration of the rival submissions, we do not find any merit in this ground of appeal of the revenue. The AO merely made comparative study of the expenses for the year under consideration with the preceding assessment year and found that expenses incurred in the preceding assessment year were 2.89% on turnover but in the assessment year under appeal it was 4.78% on the turnover. The expenses were, therefore, found excessive without pointing out as to which of the expenses incurred by the assessee was not connected with the business activity of the assessee. The AO has not pointed out which of the expenditure were not admissible in law. In the absence of any pointing out inadmissible expenses, the AO cannot make addition merely by comparing the expenditure with the preceding year's expenditure. The learned CIT(A) on proper appreciation of the facts and material on record rightly deleted the addition. This ground of appeal of the revenue is accordingly dismissed." The entire issue is based on appreciation of evidence. No question of law arises. When the Commissioner (Appeals) as well as the Tribunal concurrently held that on the basis of the evidence, addition as made by the Assessing Officer was not justified, we are not inclined to interfere." 9. In Commissioner of Income-tax-XII v. Smt. Poonam Rani (supra), it is observed as under:-- "10. During the course of arguments before us, it was submitted by the learned counsel for the appellant that the assessee was not maintaining the Daily Stock Register. We, however, find no such finding in the assessment order. On the other hand, we note that the Assessee had submitted

(8 of 29) before the Commissioner of Income Tax (Appea ls) that Form 3CD containing all the quantitative details in respect of raw materials as well as the finished goods, duly audited by the Certified Accountant had been placed on record, but, the Assessing Officer ignored those actual figures enclosed with the return. In any case, no statutory

provision

under the Income Taxregime

requiring

assessee to maintain the Daily Stock Register has been brought to our notice. Hence, even if no such register was being maintained by the assessee as is contended by the learned counsel for the appellant, that by itself does not lead to inference that it was not possible to deduce the true 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 facts of the case, we are of the opinion that the view taken by CIT (Appeals) is required to be accepted by setting aside the impugned order of the Tribunal. Accordingly, the question posed for our consideration is

(9 of 29) answered in favour of the assessee and it is held that the Tribunal has erred in upholding the action of the Respondent in rejecting the books of accounts of the Assessee under Section 145 (2) of the Act and further erred in confirming the part of the addition on estimated basis against the revenue. Accordingly, Tax Appeal No. 1196 of 2007 is allowed.” 9.Therefore, he has contended that the rejection of books of accounts for non maintenance of stock register is not a ground under Section 145(3) of the Act. 10. He has relied upon following decisions: Manjusha Estates Pvt. Ltd. vs. The Income Tax Officer Tax Appeal No.828/2007 [Gujrat

High

Court],

decided

on 12.08.2016: 4.1 Learned Counsel for the department has taken this Court to Section 145(3) of the IT Act which relates to rejection of the books of accounts and contended that the CIT(A) as well as the Tribunal has rightly come to the conclusion after considering the material placed before them. After making the aforesaid submissions he has contended that the appeal may be dismissed. 5. Having heard the learned Counsel for the parties and having gone through the order passed by the authorities below, as well as, considering the fact that the assessee has followed the method which is consistent considering the decision in case of Shivalik Buildwell (P.) Ltd. (supra) and Umang Hiralal Thakkar (supra) and therefore this Court is of the opinion that the view taken by the tribunal and CIT(A) is not correct. Since the issue involved in this appeal is identical to the decision cited by the learned Counsel for the assessee while adopting such reasons, we allow this appeal and accordingly answer the issue raised in this appeal in favour of the assessee and against the department. CIT-IV vs. Shivalik Buildwell (P.) Ltd. [2013] 40 Taxman.com 219 (Guj.): 3. On the revenue’s appeal, the Tribunal confirmed the view of CIT (Appeals), however, on slightly different ground, namely, that the assessee being a developer of the project, profit in his case, will arise on transfer of title of the property and receipt of

(10 of 29) any advances or booking amount cannot be treated as trading receipt of 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 central government to notify in the Official Gazette from time to time the income computation and disclosure standards to be followed by any class of Assesses or in respect of any class of income. That change is prospective and in any event does not apply to the case on hand. 19. The settled legal position as far as Section 145 of the Act is concerned is that it is not open to an AO to reject the accounts of an Assessee unless he comes to a determination that notified accounting standards have not been regularly followed by the Assessee. As pointed out by the CIT (A) in the order dated 2nd July, 2010, the AS of the ICAI did not have any statutory recognition under the Act although it was binding under the Companies Act, 1956. The method of accounting followed by the Assessee in the present case i.e. project completion method was certainly one of the recognized methods and has been consistently followed by it.

(11 of 29) Lunar

Electricals

vs.

Assistant Commissioner of Income Tax [2012] 2010 Taxman 69 (Delhi): The next aspect relates to rejection of books of accounts because the assessee was following completed contract method. We do not think completed contract method is contrary and cannot be adopted and applied when an assessee follows mercantile system of accounting. This issue was examined by

Madras

High

in Commissioner of Income Tax versus SAS

Hotels

and

Enterprises Limited, MANU/TN/3098/2010 : (2011) 334 ITR 194 (Mad.) and it has been held that the said method confirms and can be adopted by an assessee. In fact, we find that there is a contradiction in the orders of both the CIT(Appeals) and the tribunal on the said aspect. With regard to NBCC contract, both of them have held that the receivables and expenses should be excluded as the contract was incomplete. But, at the same time they have held that completed contract method cannot be adopted

for

purpose

accounts/computing taxable income as the assessee is following mercantile system of accounting. We may notice here that while examining the question of rejection of books of accounts, the CIT(Appeals) in his finding, which have been quoted above, was ambivalent and did not deal with the real issue and question whether or not the completed contract method is permitted and can be adopted by the assessee following mercantile system of accounting. The tribunal also went on certain other 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.

(12 of 29) 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 vogue is not correct and it distorts the profits of a particular year. Under the mercantile system of accounting based on the concept of accrual, the method of accounting followed by the assessees is relevant. In the present case, there is no finding recorded by the AO that the completed contract method distorts the profits of a particular year. Moreover, as held in various judgments, the Chit Scheme is one integrated scheme spread over a period of time, sometimes exceeding 12 months. We have examined computation of tax effect in these cases and we find that the entire exercise is revenue neutral, particularly when the scheme is read as one integrated scheme spread over a period of time. 20. As stated above, we are concerned with assessment years 1991-1992 to 1997-1998. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessees, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from completed contract method to deferred revenue expenditure, is revenue

(13 of 29) neutral. Therefore, we do not wish to interfere with the impugned judgment of the High Court. CIT vs. Manish Build Well (P) Ltd. [2011] 63 DTR 369(Delhi): 6. Questions Nos. 2 and 3 are connected. They assail the decision of the Tribunal rendered in paragraph 20 of its order. An addition of Rs.28,21,000/was made by the assessing officer on the footing that the assessee was adopting the project completion method or the completed contract method, which was not proper and the profits of the business should be computed on the basis of the percentage completion method under which the profits of the development and construction business of the assessee get assessed over a period of years, keeping pace with

progress

construction/development of the project. The CIT (A) however held that the assessee had no 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

copy

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, possession of 20% of the remaining area was handed over to the buyers. The possession of the balance 5% of the developed area could

(14 of 29) not be handed over to the remaining buyersbecause they could not make full payment and take possession. On these findings the CIT (A) held that the allegation of the assessing officer that the assessee was adopting a method of accounting namely the project completion method, to suit its convenience to book income was baseless. A further finding recorded by the CIT (A) is that there was no manipulation in the books of accounts. So far as the method of accounting is concerned, the CIT (A) held that the project

completion

method

is a wellrecognized and accepted method of accounting and was the only method suitable for any developer who has to deliver a completed product to the buyer. Ultimately the CIT (A) held as under: Thus on overall perusal of the assessment order it is seen that neither any defect has been pointed out by the assessing officer in the method of accounting followed by the appellant nor any finding has been given that true and fair profits cannot be deduced following the said method of accounting. No evidence was found during the course of search to show that the books of account are not properly maintained by the appellant. The main thrust of the assessing officer in making the addition is that the assessee is deferring the payment of taxes. But this allegation of the assessing officer cannot be accepted as the assessee is consistently following a method

accounting

which is well recognized in development business and has been accepted by the assessing officer also in the other group cases. Thus the addition is here by deleted. 7. The aforesaid finding of the CIT (A) was approved by the Tribunal with the observation that the department has accepted the assessee's method of accounting namely, the project completion method and therefore there was no justification for adopting the percentage completion method for one year on selective basis. 8. It is well settled that the project completion method is one of the recognized methods of accounting. In Commissioner Income-Tax And Another v. Hyundai Heavy Industries Co. Ltd. MANU/SC/7731/2007

(15 of 29) (2007) 291 ITR 482 (SC) the Supreme Court held as follows: Lastly, there is a concept in accounts which is called the concept of contract accounts. Under 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 said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the contract is completed. This method leads to objective assessment of the results of the contract. On the other hand, the percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under this method is determined by reference to the stage of completion of the contract. The stage of completion can be looked at under this method by taking into consideration the proportion that costs

(16 of 29) incurred to date bears to the estimated total costs of contract. The above indicates the difference between the completed contract method and the percentage

completion

method." (underlining ours) 9. After the above judgments of the Supreme Court it cannot be said that the project completion method followed by the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the Income Tax Act. Accounting Standards 7 (AS7) issued by the Institute of Chartered Accountants of India also recognize the position that in the case of construction contracts, the assessee can follow either the project completion method or the percentage completion method. In view of the judgments of the Supreme Court (Supra), the finding of the CIT (A), upheld by the Tribunal, does not give rise to any substantial question of law. Further, the Tribunal has also found that there was no justification on the part of the assessing officer to adopt the percentage completion method for one year (the year under appeal) on selective basis. This will distort the computation of the true profits and gains of the business. For these reasons, we are of the view that no substantial question of law arises. We, therefore, decline to admit question Nos. 2 and 3. CIT vs. SAS Hotels & Enterprises Ltd. [2011] 334 ITR 194 (Madras): 7. In this context, when we apply Section 145(3) of the Income Tax Act, it specifically stipulates that where the Assessing Authority is not satisfied about the correctness or completeness of the accounts of the Assessee, or where the method of accounting provided in Sub-section (1) or accounting standards as notified 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

(17 of 29) 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 authenticity of the said accounting system is not under challenge. The assessing firm/appellant being a Private Limited Company was maintaining the account following the said system and the account were duly audited by qualified Chartered Accountant, maintenance of the accounts as well as the valuation of works in progress will not prejudice either side. Admittedly, the particular work control were not completed and it comes under the category of work in progress. There is also no dispute that the ultimate liability of the Assessee as regards tax will be dependant upon in total (fixed) amount received by the Assessee against the particular work control. 12. We, therefore, hold that the Income tax authority has no option/ jurisdiction to muddle in the matter either by directing the assessee to maintain the account in a particular manner or adopt a different method for valuing the work in progress. We reiterate the decision in Doom Dooma India Ltd. (supra) and hold that an assessee has as the option/liberty to adopt any recognized method of account for his business and the income shall be computed in accordance with such regularly maintained accounting system.

(18 of 29) CIT vs. V.S. Dempo & CO. Pvt. Ltd. [1996] 131 CTR 203 (Mum): 4. We have carefully considered the rival submissions. We find that the controversy in this case is basically a finding of fact which has to be decided by the authorities concerned on the facts and circumstances of each case. In the instant case, the Tribunal has come to a conclusion that the method of accounting followed by the assessee was correct and resort to s. 145(1) was not called for. We do not find any infirmity in the said finding. We, therefore, refuse to interfere with the same. ST. Teresa’s Oil Mills vs. State of Kerala [1970] 76 ITR 0365 (Ker): 4. The learned counsel for the petitioner brought to our notice the decision of the Ahdhra Pradesh High Court in N. Raja Pullaiah v. Deputy Commercial Tax Officer, [1969] MANU/AP/0166/1969 : 73 I.T.R. 224 and contended that the consumption of electricity by itself cannot form a reliable test for determining the yield of oil, that the yield depends upon various factors like the condition of the machine, the quality of copra--whether it was dried or moist--the nature of the electric supply and other similar factors and that the consumption of electricity is affected by these 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-

(19 of 29) 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 proper particulars and vouchers are not forthcoming or if they do not include entries relating to one particular class of business. In this connection, it has to be pointed out that the rejection of accounts and assessment to the best of judgment are two distinct and separate processes and should not be confused as one, although there will be no overlapping in the materials used for applying both processes. The initial step of rejecting the accounts will be justified when the account books are found for valid reasons unreliable, incorrect or incomplete. The assessee at this stage has to be given reasonable

opportunity

for

offering explanations regarding the defects in the accounts and on his failure to satisfactorily explain the defects, the department will be justified in rejecting the accounts. The subsequent step of assessment to the best of judgment, as has been uniformly recognised by the courts, involves some guess-work and necessarily has to be done on the materials available in each case. The Privy Council had occasion to consider the exact import of the expression "to the best of his judgment" occurring in Section 23(4) of the Indian Income Tax Act, 1922 (see Commissioner of Income Tax v. Laxminarain Badridas [1937] 5 I.T.R. 170, 180 (P.C.)). The Privy Council made the following observation in that judgment: "He (the assessing authority) must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guess-work in the matter, it must be honest guess-work."

(20 of 29) 5. In the case on hand, the only circumstance relied on by the authorities below for the rejection of the accounts is that there was wide disparity in the consumption of electricity. In our opinion, this factor by itself without any other supporting circumstance does not justify the rejection of the accounts. Such variation in the consumption of electricity can be due the various factors 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 the circumstances, however, there will be no order as to costs. United Commercial Bank vs. CIT [1999] 240 ITR 355 (SC): 11. From the aforesaid form of the prescribed balance sheet, it is evident that Scheduled Nationalised Banks were directed to put the value of shares and securities at cost and if the market value is lower, it was to be shown separately in brackets. Now, the question would be when such a Bank is submitting its statutory return of income, whether it can disclose in its return its real profit and/or loss on the basis of market value of securities and shares? It has been pointed out that the balance sheet or the audited accounts maintained on the basis of the investment in shares at cost would not disclose

(21 of 29) the real profit or loss of the Bankin view of the fact that depreciation in the value of the shares or fall in the market value of the shares and securities is not provided in the audited accounts. Learned Counsel for the appellant submitted that even though in the balance sheet maintained by the assessee, market price of the shares and securities is not mentioned, yet for determining the real income of the assessee Bank, the said price is required to be taken into account. And, for that purpose since years, the assessee Bank was submitting income tax returns after taking into account the market price of such shares and securities which has been accepted by the Department without any objection. He also submitted that not making of proper entries in the balance sheet could hardly be a ground for not assessing the real income. 12. For the reasons, the Central Government had issued Notification dated 12th May, 1982 permitting the assessee bank not to disclose in brackets the market value of the investment under the sub-heads in inner column against any of the sub-heads (ii), (iii), (iv) and (v) of Item 4 of the assets side of the prescribed form. It is also undisputed that: (a) the appellant is a Nationalised Bank and therefore is governed by the Banking Regulation Act, 1949. (b) The appellant follows mercantile systems of accounting both for Book keeping purpose as well as for tax purposes. (c) The appellant consistently and for over 30 years prior to the assessment year in dispute (1982-83) has been valuing its stock- in-trade (investments) 'at cost' in the balance sheet whereas for the same period of time 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:

(22 of 29) '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 on Financial Risks attaching to the holding of Trading Stocks, 1919, As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure.... From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question." (extracted in paragraph 281 of the Report of the Committee on the Taxation of Trading Profits presented to British Parliament in April, 1951). While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as

established

rule of commercial practice and accountancy. As profits for income tax purposes are to be

(23 of 29) computed in conformity with the ordinary principles of commercial accounting, unless, of course, such principles have been superseded or modified by legislative enactments, unrealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year's in a business that is continuing are not brought into the charge as a matter of practice, though as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually realised. As truly observed by one of the learned Judges in Whimster & Co. v. Commissioner of Inland Revenue 12 Tax Cas. 813, Under this law (Revenue Law) the profits are the profits realised in the course of the year. 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 decision would not in a way advance the contention raised by the respondent. The Court while dealing with the contention of the assessee for valuation of the raw material without taking into account any portion of the cost of manufacture, held that the question of fact which the Assessing

(24 of 29) Officer must necessarily decide is whether or not the method of accounting followed by the assessee discloses true income and observed thus: It is a well recognised principle of commercial accounting to enter in the profit and loss account the value of the stock- in-trade at the beginning and at the end of the accounting year at cost or market price, whichever is the lower. 22.

The

further

considered Section 145 of the Act and observed that what is to be determined by the officer in exercise of the power is a question of fact, that is, whether or not income chargeable under the Act can be properly deduced from the books of accounts and the question must be decided with reference to the relevant material and in accordance with the correct principles. The Court also observed: Where the market value has fallen before the date of valuation and, on that date, the market value of the article is less than its actual cost, the assessee is entitled to value the articles at market value and thus anticipate the loss which he will probably incur at the time of the sale of the goods. Valuation of the stock-in-trade at cost or market value, whichever is the lower, is a matter entirely within the discretion of the assessee. But whichever method he adopts, it should disclose a true picture of his profits and gains. If, on the other hand he adopts a system which does not disclose the true state of affairs for the determination of tax, even if it is ideally suited for other purposes of his business, such as the creation of a reserve, declaration of dividends, planning and the like, it is the duty of the Assessing Officer to adopt any such computation as he deems appropriate for the proper determination of the true income of the assessee. This is not only a right but a duty that is placed on the officer, in terms of the first proviso to Section 145, which concerns a correct and complete account but which in the opinion of the officer, does not disclose the true and proper income. 23. Hence, for the purpose of income tax whichever method is adopted by the assessee a true 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

(25 of 29) 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

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 different. For reasons, Central Government, in exercise of the powers conferred by Section 53 of the Banking Regulation Act, and on the recommendation of the Reserve Bank of India, permitted the assessee not to disclose the market value of its investment in the balance sheet required to be maintained as per the statutory form. But as the assessee was maintaining its accounts on mercantile system, he was entitled to show his real income by taking into account market value of such investments in arriving at real taxable income. On that basis, therefore, Assessing Officer has taxed the assessee. 24. From the decisions discussed above, it can be held: (1) That for valuing the closing stock, it is open to the assessee to value it at the cost or market value, whichever is lower; (2) In the balance sheet, if the securities and shares are valued at cost but from that no firm conclusion can be drawn. A taxpayer is free to employ for the purpose of his trade, his own method of keeping accounts, and for that purpose, to value stock-in-trade either at cost or market price;

(26 of 29) (3) A method of accounting adopted by the tax payer consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation; (4) The concept of real income is certainly applicable in judging whether there has income or not, but in every case, it must be applied with care and within their recognised limits; (5) Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation; and (6) Under Section 145 of the Act, in a case where accounts are correct and complete but the method employed is such that in the opinion of the Income Tax Officer, the income cannot be properly deduced therefrom, the computation shall be made in such manner and on such basis as the Income-Tax Officer may determine. 26. In our view, as stated above consistently for 30 years, the assessee was valuing the stock-in-trade at cost for the purpose of statutory balance sheet, and for the income tax return, valuation was at cost or market value whichever was lower. That practice was accepted by the Department and there was no justifiable reason for not accepting the same. Preparation of the balance sheet in accordance with the statutory provision 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.”

(27 of 29) 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: “9. So far as second question is concerned, we find that the same is covered by decision

this

case of CIT v. Amar Corporation (supra).

This Court while considering the same issue held and observed as under: "5. It could be seen from the facts that the housing projects were developed during the years prior to Assessment Year 2004-05. The search was conducted on 18.06.2003 wherein the loose papers or the documents were seized. The material seized in form of loosepaper was qua one flat No. A/204 only in respect of which taking of 'on-money' could be alleged. It was on the basis of such loose papers, the addition on On-money account was sought to be made. That material could not have been used for the subsequent years for making addition on the same count. The addition in the Assessment Year 2004-05 was not sustained by the Tribunal in the appeal before it on the ground that the Assessing Officer ought to have confined himself in respect of sale transaction of one particular flat and he could not have on that basis calculated the addition for all flats. Accordingly, in respect of previous Assessment Year 2004-05, it was held by the Tribunal that the addition for On-money, made in the said year was not proper inasmuch as such addition could have been made only in respect of the flat in respect of which the evidence of On-money was found at the time of search. The said decision dated 31.03.2011 of ITAT, Ahmedabad was relied on, on behalf of the assessee. 5.1 Even as for the year 2004-05 also, the addition on account of on-money was held to be on the basis of guess work and extrapolation, again in the next year 2005-06 being year under consideration the addition of Rs. 1,52,53,128/- was made repeating the

(28 of 29) same story. When in respect of previous Assessment Year 2004-05 also the Tribunal had dismissed the HC-NIC Department's appeal on the ground that the addition in that year also was based on extrapolation, it emerged beyond pale of doubt that for the addition made for the year 2005-06 there was no evidence whatsoever and the same was presumptive in nature. 6. In above view, the findings recorded by the Tribunal were proper and legal flowing logically from the facts on record. The Tribunal has not committed any error in passing the impugned order. The appeal is devoid of merit, and raises no substantial question of law 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 department.”

(29 of 29) 5. Hence, no substantial question of law arises. 6. The appeal stands dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. Brijesh 55.