1983 (1) TMI 116 - AT - Income Tax

Summary

Issues:
- Assessment of profits for a private limited company involved in construction and sale of flats and office premises.
- Acceptance of method of accounting by the Income Tax Officer (ITO).
- Application of Section 145(1) and its proviso in determining income.
- Interpretation of income accrual and valuation of stock-in-trade for tax assessment purposes.

Analysis:

The judgment pertains to an appeal by a private limited company engaged in construction and sale of flats and office premises against the assessment order for the assessment year 1976-77. The company had purchased a land with an old building, which was to be demolished for a new construction project named "Malad Shopping Centre." The Income Tax Officer (ITO) found discrepancies in the company's accounting method, where profits were to be shown only after the completion of the entire project. The ITO estimated profits at 10% of total receipts attributable to completed wings, as the company did not maintain separate accounts for each wing.

The Central Board of Direct Taxes (CBDT) provides guidelines under Section 145 for computing income based on the method of accounting regularly employed by the assessee. The judgment discusses the accepted method in the construction industry to defer recognizing profits until project completion. The ITO had previously accepted this method for the company's assessments in the preceding years, emphasizing the importance of consistency in accounting practices.

The proviso to Section 145(1) allows the ITO to determine income if the method employed does not accurately reflect profits. In this case, the department argued that income accrued from completed flats, but the company's accounting treated the entire project as one unit. The judgment highlights the need for a strong case to reject a previously accepted accounting method and the relevance of assessing income based on the true accountancy principles.

The judgment references legal precedents such as the Supreme Court decision in Mohammed Meerakhan vs. CIT, emphasizing the importance of valuing stock-in-trade for tax assessment in trading ventures. However, the court distinguishes the present case as involving a unified project rather than individual stock items. Additionally, the Gujarat High Court case of Balarpur Vibhag Jungle Kamdar Mandali Ltd. vs. CIT is cited to support the maintenance of a consistent accounting method accepted by the revenue.

Ultimately, the appellate tribunal allowed the company's appeal, emphasizing the importance of adhering to the accepted accounting method and rejecting the need to assess the validity of the 10% profit estimate. The judgment underscores the significance of maintaining consistency in accounting practices for tax assessments and upholding the principles of income computation based on recognized industry standards.