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CIT Central Jaipur Versus M/s Unique Builders And Developers Jpr, M/s Rama Ajit Builders And Dev Jaipur, M/s Unique Affordable Homes Pvt Ltd, M/s Murano Developers Pvt Ltd

2017 (5) TMI 1505 - RAJASTHAN HIGH COURT

Rejection of books of accounts - non presenting true and correct picture - Held that:- Merely because of non maintenance of a detailed qualitative and quantitative register alone, the same could not be a valid reason to reach a finding that books of account do not present true and complete picture of accounts and financial transactions. The finding by the assessing authority being perverse is, therefore, set aside. - Invoking provisions of section 145 - non verification of some of the vouche .....

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assessee to get payment of any specific amount of direct expenses verified. Merely for saying it could not be taken a lacuna in the books of account of the assessee and take the same as a reason for rejecting the books of account that were maintained by assessee in regular course of its business. - Search proceedings revealed incriminating documents which contained nothings of receipt of cash "out of books" by the members of Unique Group of which the assessee is an important member - Held t .....

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es' prevailing in trade circles has been disapproved. Having considered the aforesaid view, the finding of "on-money transactions" in the appellant's case by the authorities below is found without any basis and found perverse on facts. It, therefore, could not be a reason for rejecting the books of account maintained by the assessee in regular course of business. - Assessee has not followed Accounting Standards 9 & 7 which tantamount to not following Accounting Standard-1 as prescribed under .....

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f method regularly employed by the appellant. The Income-tax Authority, therefore, has no option or jurisdiction to meddle in the matter either by directing the assessee to maintain its account in a particular manner or adopting a different method for valuing work-inprogress. It also cannot recompute income by adopting any method other than that regularly employed by the assesseeappellant in a case like this nor make the same as basis to reject its accounts. - D.B. Income Tax Appeal No. 23/2013, .....

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tions of law and facts are involved and as they relate to the same assessee, they were heard together and decided finally by this common judgment. 2. In these appeals, the Department has challenged the judgment and order of the Tribunal whereby the Tribunal has partly allowed the appeal preferred by the assessee and dismissed the appeal of the Department. 3. This court while admitting the appeals framed the following substantial questions of law:- 3.1 ITA NO. 23/2013, 18/2013, 20/2013, 22/2013, .....

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Whether the Tribunal was justified inrejecting application of Percentage completion method adopted by the AO and confirmed by CIT(A)(C), Jaipur, in contravention of the Accounting Standard7 and Accounting Standard-9 issued by the ICAI, resulting in acceptance of loss return of the assessee engaged in construction and sale of residential/commercial projects. (iii) Whether the Tribunal was justified inignoring that the two brothers were partners either themselves or through their sons and their f .....

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the undisputed fact that the assessee has failed to maintain quantitative and qualitative stock registers and vouch the expenses incurred by it and on-money received by it has not been disclosed. (ii) Whether the Tribunal was justified inrejecting application of percentage completion method adopted by the AO, when this rejection means acceptance of loss returns of the assessee engaged in construction and sale of residential/commercial projects in contravention of Accounting Standard-7 and Accoun .....

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e books of accounts of the assessee u/s 145(3) of the Act and thereby reversing the findings given by the Assessing Officer as well as CIT(A), ignoring the undisputed fact that the assessee has failed to maintain quantitative and qualitative stock registers and vouch the expenses incurred by it and on-money received by it has not been disclosed. (ii) Whether the Tribunal was justified inrejecting application of Percentage completion method by the AO, When this rejection means acceptance of loss .....

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case and in law the ITAT was justified law in rejecting the books of accounts of assessee under Section 145(3) of the IT Act, and thereby reversing the findings given by the Assessing Officer ignoring the undisputed facts that the assessee failed to maintain quantities and qualitative stock registers and vouch the expenses incurred by its and on money received by it has not been disclosed. (ii) Whether on the facts and in the circumstances of the case and in law the ITAT was justified law in re .....

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rejecting the books of accounts of the assessee under Section 145(3) of the Act and reversing the findings ignoring the undisputed facts that the assessee has failed to maintain quantitative and qualitative stock registers and vouch the expenses incurred by it and on-money received by it has not been disclosed. (ii) Whether the Tribunal was justified in holding that the percentage completion Method applied by Assessing Officer was unjustified and the Project Completion Method adopted by the ass .....

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ring the undisputed facts that the assessee has failed to maintain quantitative and qualitative stock registers and vouch the expenses incurred by it and on money received by it has not been disclosed? (ii) Whether the Tribunal was justified in deleting the entire addition of ₹ 5,31,79,520/-, made by the Assessing Officer on account of rejection of books of accounts and holding that the Percentage Completion Method applied by Assessing Officer was unjustified and the Percentage Completion .....

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ersing the findings, ignoring the undisputed facts that the assessee has failed to maintain quantitative and qualitative stock registers and vouch the expenses incurred by it and thereby deleting the addition of ₹ 1,06,04,676/-? (ii) Whether the Tribunal was justified in holding that the Percentage Completion Method applied by Assessing Officer was unjustified and the Percentage Completion Method adopted by the assessee was proper, ignoring that the said method of assessee for computation .....

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ck as well as details/information including original vouchers for the payments made in respect of direct expenses. However, the Assessee could not produce such a stock register and argued that the basis of closing stock is 'lower of cost or net realizable value'. Further, some voucher relating to payment in respect of direct expenses could not be verified. In adition during the course of search proceedings, incriminating documents were found which contain nothing of receipt of cash ' .....

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ng Standard (AS)-1 issued by the Institute of Chartered Accountants of India (ICAI) as well. In view of the above, the Assessee was asked to show as to why the books of accounts in the relevant year should not be rejected by invoking the provisions of section 145(3) of the Act? The assessee submitted that considering the nature of trade as well as the number of items of stock it was not possible to maintain a detailed qualitative cum quantitative stock register. The reply/submission of the asses .....

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2, it is essential that details in respect of both quality as well as quantity of the different items of stock, including details relating to direct expenses and costs, are meticulously maintained by the assessee. The assessee has, however, not maintained such details. In view of the above discussion specifically pointing out the lacunae inthe books of accounts of the assessee and the reasons therefore, I, reject the books of acounts of the assessee by invoking the provisions of section 145(3) o .....

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i Sindhuja Foods Pvt. Ltd. 35 Tax world 67. 5. Application of Percentage Completion method Background 1. the assessee is engaged in the businessof real estate including the development and construction of residential/commercial buildings. During the period of last six preceding years from the years in which search was conducted i.e. AY 2003-04 to AY 2009-10 which is the scope of Assessment u/s 153A/143(3) in the instant group which was searched on 28.01.2009. it is noticed that the Assessee grou .....

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e above chart, we have a bird's eye view of the income offered by the group in each project/venture in each FY. Itis seen that no income is offered for taxation and almost all the projects are lurking in loss in all the years in which the project is spread out. 3. The taxability of income of the personswho are engaged in the business of real estate/developer has off late been the issue of academic discussion as well as deliberations in all circuits of economy especially inlight of the tremen .....

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rofit until the construction project is complete. The second approach is the percentage of completion method this recognizes profit on a piecemeal basis. Percentage of completion method Definition - Method that recognizes profit on a long term construction contract as it is earned gradually during the construction period. Logic behind using this method - The logic behind the percentage of completion method is that both the buyer and seller have obtained enforceable rights. The buyer has the righ .....

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revenue and expense in the period of benefit. It should be used when reliable estimates of the degree of completion are possible. It is more realistic and levels out the earnings. Working of the revenue realization under this method - Under this method, the measure of revenue to be recognized each year is equal to percentage completed x contract price. One approach to estimate the percentage completed is based on the following relationship: Cost Incurres to Date x Contract price = Cumulative Rev .....

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contract to determine the amount to be included in taxable income for that tax year. Taxpayers using the percentage of completion method are also subject to the look-back rule for re-computing prior year tax liability. IT was seen from the return of income that the Assessee group is invariably following the completion method in order to work out the profits of the firms. As it is seen from the above chart, the Assessee group has declared loss or marginal profits in each of its real estate projec .....

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in presenting in your accounts in project(s) undertaken by you. As per the information of the undersigned, the Institute of Chartered Accountants of India (ICAI), has made application of Accounting Standards - 1,7,8,9 and 10 mandatory in respect of preparation and representation of financial accounts for the period commencing on or after 1.4.1991. in so far as you are concerned, it is sen that you have not followed the above referred Accounting Standards, specifically AS-9 read with AS-7, which .....

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CIT(A). 4.2 Counsel has further contended that thereafter, the CIT(A) has observed as under: 23.1 From the facts available on record, it is evident that Sh. Navin Bhutani is not stranger or third party. He is senior executive of the appellant group working in the senior position of Vice President. The argument of A.R. that M/s Unique Builder and Developer (Reality) and M/s Unique builder and Developer (Ajit) belong to UDB group owned by Sh. Ajit Singh and his son, is also contrary to the facts .....

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th the brothers are partners in these two aforesaid concerns as well as in the case of appellant firm also. The A.R. has further argued that both the sub groups are running separate projects, putting up separate hoardings and cut outs in the city etc. firstly, this practical position may be true after the search and seizure operation was carried out on January, 2009 but cannot be said to be true before the search. Secondly, the facts available on record by way of partnership deed duly executed a .....

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rship firm form time to time in as much as that some member of other outside family has retired, but even at the time of those changes, the members of both the families continued in all those firms and not only continued but continued with equal share (50-50%) in partnership firms. In view of the aforesaid discussion, it is evident that there is nothing on record to substantiate that these are two independent groups running independent partnership firms. More so at least till the date of search, .....

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as then urged that the four reasons given, which we have out above, could not make s. 13 applicable. For the rejection of accounts several reasons were given by the Appellate Tribunal; one these reasons was the non-production of stock registers and manufacturing accounts This reason was given by the Income-tax Officer and adopted by the Appellate Tribunal. It was submitted that the non-production of stock account was not such a defect as to entitle the Taxing Authorities to reject the books and .....

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s and sales and there was no finding by Income-tax Officer that in his opinion the income could not properly be deduced therefrom. Khosla, J. (as he then was) there said : 'There is no finding that there was material before the Income-tax Officer to lead him to the conclusion that a proper statement of income, profits and gains could not be deduced from the material placed before him. All he said was that the profits appeared to be somewhat low and there was no stock register'. The want .....

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ari Investment (P) Ltd. 2008 (4) SCC 232 wherein it is held as under: 11. The limited controversy is whether the completed contract method of accounting adopted by the assessees as method of accounting for chit discount is required to be substituted by percentage of completion method. 12. In this connection, it is the case of the assessees that, profits (loss) accrued to the assessees only when the dividends exceeded the discount paid and that difference could be known only on the termination of .....

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to the assessees, a chit transaction has been treated by the various courts as one single scheme running for the full period and, therefore, according to the assessees, the completed contract method adopted by it over the years was not required to be substituted by any other method of accounting.21. Before concluding, we may point out that under section 211(2) of the Companies Act, Accounting Standards ("AS") enacted by the Institute of Chartered Accountants have now been adopted [see .....

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tment to consider these new accounting standards and concepts in future cases of chit transactions. We express no opinion in that regard. Suffice it to state that, these new concepts and accounting standards have not been invoked by the Department in the present batch of civil appeals. 4.5 He has further relied upon the decision in the case of (2008) 15 SCC 112 wherein it has been held as under: In cases where the Department wants to tax an assessee on the ground of the liability arising in a pa .....

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rofits and is therefore rejected. Otherwise, the presumption would be that the entire exercise is Revenue neutral. 5. Counsel for the appellant has contended that the observations which have been made by the Tribunal in para 12 & 13 are contrary to law, which reads as under: We have heard parties with reference to material on record. The rival submissions as well as case laws brought to our notice have duly been considered. The assessee is engaged in the business of construction as a builder .....

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under section 132 of the IT Act ("Act" for short) was taken on its business premises on 28.01.2009. On the same very day the members of the appellant group as well as of the separated group and their business/residential premises were also searched by the department. The assesseeappellant furnished return of income in response to notice issued under section 153A of the Act. The return of income was furnished on the basis of books of account maintained by it as no document giving rise t .....

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ee by application of provisions of section 145(3) of the Act as they failed to depict the complete picture of accounts and moreover do not follow the method of accounting standard as specified under section 145(2) of the Act. The Assessing Officer has drawn support from few judgments rendered by the Appellate Tribunal and also by the judgment in the case of Kachwala Gems vs. JCIT, MANU/SC/8797/2006MANU/SC/8797/2006 : 288 ITR 10 (SC) for invoking provisions of section 145(3) of the Act. 12.1. Sec .....

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ny class of assessees or in respect of any class of income. (3) Where the Assessing Officer is notsatisfied 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 subsection (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144. 12.2. The first basis taken by the AssessingAuthority in reaching a .....

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as is evident from various ledger accounts related to construction material that were forming part of the seized material available with the assessing authority. All the expenses relating to the project including material purchased were charged to project/work-in-progress and directly taken to the balance sheet. In other words, the materials purchased for the project are issued to site immediately after its purchase and transferred to project in progress for determining profit at the time of com .....

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ure to record any purchases or direct expenses to the project in process nor even the case is that the assessee has inflated the cost of such stock held and disclosed by the assessee in the financial statements presented along with the return of income. In fact, this is a case where the accounts were found duly audited by a qualified Chartered Accountant with no adverse comments with respect to correctness and completeness of the accounts maintained by the assessee or the method of valuation ado .....

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s purchased by the assessee and correctness of valuation disclosed in the accounts. For the remissness on the part of the Assessing Officer, assessee cannot be blamed. The Assessing Officer also appears to have casually stated that as per AS-2 it is essential that the details of both quality as well as quantity of different items of stocks including details of direct expenses and costs are required to be maintained meticulously. In fact, the AS-2 notified by the CBDT relates to disclosure of pri .....

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CIT,MANU/PH/0015/1955MANU/PH/0015/1955 : 26 ITR 159, the Hon'ble Punjab & Haryana High Court has held that the mere fact that there is no stock register, it only cautions him against the falsity of the return made by the assessee. He cannot say that merely there is no stock register, the accounts book must be false. The Hon'ble Supreme Court took note of this judgment in the case of S.N. Namasivayam Chettiar vs. CIT, 38 ITR 570 (SC) and held that it is for the Incometax authorities .....

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reason to reach a finding that books of account do not present true and complete picture of accounts and financial transactions. The finding by the assessing authority being perverse is, therefore, set aside. 12.4. The second issue raised by theassessing authority for invoking provisions of section 145 of the Act is about non verification of some of the vouchers relating to payment in respect of direct expenses. The perusal of the impugned order reveals that this was only a prima facie view whic .....

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f the assessee and take the same as a reason for rejecting the books of account that were maintained by assessee in regular course of its business. 12.5. Thirdly, the Assessing Officer hastaken the reasoning that the search proceedings revealed incriminating documents which contained nothings of receipt of cash "out of books" by the members of Unique Group of which the assessee is an important member. The Ld. CIT (A) in paras 13.1 to 13.3 of the impugned order has supported the finding .....

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iled by one of the partners. We, therefore, required the Ld. D/R to produce such material and evidence so as to test the correctness of the veracity of the authorities below as the appellant has categorically denied of receipt of any "on-money" in the joint business carried with his separated brother Shri Ajit Singh and his son. The separation had occasioned in the year 2006 which is a date much prior to the date of action taken under section 132 of the Act on the appellant. From the r .....

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e flats sold by them. These sales were not of the projects done jointly with the appellant, its constituents or family members. The "on-money" so received by them has been disclosed and applied to explain the transactions of their independent business unrelated to the appellant and its constituents. The statements so taken, therefore, did not constitute a material or evidence for rejecting the books of account maintained by the assessee in saying that the monies received as earnest mon .....

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eliable. The department has to prove satisfactorily that the accounts books are unreliable, incorrect or incomplete before rejecting the accounts. The rejection of books is not a matter to be done light heartedly. 12.9. There is also a feeble observation inthe orders of the authorities below for rejecting the accounts that in the trade of real estates 'notorious trade practices' are prevailing. The Ld. Counsel for the assessee has placed reliance on the judgment by Hon'ble Apex Court .....

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ransactions" in the appellant's case by the authorities below is found without any basis and found perverse on facts. It, therefore, could not be a reason for rejecting the books of account maintained by the assessee in regular course of business. 12.10. The last reasoning taken by theassessing authority as also stood confirmed by the Ld. CIT (A) is that the assessee has not followed Accounting Standards 9 & 7 which tantamount to not following Accounting Standard-1 as prescribed und .....

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on method from year to year and the assessments prior to the date of search were also made by accepting project completion method. Both Project Completion method and the Percentage Completion method are recognized methods for assessment of correct income of the assessee under the IT Act, 1961. The choice of method of accounting, however, lies with the assessee. It is not open to the Assessing Officer to change his own opinion or change the method of accounting because he finds another method of .....

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at the method of accounting provided under sub-section (1) or Accounting Standard notified under sub section (2) of section 145 of the Act have not been regularly followed by the assessee. Even for the first year, the method of accounting is deemed to have been employed if the same is shown to have been regularly employed in subsequent years. The decision by Hon'ble Delhi High Court in the case of CIT vs. Smt. V. Sikka & Another (1984) 149 ITR 73 (Del.) is relevant. The real estate devel .....

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struction contracts the assessee can follow either the project completion method or the Percentage completion method. The judgment by Hon'ble Delhi High Court in the case of CIT vs. Manish Buildwell (P) Ltd. in ITA No. 928/2011 dated 15.11.2011 is relevant. Neither the revised Guidance Notes 2012 issued by Institute of Chartered Accountants of India nor the Exposure Draft for Guidance Note on Recognition of Revenue issued by the Institute of Chartered Accounts of India in 2011 are mandatory. .....

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ployed by the appellant. The Income-tax Authority, therefore, has no option or jurisdiction to meddle in the matter either by directing the assessee to maintain its account in a particular manner or adopting a different method for valuing work-inprogress. It also cannot recompute income by adopting any method other than that regularly employed by the assesseeappellant in a case like this nor make the same as basis to reject its accounts. 12.11. The Apex Court in the case of CITvs. McMillan & .....

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regularly for his own purposes. The section and the proviso read together clearly make such a method of accounting regularly employed by the assessee a compulsory basis of computation unless, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom. If the true income, profits and gains cannot be ascertained on the basis of the assessee's method, or where no method of accounting has been regularly employed, the income must be computed upon .....

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clusion can be drawn from the method of keeping accounts. A taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts, and for that purpose to value his stock-in-trade either at cost or market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping account or of valuation. The method of accounting regularly employed ma .....

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appellant before us is found to have entertained a view that 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 of accounts or of valuation. The Revenue's reliance upon the decision in CIT vs. British Paints India Ltd. (supra) in no way advanced the case of the revenue. The Apex court while dealing with the contention of the assessee in that case f .....

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t or market price, which-ever is the lower. The court 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 account and the question must be decided with reference to the relevant material and in accordance with the correct principles. The court also observed (page 52): Where the market value has fallen bef .....

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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 .....

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n 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. 12.14. The Hon'ble Andhra Pradesh High Court in the case of CIT vs. Margadarshi Chit Funds (P) Ltd., 155 ITR 442 (AP) did not find any justification in the entertainment of the view by the Assessing Officer that there could be a better system of accounting. This is no reason to the application of the provisions of section 145 of the Act. T .....

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different from the one which is followed by the assessee, on the ground that the system which commends to the ITO is better. Attention may be invited to the decisions in: (i) CIT & EPT v. Chari and Rant MANU/TN/0427/1948MANU/TN/0427/1948 : [1949] 17 ITR 1 (Mad); (ii) CIT v. Srimati Singari BaiMANU/UP/0354/1954MANU/UP/0354/1954 : [1945] 13 ITR 224 (All); (iii) CIT v. K. Doddabasappa MANU/KA/0021/1963MANU/KA/0021/1963 : [1964] 54 ITR 221 (Mys); and (iv) Juggilal Kamlapat, Bankers v. CITMANU/U .....

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ular and the ITO, therefore, is not entitled to interfere with the system of accounting followed by the assessee, unless it is possible for him to make out and bring the case within the terms of s. 145 of the I.T. Act. On this basic issue itself, the Department's contention that the dividend should be assessed in the hands of the assessee as and when it is received, in substitution of the method of accounting followed by the assessee, should fail. Even otherwise, we are not persuaded to acce .....

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accounting methods. The Completion Contract method is one of such methods. Under the Completed contract method, the revenue is not recognized until the contract is completed. 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. The method leads to objective assessment of the results of t .....

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1 ITR 482 (SC) took the similar view and held at page 495 as under:- Lastly, there is a concept in accounts which 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 assoc .....

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sessing officer cannot change the method of accounting to the "percentage of completion method. 12.16. The Hon'ble Delhi High Court whiledealing with the similar situation in the case of CIT vs. Manish Buildwell Pvt. Ltd. in ITA No. 928/2011 dated 15.11.2011 held that 'after the above judgment of Supreme Court in CIT vs. Bilahari Investment Pvt. Ltd., 299 ITR 1, it cannot be said that the project completion method followed by the assessee would result in deferment of the payment of .....

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as also found that there was no justification on the part of the assessing officer to adopt the percentage completion method for one year on selective basis. This will distort the true profits and gains of business." 12.17. The judgment rendered by ApexCourt in the case of Kachwala Gems vs. JCIT, MANU/SC/8797/2006MANU/SC/8797/2006 : 288 ITR 10 (SC) the Hon'ble Apex Court has observed that several cogent reasons have been given on facts by Income-tax authorities for rejecting the books o .....

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true and complete picture of its accounts and financial transactions. It is a case where accounts of the assessee are correct and complete. Method of accounting and accounting standard has been regularly followed. True and correct profits of the business of the assessee could be deduced from such books of accounts. In this view of the matter the assessing authority could not change the method regularly adopted by the assessee from Project Completion Method to Percentage Completion Method on irre .....

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issues are required to be answered in favour of the Department and against the assessee. 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 a .....

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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 ac .....

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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 mad .....

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e 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 estimat .....

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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 .....

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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 of 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, .....

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d 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 .....

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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 m .....

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iture 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 .....

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other hand, we note that the Assessee had submitted before the Commissioner of Income Tax (Appeals) 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 the assessee to maintain the Daily Stock Register has been broug .....

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rn 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 the gross profit declared by him in the preceding year, that may alert the Assessing Officer and serve as a warning to him, to loo .....

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ls) is required to be accepted by setting aside the impugned order of the Tribunal. Accordingly, the question posed for our consideration is 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. Th .....

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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 Tha .....

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ibunalconfirmed 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 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 opin .....

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earing 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 c .....

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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. Lunar Electricals vs. Assistant Commissioner of Income Tax [2012] 2010 Taxman 6 .....

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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 the purpose of accounts/computing taxable income as the assessee is following mercantile system of accounting. We may .....

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ion 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 .....

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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 .....

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hod 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 enti .....

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dopting 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 the progress in the 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 .....

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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, poss .....

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od 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 .....

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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 of 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 .....

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f 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 .....

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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 m .....

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f contract. The above indicates the difference between the completed contract method and the percentage of 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 p .....

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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 th .....

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ccounts 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 questio .....

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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 In .....

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mp; 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, theref .....

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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 of the revenue it .....

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incorrect or incomplete before it can reject the accounts. The rejection of accounts is not a matter to be done lightheartedly, 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 .....

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rtunity 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 jud .....

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heir 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." 5. In the case on hand, the only circumstancerelied on by the authorities below for the rejecti .....

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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 circum .....

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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 prescribedbalance 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/o .....

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ed 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 hardl .....

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949. (b) The appellant follows mercantile systemsof 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 back .....

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ny 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 pa .....

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s 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 .....

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or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income tax purposes are to be 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 .....

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ed 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 b .....

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ied 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 Officer must necessarily decide is whether or not the method of accounting followed .....

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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 .....

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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 taxwhichever method is adopted by the assessee .....

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971]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 .....

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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, itcan be held: (1) That for valuing the closing stock, it isopen to the assessee to value it at the cost or market value, whichever is lower; (2) .....

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r of valuation; (4) The concept of real income is certainlyapplicable 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 orarisen 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 inc .....

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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 diff .....

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he 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 of this Court in case of CIT v. Amar Corporation (supra). This Court while considering the same issue held and observed as under: "5. It could be see .....

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ars 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 pro .....

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