AO is not justified to change the earlier method of accounting adopted by the assessee to determine the income tax on estimate basis: HC Karnataka

Facts of the case:

  • Assessee, is engaged in development of plots and construction of flats, was consistently following mercantile system of accounting and completed contract method of accounting.
  • Assessee declared his income for the reporting period under consideration (AY-1997-98) to be Rs. 7.59 lacs. Also, he had received an advance of Rs. 152.42 lacs from customers.
  • The Assessing Officer (AO) contended that current profit for the relevant AY under consideration cannot be decided by the method of book of accounting followed by the assessee and he determined the income of the assessee on estimated basis. Aggrieved by the decision of CIT, Revenue department filed an appeal before the HC.

Contention of the Department:

  • AO contended that assessee is in construction business and is bound to follow the percentage completion method instead of project completion method, as held in the case of ‘CIT and another v. Thumbay Holdings (P.) Ltd
  • AO further contended that income of assessee should be assessed by applying 8% rate on the advances received on the sum of Rs. 152.42 lacs by following percentage completion method.

Contention of the Assessee:

  • Assessee contended that method of accounting once adopted is followed, since the same has been accepted by the tax authorities in previous years.
  • Assessee further submitted that charge of tax in the instant case pertains to previous year and not the current year, therefore, the decision rendered in the case of Thumbay Holdings (P.) Ltd. has no application to the fact situation of the case.

 Conclusion:

  • The HC of Karnataka held the decision in favor of Assessee and stated that every Assessee is entitled to follow the method of accounting which the department has earlier accepted.
  • AO is only allowed to change the method of Accounting in the event of distortion of profits by current method which is being followed by the Assessee.
  • Since the accounting method followed by the assessee was earlier accepted by the department, and has been reporting its income correctly, therefore AO is not justified to change the same, keeping in view of law laid down by SC in case of Bilahari Investments Pvt. Ltd.

Case Law: Commissioner of Income-tax V. Banjara Developers & Constructions (P.) Ltd. [2020] 117 taxmann.com 747 (Karnataka) (In Favor of Assessee)