Pr. Principal Commissioner Of Income Tax, Jaipur-2, Jaipur v. M/S Unique Builders & Developers (Ajay), 8Th Floor, The Mile Stone, Tonk Road, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 269 / 2017 Pr. Principal Commissioner of Income Tax, Jaipur-2, Jaipur. ----Appellant Versus M/s Unique Builders & Developers (ajay), 8th Floor, the Mile Stone, Tonk Road, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Prabhanth Sharma on behalf ofMr. R. B. Mathur For Respondent(s) : _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYASJudgment 05/10/2017 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal whereby the Tribunal hasdismissed the appeal of the department. 2.Counsel for the appellant has framed the following substantial questions of law:- “1 Whether on the facts and in the circumstancesof the case and in law the ITAT has erred in deleting theaddition of Rs. 58779840/- made by Assessing Officerby application of Section 145(3) of the Act andestimation of profits when the assessee is notmaintainable quantitative and qualitative stock registersand seized documents seized from Sh. Navin Bhutani(A-2/51) and from Sh. Vibhishek Singh (Partner) (A-2/19) indicated on money received.” 2. Whether on the facts and in the circumstances of thecase and in law the ITAT has erred in rejecting theapplication of percentage completion method adoptedby the Assessing Officer, when this rejection meansacceptance of loss returns of the assessee engaged in construction and sale of residential/commercial project. 3.Whether on the facts and in the circumstances ofthe case and in law the ITAT was justified in relyingupon the decision of coordinate Bench in the case of theassessee though these orders have been appealedagainst before Hon’ble High Court by the department onperversity of facts. 4.Whether on the facts and circumstances of the casand in law the ITAT was justified ignoring that order ofcoordinate bench on which the ITAT has relied upon,stated a wrong fact that the two brothers had separatedin 2006 and that the document (A-2/51) was seizedfrom the laptop of any employee of the separated AjitPal Group, ignoring the fact that the two brothers ShriAjay Pal Singh and Shri Ajit Pal Singh were activelyengaged in business together as partners themselves orthrough their families in various sister concerns of theassessee firm and the seized document mentioned theprojects of the firm like Royal Paradise” 3.The issue is now squarely covered by the decision of this Court in the case of same assessee in D.B. Income Tax AppealNo. 18/2013 decided on 19.05.2017 wherein it has been held as under:- “9.Therefore, he has contended that the rejection ofbooks of accounts for non maintenance of stock register isnot a ground under Section 145(3) of the Act. 10.He has relied upon following decisions:Manjusha Estates Pvt. Ltd. vs. The Income TaxOfficer Tax Appeal No.828/2007 [Gujrat High Court],decided on 12.08.2016: 4.1 Learned Counsel for the department hastaken this Court to Section 145(3) of the ITAct which relates to rejection of the books ofaccounts and contended that the CIT(A) aswell as the Tribunal has rightly come to theconclusion after considering the materialplaced before them. After making theaforesaid submissions he has contended thatthe appeal may be dismissed. 5. Having heard the learned Counsel for theparties and having gone through the orderpassed by the authorities below, as well as,considering the fact that the assessee hasfollowed the method which is consistentconsidering the decision in case of Shivalik 10.He has relied upon following decisions:Manjusha Estates Pvt. Ltd. vs. The Income TaxOfficer Tax Appeal No.828/2007 [Gujrat High Court],decided on 12.08.2016: 4.1 Learned Counsel for the department hastaken this Court to Section 145(3) of the ITAct which relates to rejection of the books ofaccounts and contended that the CIT(A) aswell as the Tribunal has rightly come to theconclusion after considering the materialplaced before them. After making theaforesaid submissions he has contended thatthe appeal may be dismissed. 5. Having heard the learned Counsel for theparties and having gone through the orderpassed by the authorities below, as well as,considering the fact that the assessee hasfollowed the method which is consistentconsidering the decision in case of Shivalik Buildwell (P.) Ltd. (supra) and Umang HiralalThakkar (supra) and therefore this Court isof the opinion that the view taken by thetribunal and CIT(A) is not correct. Since theissue involved in this appeal is identical tothe decision cited by the learned Counsel forthe assessee while adopting such reasons,we allow this appeal and accordingly answerthe issue raised in this appeal in favour ofthe assessee and against the department. CIT-IV vs. Shivalik Buildwell (P.) Ltd. [2013] 40Taxman.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 developerof the project, profit in his case, will arise ontransfer of title of the property and receipt ofany advances or booking amount cannot betreated as trading receipt of the year underconsideration. The tribunal further noted thatsuch method of accounting followed by theassessee had been accepted by the revenuein earlier years. The Tribunal was, therefore,of the opinion that the Assessing Officer’sdecision to reject the book results during theyear under consideration was not justified. 4. WE are of the opinion that the Tribunalcommitted no error. If as per the accountingstandard available, the assessee was entitledto claim the entire income on completion ofthe project and if such accounting standardwas accepted by the revenue in the earlieryears, in the present year, the AssessingOfficer could not have taken a different standand 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 theincome chargeable under the heads 'Profitsand gains of business or profession' shall becomputed in accordance with either cash ormercantile system of accounting "regularlyemployed by the Assessee". It is only witheffect from 1st April 2015 that a change hasbeen brought about in Section145(2) whichpermits the central government to notify inthe Official Gazette from time to time theincome computation and disclosure standards to be followed by any class of Assesses or inrespect of any class of income. That change isprospective and in any event does not applyto the case on hand. 19. The settled legal position as far asSection 145of the Act is concerned is that itis not open to an AO to reject the accounts ofan Assessee unless he comes to adetermination that notified accountingstandards have not been regularly followed bythe Assessee. As pointed out by the CIT (A)in the order dated 2nd July, 2010, the AS ofthe ICAI did not have any statutoryrecognition under the Act although it wasbinding under the Companies Act, 1956. Themethod of accounting followed by theAssessee in the present case i.e. projectcompletion method was certainly one of therecognized methods and has beenconsistently followed by it. Lunar Electricals vs. Assistant Commissioner ofIncome Tax [2012] 2010 Taxman 69 (Delhi): 19. The settled legal position as far asSection 145of the Act is concerned is that itis not open to an AO to reject the accounts ofan Assessee unless he comes to adetermination that notified accountingstandards have not been regularly followed bythe Assessee. As pointed out by the CIT (A)in the order dated 2nd July, 2010, the AS ofthe ICAI did not have any statutoryrecognition under the Act although it wasbinding under the Companies Act, 1956. Themethod of accounting followed by theAssessee in the present case i.e. projectcompletion method was certainly one of therecognized methods and has beenconsistently followed by it. Lunar Electricals vs. Assistant Commissioner ofIncome Tax [2012] 2010 Taxman 69 (Delhi): The next aspect relates to rejection of booksof accounts because the assessee wasfollowing completed contract method. We donot think completed contract method iscontrary and cannot be adopted and appliedwhen an assessee follows mercantile systemof accounting. This issue was examined bytheMadrasHighCourtin Commissioner of Income Tax versusSASHotelsandEnterprisesLimited,MANU/TN/3098/2010:(2011)334 ITR 194 (Mad.) and it has been heldthat the said method confirms and can beadopted by an assessee. In fact, we findthat there is a contradiction in the orders ofboth the CIT(Appeals) and the tribunal onthe said aspect. With regard to NBCCcontract, both of them have held that thereceivables and expenses should beexcluded as the contract was incomplete.But, at the same time they have held thatcompleted contract method cannot beadoptedforthepurposeofaccounts/computing taxable income as theassessee is following mercantile system ofaccounting. We may notice here that whileexamining the question of rejection of booksof accounts, the CIT(Appeals) in his finding,which have been quoted above, was ambivalent and did not deal with the realissue and question whether or not thecompleted contract method is permitted andcan be adopted by the assessee followingmercantile system of accounting. Thetribunal also went on certain other aspectsrelating to service of notice in the firstproviso to Section145and did not deal withthe issue and question accordingly. On thesecond question, therefore, we hold andobserve that completed contract method canbe adopted under Section145of the Actwhen an assessee follows mercantile systemof accounting. However, we remand thematter to the tribunal to examine the otheraspects relating to computation oftaxable income on the basis of completedcontract method. Question No. 2 isaccordingly answered partly affirmative andpartly in negative. Commissioner of Income Tax vs. Bilahari Investment (P)Ltd [2008] 299 ITR 1 SC: 15.Recognition/ identification of incomeunder the 1961 Act is attainable by severalmethods of accounting. It may be noted thatthe same result could be attained by any oneof the accounting methods. Completedcontract method is one such method.Similarly, percentage of completion methodis another such method. 19. In the judgment of the Bombay HighCourt in Taparia Tools Ltd. (supra) it hasbeen held that in every case of substitutionof one method by another method, theburden is on the Department to prove thatthe method in vogue is not correct and itdistorts the profits of a particular year. Underthe mercantile system of accounting basedon the concept of accrual, the method ofaccounting followed by the assessees isrelevant. In the present case, there is nofinding recorded by the AO that thecompleted contract method distorts theprofits of a particular year. Moreover, as heldin various judgments, the Chit Scheme is oneintegrated scheme spread over a period oftime, sometimes exceeding 12 months. Wehave examined computation of tax effect inthese cases and we find that the entireexercise is revenue neutral, particularly when the scheme is read as one integrated schemespread over a period of time. 20. As stated above, we are concerned withassessment years 1991-1992 to 1997-1998.In the past, the Department had acceptedthe completed contract method and becauseof such acceptance, the assessees, in thesecases, have followed the same method ofaccounting, particularly in the context of chitdiscount. Every assessee is entitled toarrange its affairs and follow the method ofaccounting, which the Department has earlieraccepted. It is only in those cases where theDepartment records a finding that themethod adopted by the assessee results indistortion of profits, the Department caninsist on substitution of the existing method.Further, in the present cases, we find fromthe various statements produced before us,that the entire exercise, arising out of changeof method from completed contract methodto deferred revenue expenditure, is revenueneutral. Therefore, we do not wish tointerfere with the impugned judgment of theHigh Court. CIT vs. Manish Build Well (P) Ltd. [2011] 63 DTR369(Delhi): 6. Questions Nos. 2 and 3 are connected.They assail the decision of the Tribunalrendered in paragraph 20 of its order. Anaddition of Rs.28,21,000/was made by theassessing officer on the footing that theassessee was adopting the project completionmethod or the completed contract method,which was not proper and the profits of thebusiness should be computed on the basis ofthe percentage completion method underwhich the profits of the development andconstruction business of the assessee getassessed over a period of years, keeping pacewiththeprogressintheconstruction/development of the project.The CIT (A) however held that the assesseehad no reason to withhold the handing over ofpossession of the space to the purchaser inrespect of a project which is completed andthat wherever possession was not handedover to the purchaser, it was for the reasonthat the project was not completed. Hefurther found that a buyer who has paid theentire sale consideration would immediately demand possession and the entire saleconsideration could be received by theassessee only on completion of the project.On these facts it was noted by the CIT (A)that unless the buyer makes full payment theassessee could not hand over possession norget the sale transaction registered. A furtherfinding recorded by the CIT (A) was that theimpugned project was completed only in theaccounting period relevant to the assessmentyear 2008-09 and in support of this finding,henotedthata copyofthecompletion/occupancy certificate was placedon the record of the Assessing Officer. Hefurther recorded a finding that after the issueof the occupancy certificate and till the dateof the assessment order, possession of almost75% of the developed area was handed overto the buyers who made full payment and thesale deeds were also executed. Thereafter,possession of 20% of the remaining area washanded over to the buyers. The possession ofthe balance 5% of the developed area couldnot be handed over to the remaining buyersbecause they could not make full paymentand take possession. On these findingsthe CIT (A) held that the allegation of theassessing officer that the assessee wasadopting a method of accounting namely theproject completion method, to suit itsconvenience to book income was baseless. Afurther finding recorded by the CIT (A) is thatthere was no manipulation in the books ofaccounts. So far as the method of accountingis concerned, the CIT (A) held that theprojectcompletionmethodisa wellrecognized and accepted method ofaccounting and was the only method suitablefor any developer who has to deliver acompleted product to the buyer. Ultimatelythe CIT (A) held as under: Thus on overall perusal of the assessmentorder it is seen that neither any defect hasbeen pointed out by the assessing officer inthe method of accounting followed by theappellant nor any finding has been given thattrue and fair profits cannot be deducedfollowing the said method of accounting. Noevidence was found during the course ofsearch to show that the books of account arenot properly maintained by the appellant. Themain thrust of the assessing officer in makingthe addition is that the assessee is deferring the payment of taxes. But this allegation ofthe assessing officer cannot be accepted asthe assessee is consistently following amethodofaccountingwhichis well recognized in development businessand has been accepted by the assessingofficer also in the other group cases. Thus theaddition is here by deleted. 7. The aforesaid finding of the CIT (A) wasapproved by the Tribunal with the observationthat the department has accepted theassessee's method of accounting namely, theproject completion method and thereforethere was no justification for adopting thepercentage completion method for one yearon selective basis. 8. It is well settled that the projectcompletion method is one of the recognizedmethods of accounting. In CommissionerIncome-Tax And Another v. Hyundai HeavyIndustries Co. Ltd.MANU/SC/7731/2007 :(2007) 291 ITR 482 (SC) the Supreme Courtheld as follows: Lastly, there is a concept in accounts which iscalled the concept of contract accounts. Underthat concept, two methods exist forascertaining profit for contracts, namely,completed contract method" and "percentageof completion method". To know the results ofhis operations, the contractor prepares whatis called a contract account which is debitedwith various costs and which is credited withrevenue associated with a particular contract.However, the rules of recognition of cost andrevenue depend on the method of accounting.Two methods are prescribed in AccountingStandard No.7. They are "completed contractmethod" and "percentage of completionmethod. This view was reiterated by the SupremeCourt in Commissioner of Income-Tax v.BalearicInvestment P. Ltd. MANU/IG/5001/2007 :(2008) 299 ITR 1 (SC) with the followingobservations: Recognition/identification of income under the1961 Act is attainable by several methods ofaccounting. It may be noted that the sameresult could be attained by any one of theaccounting methods.The completed contractmethod is one such method. Similarly, the percentage of completion method is anothersuch method. Under the completed contract method, therevenue is not recognized until the contract iscomplete. Under the said method, costs areaccumulated during the course of thecontract. The profit and loss is established inthe last accounting period and transferred tothe profit and loss account. The said methoddetermines results only when the contract iscompleted. This method leads to objectiveassessment of the results of the contract. On the other hand, the percentage ofcompletion method tries to attain periodicrecognition of income in order to reflectcurrent performance. The amount of revenuerecognized under this method is determinedby reference to the stage of completion of thecontract. The stage of completion can belooked at under this method by taking intoconsideration the proportion that costsincurred to date bears to the estimated totalcosts of contract. The above indicates the difference betweenthe completed contract method and thepercentageofcompletionmethod."(underlining ours) On the other hand, the percentage ofcompletion method tries to attain periodicrecognition of income in order to reflectcurrent performance. The amount of revenuerecognized under this method is determinedby reference to the stage of completion of thecontract. The stage of completion can belooked at under this method by taking intoconsideration the proportion that costsincurred to date bears to the estimated totalcosts of contract. The above indicates the difference betweenthe completed contract method and thepercentageofcompletionmethod."(underlining ours) 9. After the above judgments of the SupremeCourt it cannot be said that the projectcompletion method followed by the assesseewould result in deferment of the payment ofthe taxes which are to be assessed annuallyunder the Income Tax Act. AccountingStandards 7 (AS7) issued by the Institute ofChartered Accountants of India also recognizethe position that in the case of constructioncontracts, the assessee can follow either theproject completion method or the percentagecompletion method. In view of the judgmentsof the Supreme Court (Supra), the finding ofthe CIT (A), upheld by the Tribunal, does notgive rise to any substantial question of law.Further, the Tribunal has also found that therewas no justification on the part of theassessing officer to adopt the percentagecompletion method for one year (the yearunder appeal) on selective basis. This willdistort the computation of the true profits andgains of the business. For these reasons, weare of the view that no substantial question oflaw arises. We, therefore, decline to admitquestion Nos. 2 and 3. CIT vs. SAS Hotels & Enterprises Ltd. [2011] 334 ITR 194(Madras): 7. In this context, when we applySection145(3)of the Income Tax Act, itspecifically stipulates that where theAssessing Authority is not satisfied about thecorrectness or completeness of the accountsof the Assessee, or where the method ofaccounting provided in Sub-section (1) oraccounting standards as notified under Sub-section (2), have not been regularly followedby the Assessee, the Assessing Authoritymay make an assessment in the mannerprovided in Section 144. Therefore, in orderto invoke Section145(3)of the Act anddisturb the existing system of accounting,the Assessing Officer must necessarilyexpress his dissatisfaction about thecorrectness or completeness of the accountsof the Assessee and also note that suchsystem of accounting was not regularlyfollowed by the Assessee, in which eventalone, the Assessing Officer can exercise hisjurisdiction and make an assessment asprovided under Section 144of the Act. 9. We fully concur with the conclusion of theTribunal in having interfered with the ordersof the Assessing Authority as well as that ofthe Commissioner of Income-tax (Appeals).We are, therefore, not inclined to entertainthe substantial question of law, as we do notfind any need for the same. The appeal failsand the same is dismissed. No costs. MKB (Asia) (P) Ltd. vs. CIT [2007] 294 ITR 655(Gau HC): 11. As stated above, the accounting systemAS 7 is an approved system of accountingby the Institute of Chartered Accountantsand as such the authenticity of the saidaccounting system is not under challenge.The assessing firm/appellant being a PrivateLimited Company was maintaining theaccount following the said system and theaccount were duly audited by qualifiedChartered Accountant, maintenance of theaccounts as well as the valuation of worksin progress will not prejudice either side.Admittedly, the particular work control werenot completed and it comes under the category of work in progress. There is alsono dispute that the ultimate liability of theAssessee as regards tax will be dependantupon in total (fixed) amount received by theAssessee against the particular workcontrol. 11. As stated above, the accounting systemAS 7 is an approved system of accountingby the Institute of Chartered Accountantsand as such the authenticity of the saidaccounting system is not under challenge.The assessing firm/appellant being a PrivateLimited Company was maintaining theaccount following the said system and theaccount were duly audited by qualifiedChartered Accountant, maintenance of theaccounts as well as the valuation of worksin progress will not prejudice either side.Admittedly, the particular work control werenot completed and it comes under the category of work in progress. There is alsono dispute that the ultimate liability of theAssessee as regards tax will be dependantupon in total (fixed) amount received by theAssessee against the particular workcontrol. 12. We, therefore, hold that the Income taxauthority has no option/ jurisdiction tomuddle in the matter either by directing theassessee to maintain the account in aparticular manner or adopt a differentmethod for valuing the work in progress.We reiterate the decision in Doom DoomaIndia Ltd. (supra) and hold that anassessee has as the option/liberty to adoptany recognized method of account for hisbusiness and the income shall be computedin accordance with such regularlymaintained accounting system. CIT vs. V.S. Dempo & CO. Pvt. Ltd. [1996] 131 CTR203 (Mum): 4. We have carefully considered the rivalsubmissions. We find that the controversy inthis case is basically a finding of fact whichhas to be decided by the authoritiesconcerned on the facts and circumstances ofeach case. In the instant case, the Tribunalhas come to a conclusion that the method ofaccounting followed by the assessee wascorrect and resort to s. 145(1) was not calledfor. We do not find any infirmity in the saidfinding. We, therefore, refuse to interferewith the same. ST. Teresa’s Oil Mills vs. State of Kerala [1970] 76ITR 0365 (Ker): 4. The learned counsel for the petitionerbrought to our notice the decision of theAhdhra Pradesh High Court in N. Raja Pullaiahv. Deputy Commercial Tax Officer,[1969]MANU/AP/0166/1969 : 73 I.T.R. 224and contended that the consumption ofelectricity by itself cannot form a reliable testfor determining the yield of oil, that the yielddepends upon various factors like thecondition of the machine, the quality ofcopra--whether it was dried or moist--thenature of the electric supply and other similarfactors and that the consumption of electricity ST. Teresa’s Oil Mills vs. State of Kerala [1970] 76ITR 0365 (Ker): 4. The learned counsel for the petitionerbrought to our notice the decision of theAhdhra Pradesh High Court in N. Raja Pullaiahv. Deputy Commercial Tax Officer,[1969]MANU/AP/0166/1969 : 73 I.T.R. 224and contended that the consumption ofelectricity by itself cannot form a reliable testfor determining the yield of oil, that the yielddepends upon various factors like thecondition of the machine, the quality ofcopra--whether it was dried or moist--thenature of the electric supply and other similarfactors and that the consumption of electricity is affected by these and various other factors.It was also contended that no test-crushinghad been done in this case and thedepartment itself had accepted in other casesfigures varying from 10 to 12 units per quintalof copra. In the petitioner's case, the averageworks out to 12 units per quintal. On behalf ofthe revenue it was urged that the rejection ofthe accounts was justified since there wasvery wide divergence in the consumption ofelectricity and that it was indicative of theunreliability of the petitioner's accounts. Theproposition is well-settled that accountsregularly maintained in the course of businesshave to be taken as correct unless there arestrong and sufficient reasons to indicate thatthey are unreliable. The department has toprove satisfactorily that the account booksare unreliable, incorrect or incomplete beforeit can reject the accounts. The rejection ofaccounts is not a matter to be done light-heartedly, though it may not be possible tolay down in general terms the exactcircumstances in which the accounts shouldbe considered as unreliable or incorrect. Theaccounts could be rejected as unreliable ifimportant transactions are omitted therefromor if proper particulars and vouchers are notforthcoming or if they do not include entriesrelating to one particular class of business. Inthis connection, it has to be pointed out thatthe rejection of accounts and assessment tothe best of judgment are two distinct andseparate processes and should not beconfused as one, although there will be nooverlapping in the materials used for applyingboth processes. The initial step of rejectingthe accounts will be justified when theaccount books are found for valid reasonsunreliable, incorrect or incomplete. Theassessee at this stage has to be givenreasonableopportunityforofferingexplanations regarding the defects in theaccounts and on his failure to satisfactorilyexplain the defects, the department will bejustified in rejecting the accounts. Thesubsequent step of assessment to the best ofjudgment, as has been uniformly recognisedby the courts, involves some guess-work andnecessarily has to be done on the materialsavailable in each case. The Privy Council hadoccasion to consider the exact import of theexpression "to the best of his judgment"occurring in Section 23(4)of the Indian Income Tax Act, 1922 (see Commissioner ofIncome Tax v. Laxminarain Badridas [1937] 5I.T.R. 170, 180 (P.C.)). The Privy Councilmade the following observation in thatjudgment: "He (the assessing authority) must not actdishonestly or vindictively or capriciouslybecause he must exercise judgment in thematter. He must make what he honestlybelieves to be a fair estimate of the properfigure of assessment, and for this purpose hemust, their Lordships think, be able to take intoconsideration local knowledge and repute inregard to the assessee's circumstances, and hisown knowledge of previous returns by andassessments of the assessee, and all othermatters which he thinks will assist him inarriving at a fair and proper estimate; andthough there must necessarily be guess-workin the matter, it must be honest guess-work." "He (the assessing authority) must not actdishonestly or vindictively or capriciouslybecause he must exercise judgment in thematter. He must make what he honestlybelieves to be a fair estimate of the properfigure of assessment, and for this purpose hemust, their Lordships think, be able to take intoconsideration local knowledge and repute inregard to the assessee's circumstances, and hisown knowledge of previous returns by andassessments of the assessee, and all othermatters which he thinks will assist him inarriving at a fair and proper estimate; andthough there must necessarily be guess-workin the matter, it must be honest guess-work." 5. In the case on hand, the only circumstancerelied on by the authorities below for therejection of the accounts is that there was widedisparity in the consumption of electricity. Inour opinion, this factor by itself without anyother supporting circumstance does not justifythe rejection of the accounts. Such variation inthe consumption of electricity can be due thevarious factors outside the control of theassessee. It is unsafe to categorically say thatbecause there is variation in the consumptionof electricity the accounts are incorrect orunreliable. It sometimes happens that currentsupply falls far below the usual voltage and onsuch occasions the output will necessarily bemuch lower than the normal rate. Theefficiency of the crushing machine as also themoisture content in the copra would also berelevant factors to be taken into account inarriving at the output. It is, therefore, unsafe touphold the rejection of the accounts purely onthe ground that there has been divergence inthe consumption of electricity. In this case,there is also the additional circumstance thatthe department itself has admitted variationsranging from 10 to 12 units per quintal; andthe petitioner's consumption of electricity is 12units per quintal, which cannot be said to bewide off the accepted consumption. We are ofthe opinion that in these circumstances therejection of the accounts is not legally justified. 6. We accordingly set aside the order of theTribunal and direct that the assessment bemodified accepting the assessee's accounts. Inthe circumstances, however, there will be noorder 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 ScheduledNationalised Banks were directed to put thevalue of shares and securities at cost and if themarket value is lower, it was to be shownseparately in brackets. Now, the question wouldbe when such a Bank is submitting its statutoryreturn of income, whether it can disclose in itsreturn its real profit and/or loss on the basis ofmarket value of securities and shares? It hasbeen pointed out that the balance sheet or theaudited accounts maintained on the basis of theinvestment in shares at cost would not disclosethe real profit or loss of the Bankin view of thefact that depreciation in the value of the sharesor fall in the market value of the shares andsecurities is not provided in the auditedaccounts. Learned Counsel for the appellantsubmitted that even though in the balancesheet maintained by the assessee, market priceof the shares and securities is not mentioned,yet for determining the real income of theassessee Bank, the said price is required to betaken into account. And, for that purpose sinceyears, the assessee Bank was submittingincome tax returns after taking into account themarket price of such shares and securitieswhich has been accepted by the Departmentwithout any objection. He also submitted thatnot making of proper entries in the balancesheet could hardly be a ground for notassessing the real income. 12. For the reasons, the Central Governmenthad issued Notification dated 12th May, 1982permitting the assessee bank not to disclose inbrackets the market value of the investmentunder the sub-heads in inner column againstany of the sub-heads (ii), (iii), (iv) and (v) ofItem 4 of the assets side of the prescribedform. It is also undisputed that: (a) the appellant is a Nationalised Bank andtherefore is governed by the BankingRegulation Act, 1949. (b) The appellant follows mercantile systemsof accounting both for Book keeping purposeas well as for tax purposes. (c) The appellant consistently and for over 30years prior to the assessment year in dispute(1982-83) has been valuing its stock- in-trade(investments) 'at cost' in the balance sheetwhereas for the same period of time theappellant has been valuing the very sameinvestment 'at cost or market value whicheveris lower' for income tax purposes. 13. In the background of the aforesaid facts,we would state that it is an established ruleof commercial practice and accountancy thatclosing stock can be valued at cost or marketprice whichever is lower. In ChainrupSampatram v. Commissioner of Income Tax,WestBengalMANU/SC/0046/1953 :[1953]24ITR481(SC) , this Court explainedthe underlying reasons for the said practicethus: 'It is wrong to assume that the valuation ofthe closing stock at market rate has, for itsobject, the bringing into charge anyappreciation in the value of such stock. Thetrue purpose of crediting the value of unsoldstock is to balance the cost of those goodsentered on the other side of the account atthe time of their purchase, so that thecancelling out of the entries relating to thesame stock from both sides of the accountwould leave only the transactions on whichthere have been actual sales in the course ofthe year showing the profit or loss actuallyrealised on the year's trading. As pointed outin paragraph 8 of the Report of theCommittee on Financial Risks attaching to theholding of Trading Stocks, 1919, As the entry for stock which appears in atrading account is merely intended to cancelthe charge for the goods purchased whichhave not been sold, it should necessarilyrepresent the cost of the goods. If it is moreor less than the cost, then the effect is tostate the profit on the goods which actuallyhave been sold at the incorrect figure.... Fromthis rigid doctrine one exception is verygenerally recognised on prudential groundsand is now fully sanctioned by custom, viz.,the adoption of market value at the date ofmaking up accounts, if that value is less than cost. It is of course an anticipation of the lossthat may be made on those goods in thefollowing year, and may even have the effect,if prices rise again, of attributing to thefollowing year's results a greater amount ofprofit than the difference between the actualsale price and the actual cost price of thegoods in question." (extracted in paragraph281 of the Report of the Committee on theTaxation of Trading Profits presented to BritishParliament in April, 1951). While anticipated loss is thus taken intoaccount, anticipated profit in the shape ofappreciated value of the closing stock is notbrought into account, as no prudent traderwould care to show increased profit before itsactual realisation. This is the theoryunderlying the rule that the closing stock is tobe valued at cost or market price whicheveris the lower, and it is now generally acceptedasanestablishedrule While anticipated loss is thus taken intoaccount, anticipated profit in the shape ofappreciated value of the closing stock is notbrought into account, as no prudent traderwould care to show increased profit before itsactual realisation. This is the theoryunderlying the rule that the closing stock is tobe valued at cost or market price whicheveris the lower, and it is now generally acceptedasanestablishedrule of commercial practice and accountancy. Asprofits for income tax purposes are to becomputed in conformity with the ordinaryprinciples of commercial accounting, unless,of course, such principles have beensuperseded or modified by legislativeenactments, unrealised profits in the shape ofappreciated value of goods remaining unsoldat the end of an accounting year and carriedover to the following year's in a business thatis continuing are not brought into the chargeas a matter of practice, though as alreadystated, loss due to a fall in price below cost isallowed even if such loss has not beenactually realised. As truly observed by one ofthe learned Judges in Whimster & Co. v.Commissioner of Inland Revenue 12 Tax Cas.813, Under this law (Revenue Law) the profits arethe profits realised in the course of the year.What seems an exception is recognised wherea trader purchased and still holds goods orstocks which have fallen in value. No loss hasbeen realised. Loss may not occur.Nevertheless, at the close of the year he ispermitted to treat these goods or stocks as oftheir market value. 18. Even applying the aforesaid tests laiddown by this Court, what is taxable under theAct is the really accrued or arisen income. Onthe basis of the method of accountancyregularly employed by the assessee, the real income is pointed out in the income-taxreturn submitted by the assessee. This cannotbe ignored by holding that in a balance sheetwhich is required to be statutorily maintainedin a particular form, market value of theshares and securities is not mentioned or ismentioned in brackets. The decision in thecase of State Bank of Travancore does not laydown any rule that whatever is not mentionedin the prescribed statutory balance sheet isnot to be taken into account for deciding realtaxable income. 21. The learned Counsel for the Revenuefurther relied upon the decision inCommissioner of Income-Tax v. British PaintsIndia Ltd. : [1991]188ITR44(SC) . In ourview, the said decision would not in a wayadvance the contention raised by therespondent. The Court while dealing with thecontention of the assessee for valuation of theraw material without taking into account anyportion of the cost of manufacture, held thatthe question of fact which the AssessingOfficer must necessarily decide is whether ornot the method of accounting followed by theassessee discloses true income and observedthus: It is a well recognised principleof commercial accounting to enter in theprofit and loss account the value of the stock-in-trade at the beginning and at the end ofthe accounting year at cost or market price,whichever is the lower. 22.TheCourtfurtherconsideredSection145of the Act and observed thatwhat is to be determined by the officer inexercise of the power is a question of fact,that is, whether or not income chargeableunder the Act can be properly deduced fromthe books of accounts and the question mustbe decided with reference to the relevantmaterial and in accordance with the correctprinciples. The Court also observed: It is a well recognised principleof commercial accounting to enter in theprofit and loss account the value of the stock-in-trade at the beginning and at the end ofthe accounting year at cost or market price,whichever is the lower. 22.TheCourtfurtherconsideredSection145of the Act and observed thatwhat is to be determined by the officer inexercise of the power is a question of fact,that is, whether or not income chargeableunder the Act can be properly deduced fromthe books of accounts and the question mustbe decided with reference to the relevantmaterial and in accordance with the correctprinciples. The Court also observed: Where the market value has fallen before thedate of valuation and, on that date, themarket value of the article is less than itsactual cost, the assessee is entitled to valuethe articles at market value and thusanticipate the loss which he will probablyincur at the time of the sale of the goods.Valuation of the stock-in-trade at cost ormarket value, whichever is the lower, is amatter entirely within the discretion of theassessee. But whichever method he adopts, it should disclose a true picture of his profitsand gains. If, on the other hand he adopts asystem which does not disclose the true stateof affairs for the determination of tax, even ifit is ideally suited for other purposes of hisbusiness, such as the creation of a reserve,declaration of dividends, planning and thelike, it is the duty of the Assessing Officer toadopt any such computation as he deemsappropriate for the proper determination ofthe true income of the assessee. This is notonly a right but a duty that is placed on theofficer, in terms of the first proviso toSection145, which concerns a correct andcomplete account but which in the opinion ofthe officer, does not disclose the true andproper income. 23. Hence, for the purpose of income tax whichever method is adopted by the assesseea true picture of the profits and gains, that isto say, the real income is to be disclosed. Fordetermining the real income, the entries in abalance sheet required to be maintained inthe statutory form, may not be decisive orconclusive. In such cases, it is open to theIncome Tax Officer as well as the assessee topoint out the true and proper income whilesubmitting the income tax return. InKedamath Jute Mfg. Co. Ltd. v. CommissionerofIncomeTax(Central),CalcuttaMANU/SC/0438/1971 :[1971]82ITR363(SC) , this Court hasnegatived the contention that "if an assesseeunder misapprehension or mistake fails tomake an entry into the books of account andalthough, under the law, a deduction must beallowed by the Income-Tax Officer, assesseewill loss the right of claiming or will bedebarred from being allowed that deduction."The Court held that whether the assessee isentitled to the particular deduction or not willdepend upon the provision of law relatingthereto and not on the view which theassessee might take of his rights nor can theexistence or absence of entries in the booksof account be decisive or conclusive in thematter. In the present case, the question isslightly different. For reasons, CentralGovernment, in exercise of the powersconferred by Section53 of the BankingRegulation Act, and on the recommendationof the Reserve Bank of India, permitted theassessee not to disclose the market value ofits investment in the balance sheet required to be maintained as per the statutory form.But as the assessee was maintaining itsaccounts on mercantile system, he wasentitled to show his real income by taking intoaccount market value of such investments inarriving at real taxable income. On that basis,therefore, Assessing Officer has taxed theassessee. 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 ormarket value, whichever is lower; to be maintained as per the statutory form.But as the assessee was maintaining itsaccounts on mercantile system, he wasentitled to show his real income by taking intoaccount market value of such investments inarriving at real taxable income. On that basis,therefore, Assessing Officer has taxed theassessee. 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 ormarket value, whichever is lower; (2) In the balance sheet, if the securities andshares are valued at cost but from that nofirm conclusion can be drawn. A taxpayer isfree to employ for the purpose of his trade,his own method of keeping accounts, and forthat purpose, to value stock-in-trade either atcost or market price; (3) A method of accounting adopted by thetax payer consistently a