Meaning of Method of accounting under Income Tax Act 1961: Section 145 (With Case Laws)

Method of accounting under section 145 of Income Tax: There are two method of accounting for Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” as per Income tax Act and these are cash or mercantile system of accounting.

^{Meaning of Method of accounting under Income Tax Act 1961: Section 145}

^{As Per Income Tax Act 1961 “Method of accounting” includes:}

i) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall be computed in accordance with the cash or mercantile system of accounting regularly employed by the Assessee.

ii) The Central Government may notify in the Official Gazettefrom time to time accounting standards to be followed by any class of assesses.

iii) Where the Assessing officer is not satisfied about the correctness of the accounts, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2) are not been followed by the Assessee, the Assessing officer may make an assessment.

INCOME TAX NOTIFICATION ISSUED RELATED TO METHOD OF ACCOUNTING AND ACCOUNTING STANDARD AS PER INCOME TAX ACT: Notification : No. SO 69(E), dated 25-1-1996

Annuity received by film artistes – In case of a film artiste who follows the cash system of accounting for professional income and who is paid remuneration either wholly or partly through an annuity policy (policies) as per the agreement/contract, only the particular amount of the annuity instalment(s) as is paid in a year is to be included in the total income of the said year provided the annuity policy incorporates all the features mentioned in this instruction.—Instruction : No. 1310, dated 26-2-1980 [Source : 91st Report of PAC (1981-82) (Seventh Lok Sabha)(pp. 13-15)].

State Financial Corporations – State Financial Corporations are governed by the directives of the Reserve Bank of India and IDBI. If these authorities are satisfied that the change in the system of accounting of interest from mercantile to cash basis by the concerned State Financial Corporation is legal, valid andbona fide, the Income-tax Department may accept the cash system of accounting of interest.—Circular: No. 491 [F. No. 201/60/867-IT(A-II)], dated 30-6-1987.

Notified accounting standards – The following accounting standards are notified, to be followed by all assessees following mercantile system of accounting, namely:—

Accounting Standard I relating to disclosure of accounting policies :
All significant accounting policies adopted in the preparation and presentation of financial statements shall be disclosed.
The disclosure of the significant accounting policies shall form part of the financial statements and the significant accounting policies shall normally be disclosed in one place.
Any change in an accounting policy which has a material effect in the previous year or in the years subsequent to the previous years shall be disclosed. The impact of, and the adjustments resulting, from, such change, if material, shall be shown in the financial statements of the period in which such change is made to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the previous year but which is reasonably expected to have a material effect in any year subsequent to previous year, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted.
Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. For this purpose, the major considerations governing the selection and application of accounting policies are following, namely:—

(i) Prudence : Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information;

(ii) Substance over form : The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form;

(iii) Materiality : Financial statements should disclose all material items, the knowledge of which might influence the decisions of the user of the financial statements.

If the fundamental accounting assumptions relating to Going Concern, Consistency and Accrual are followed in financial statements, specific disclosure in respect of such assumptions is not required. If a fundamental accounting assumption is not followed, such fact shall be disclosed.
For the purposes of the paragraphs (1) to (5), the expressions,—

(a) “Accounting policies” means the specific accounting principles and the methods of applying those principles adopted by the assessee in the preparation and presentation of financial statements;

(b) “Accrual” refers to the assumption that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate ;

(d) “Financial Statements” means any statement to provide information about the financial position, performance and changes in the financial position of an assessee and includes balance sheet, profit and loss account and other statements and explanatory notes forming part thereof;

(e) “Going concern” refers to the assumption that the assessee has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the business, profession or vocation and intends to continue his business, profession or vocation for the foreseeable future.

Accounting Standard II relating to disclosure of prior period and Extraordinary items and changes in accounting policies :
Prior period items shall be separately disclosed in the profit and loss account in the previous year together with their nature and amount in a manner so that their impact on profit or loss in the previous year can be perceived.
Extraordinary items of the enterprise during the previous year shall be disclosed in the profit and loss account as part of taxable income. The nature and amount of each such item shall be separately disclosed in a manner so that their relative significance and effect on the operating results of the previous year can be perceived.
A change in an accounting policy shall be made only if the adoption of a different accounting policy is required by statute or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements by an assessee.
Any change in an accounting policy which has a material effect shall be disclosed. The impact of, and the adjustments resulting from such change, if material, shall be shown in the financial statements of the period in which such change is made to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the previous year but which is reasonably expected to have a material effect in years subsequent to the previous years, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted.
A change in an accounting estimate that has a material effect in previous year shall be disclosed and quantified. Any change in an accounting estimate which is reasonably expected to have a material effect in years subsequent to previous year shall also be disclosed.
If a question arises as to whether a change is a change in accounting policy or a change in an accounting estimate, such a question shall be referred to the Board for decision.
For the purposes of paragraphs (7) to (12), the expressions,—

(a) “Accounting estimate” means an estimate made for the purpose of preparation of financial statements which is based on the circumstances existing at the time when the financial statements are prepared;

(b) “Accounting policies” means the specific accounting principles and the method of applying those principles adopted by the assessee in the preparation and presentation of financial statements;

(c) “Extraordinary items” means gains or losses which arise from events or transactions which are distinct from the ordinary activities of the business and which are both material and expected not to recur frequently or regularly. Extraordinary items includes material adjustments necessitated by circumstances which though related to years preceding to the previous years are determined in the previous year:

Provided that income or expenses arising from the ordinary activities of the business or profession or vocation of an assessee, though abnormal in amount or infrequent in occurrence, shall not qualify as extraordinary item;

(e) “Prior period items” means material charges or credits which arise in the previous year as a result of errors or omissions in the preparation of the financial statements of one or more previous years:

Provided that the charge or credit arising on the outcome of a contingency, which at the time of occurrence could not be estimated accurately shall not constitute the correction of an error but a change in estimate and such an item shall not be treated as a prior period item.

This notification shall come into force with effect from 1st day of April, 1996 and shall, accordingly, apply to the assessment year 1997-98 and subsequent assessment years.

IMPORTANT CASE LAWS RELATED TO METHOD OF ACCOUNTING UNDER INCOME TAX ACT, SECTION 145

Section 145 of the Income-tax Act, 1961 – Method of accounting – Valuation of stock – Assessment year 1992-93., II. Section 143 of the Income-tax Act, 1961 – Assessment – Additions to income – Assessment year 1992-93. ARTSON ENGG. LTD. Vs. DCIT [2005]

S. 145 of IT Act, 1961—Method of accounting—In case, the assessee has failed to produce the quantitative details and stock register and not able to get the closing stock verified, the books of account are liable to be rejected—Deepak vs. ITO (2010) 128 ITD 225 (ITAT-JP.)

S. 144, r/w s. 145 of the IT Act, 1961—Best Judgment assessment—The assessee is engaged in the business of plying of trucks and for the relevant assessment year, Assessing Officer completed the assessment under s. 144 by estimating the income on the basis of order passed by Settlement Commission. However, CIT(A) estimated income per truck at different amount. In absence of books of account, there cannot be any clear-cut and dry formula to estimate the income per truck—CIT vs. S. Harjit Singh (2010)

S. 145 of IT Act, 1961—Accounting—Since the assessee is not maintaining the books of accounts properly and, therefore after pinpointing variation in adopting the low rate sales particularly to the sister concern, the provisions of s.145 are rightly applied—Sri Vaddanahal Rajanna(HUF) vs. ACIT. [2010] 322 ITR 356 (KARN)

S. 145 IT Act, 1961—Income—The overdue charges on accrual basis not accounted in the books of account are not to be brought to tax. The additional financial charges (over due charges) are not to be added as income of the assessee—CIT vs. Annamalai Finance Ltd. [2010]

S. 145 of IT Act, 1961—Accounts—Since the Assessing Officer has neither rejected books of account nor passed an order under s. 144 of the Act and further, the assessee has also failed to produce evidence in respect of materials purchased and certain other expenses, the CIT(A) is justified in estimating income at 5 per cent. of the gross receipts as against 8 per cent adopted by the Assessing Officer—ITO vs. Modern Construction Company (2010) 134 TTJ (UO) 89 (ITAT-Chd)

S. 145 of IT Act, 1961—Method of accounting—In absence of credible books of account, option of the Assessing Officer under s. 145(3) is opened to make assessment on estimate basis in terms of s. 144 of the Act—Samurai Techno Trading Co. (P) Ltd. vs. CIT (2011)

S. 22, 145 of IT Act, 1961—Income from house property—The assessee is engaged in real estate business during the period from 1979 to 1984. Assessee anticipating completion of building and sold before Dec., 31, 1986 prepared an estimate accepting profit and paid first instalment of advance tax in time. The annual value of the property of which the assessee was the legal owner, cannot be assessed in the hands of the assessee under s. 22 of the Act—CIT vs. Babukhan Builders (2010) 326 ITR 133 (AP)

S. 145 of IT Act, 1961—Income from other sources—The assessee is an agriculturist and in the absence of any material that mercantile system is being followed, it shall be concluded that the assessee is following the cash system. Thus, the amount of interest received on account of delayed payment of enhanced compensation would fall under s. 34 of the Land Acquisition Act, 1894 and form part of income from other sources—CIT vs. Karambir Singh (2011) 337 ITR 159 (Mad.)

S. 68, 145 of IT Act, 1961—Income—The Interest shown by the bank on sticky advanced and doubtful loans and not brought into the profit and loss account cannot be included in the income of the assessee till such time interest is not actually received. The assessee is non banking financial company registered with the Reserve Bank of India and performing in its guidlines. According to the guidelines of RBI, income relating to non-performing assets is not to be treated as income/profits—CIT vs. Kailash Auto Finance Ltd. [2010] 320 ITR 394 (All)

S. 145 of the IT Act, 1961—Method of accounting—In course of assessment, the GP ratio has to be taken by Assessing Officer on the basis of facts and circumstances of the present assessment year and there is no justification to take it on the basis of earlier year GP because the facts and circumstances of each assessment year may be different—CIT vs. Jaipur Jewellers (Exports) (2010)

S. 5(1)(b), 145 of IT Act, 1961—Income—Under s. 5(1)(b) of the Act, when the income accrues or arises or is deemed to accrue or arise to the assessee in India during the previous year, it is to be taxed in that year. Therefore, that receipt of a particular amount in the relevant year should be an “income” under the provision. Sec. 145 of the Act, states that business income is to be computed in accordance with the cash or mercantile system of accounting. Under Accounting Standard 9, revenue is recognized only when the services are actually rendered. If the services are rendered partially, revenue is to be shown proportionate with the degree of completion of the services. A right to receive a particular sum under agreement would not be sufficient unless the right accrued by rendering of services and not by a promise for services. When the right to receive is anterior to the rendering of services, the income would accrue on the rendering of the services. The assessee is running a coaching institution where students are coached for entrance examination and it followed mercantile method of accounting however, assessee is charged fees in advance for entire course presumbly because there should not by any default by the students during the period of course. Until the services are rendered by assessee, the income cannot be recognised and therefore, no income accrues—CIT vs. Dinesh Kumar Goel (2011) 331 ITR 10 (Delhi)

Income Tax Act, section 145—Rejection of Account books—This appeal under section 260A of the income Tax Act, 1961(for short ‘the Act of 1961; hereinafter) is directed against the order dated 19.12.2007, passed by the, Income Tax Appettate Tribunal, Jodhpur Bench, Jodhpur (for short the ITAT hereinafter), in Misc. Application No. 107/JU/2007 ( in ITA No. 9/JU/2007), whereby an application preferred by the respondent-assessee, for rectification of the order dated 24.8.2007 passed by the learned ITAT in ITA No. 9/JU/200/ and cross objection No. 21/JU/2007, has been allowed and the aforesaid order passed by the learned ITAT, has been rectified, as prayed for. While dismissing the appeal, the Rajasthan High Court held that:—”Admittedly , the learned ITAT while passing the order dated 21.8.2007, on the appeal of the revenue and the cross-objection filed on behalf of the respondent-assessee, has only substituted the NP rate of the preceding year i.e 17.46%, declared by the assessee in the preceding year so also in the assessment year in question, was subject to depreciation, interest, salary, and interest to the parties, therefore in our considered opinion, the learned ITAT was justified in rectifying the error apparent on the face of record.” CIT, Bikaner Vs. G.K. Contractor, Sri Ganganagar [2009] 9 ITCD 96 (Raj.)

S. 145 of IT Act, 1961—Accounts—The assessee-developer is employing regularly the project completion method and the project completion method is an accepted method of accounting. As per s. 145(1), income is to be computed in accordance with system of accounting regularly employed by the assessee. Accounting Standard-7 has not been specified by the Central Government under s. 145(2), hence, the Assessing officer cannot reject the accounts under s. 145(3) on the ground that assessee has not followed the prescribed method of accounting—Prestige Estate Projects (P) Ltd vs. Dy. CIT (2010) 129 TTJ 680 (ITAT-Bang)

S. 145 of IT Act, 1961—Method of accounting—Since the books of account of the assessee are duly audited and no discrepancy has been pointed out therein by the Assessing Officer and the income of assessee is clearly discernible from the accounting method followed by it and, therefore, merely on account of not maintaining the Stock Register in a particular form, the accounts of the assessee cannot be said to be defective or incomplete—CIT vs. Jacksons House (2011)

S. 28(i) & 145 of IT Act, 1961—Accounts—The assessee adopted the same method of accounting as adopted in earlier years. Each and every purchase is vouched. Not a single purchase found to be incorrect or unverifiable. No discrepancy whatsoever has been pointed out in the books of account or purchase or sale vouchers. Payments have been made through proper banking channels. There are heavy losses suffered by the assessee in earlier year and losses have been shown on account of valuation of closing stock on the basis of market price or purchase price. Hence, the loss at higher percentage has been allowed in earlier year and there is nothing on record that sales or purchases have not been accounted, nor there was any discrepancy in the accounts, therefore, there is no justification behind rejecting the accounts and estimating of gross profits—Shukra Jewellary Ltd. vs. ACIT. [2010] 127 TTJ 8 (ITAT-Mumbai E-1)

S. 145 of the IT Act, 1961—Method of accounting—If the stock register is not maintained by the assessee, that may put the Assessing Officer on guard against the falsity of the return made by the assessee and persuade him to carefully scrutinize the account books of the assessee, but the absence of one register alone does not amount to such a material leading to the conclusion that the accounts are 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 served as a warning to him to look into the accounts more carefully and to look for some material which can lead to conclusion that the accounts maintained by the assessee are not correct but a low rate of gross profit, in absence of any material pointing towards falsehood of the account books, cannot, by itself, be a ground to reject the account books under s. 145(3) of the Act—CIT vs. Smt. Poonam Rani (2010)

S. 145 & 260A of IT Act, 1961—Appeal (High Court)—Since the finding recorded by the Tribunal are the pure findings of fact and, thus, it does not give rise to any substantial question of law for consideration by the High Court under s. 260A of the Act—Utkal Road Lines vs. Registrar, ITAT (2010) 228 CTR 569 (Orissa)

S. 145(3) of the IT Act, 1961—Accounts—Unless the Department has some material to show that there is sale outside the books of account, books of account maintained by assessee cannot be rejected only on account of mere fall in the sales—ACIT vs. Ravi Agricultural Industries (2009) 121 TTJ 903 (ITAT-Agra)

S. 145 & 153A of IT Act, 1961—Accounts—Where the books of accounts and documents are not maintained by the assessee and in the absence of complete records, the question comes how the profits of the year can be worked out. It can only be worked out if one has applied the net worth basis. Hence, net worth method is a recognised method of accounting in this situation—K.V. Srinivash & ACIT vs. ITO (2009) 125 TTJ 560 (ITAT-Visakha)

S. 28(i), 29, 37(1) & 145 of IT Act, 1961—Business expenditure—The “loss” suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under s. 37(1) of the Act—CIT vs. Wood ward Governor India (P.) Ltd. (2009) 223 CTR 1 (SC)

S. 2(47), 45(4), 47(ii) & 145 of IT Act, 1961—Capital gains—S. 45 gets attracted in the case of the transfer of capital asset by way of distribution of capital assets, inter alia, on the dissolution of a firm. When on reconstitution of a firm, new partners are admitted and one new partner took over entire assets and liabilities, it amounts to a transfer of assets on dissolution of a firm and therefore, s. 45(4) of the Act applicable. Thus valuing the closing stock on dissolution of firm at fair market rate is justified—ACIT vs. D.D. International (Global) (2009) 125 TTJ 112 (ITAT-Asr.)

S. 2(24), 5 & 145 of IT Act, 1961—Income—All receipts are not income. Only those receipts which are in the character of income can be assessed to tax. The definition of RAVIPRAJIncomeRAVIPRAJ as given in the Act, under s. 2(24) is an inclusive definition. In the present case, the dividends were received of shares which were held as investments. At the time of receipt of the dividends, the shares did not form part of the investment portfolio of the assessee and, therefore, it cannot be said that it was received by the assessee in its character as an investor. Thus, the dividend received by the assessee on shares which it had transferred and the right to receive dividend vests with the transferees cannot be assessed in the hands of the assessee—Dy. CIT vs. Tata Investment Corporation Ltd. (2011) 142 TTJ 335 (ITAT-Mum.)

S. 145 & 145A of IT Act, 1961—Valuation of closing stock—Making of an entry or absence of an entry cannot determine rights and liabilities of parties. If the duty of central excise is not due and payable, it cannot be termed to be a cost in relation to the raw materials. Such duty also cannot be termed to be a cost qua the finished goods appearing in the closing stock because admittedly, excise duty is due and payable unless and unitll s. 3 and s. 4 of the Excise Act operate together. When the assessee incurs liability to pay excise duty only upon both the events taking place, namely manufacture of excisable goods and removal of excisable goods under the scheme of the excise duty and, therefore, excise duty is not includible in the valuation of closing stock—ACIT vs. Narmada Chematur Petrochemicals Ltd. (2010) 233 CTR 265 (Guj)

S. 145 of the IT Act, 1961—Method of accounting—Since the Assessing Officer did not consider the effect of the provisions of s. 145(1)/(2) of the Act and the Notification dated 25.1.1996, therefore, the matter is remanded to the Assessing Officer for fresh consideration in view of provisions of s. 145(1)/(2) of the Act while setting aside all the orders passed by authorities below in the matter—CIT vs. Sriram Chits (Banglore) (P) Ltd. (2010)

S. 145 of IT Act, 1961—Method of Accounting—In mercantile system of accounting income is taxable on accrual basis, i.e., when the assessee acquired a right to receive. In cash system, income is taxable on receipt basis, i.e., when it is actually received. Since offering interest income from securities on RAVIPRAJdue basisRAVIPRAJ is same thing as offering it on RAVIPRAJaccrual basisRAVIPRAJ and therefore, it is amounted to following mercantile system of accounting. Hence, the addition to income of assessee made by the Assessing Officer deserves to be deleted—ACIT vs. Tamilnadu Mercantile Bank Ltd. (P) Ltd. (2010) 127 ITD 391 (ITAT-Chennai)

S. 145, r/w s. 40(b) and, 32 of IT Act, 1961—Method of accounting—It is well-settled position in law as well as on facts of the instant case that if under wrong notion or under wrong impression, the assessee has admitted that any deduction will not be claimed, but the same is allowable otherwise, then mere admission by one of the partners under wrong notion should not be basis for rejection of claim which is otherwise allowable—ITO vs. Zuberi Engineering Co. (2011) 128 ITD 375 (ITAT-JP)

S. 145 of the IT Act, 1961—Method of Accounting—Merely because the new method of accounting adopted by the assessee is detrimental to the revenue, that alone can never be the basis for denying the right to change the method of accounting. So long as the method of valuation adopted by the assessee gets recongition from the practicing accountants and the commercial world for valuation of stock-in-trade, the adoption of that method cannot be questioned by the revenue unless the adoption of that method is found to be not bona fide or restricted for a particular year—CIT vs. Indo Rama Synthetic Ltd. (2009)

Income Tax Act, 1961, sections 28, 29, 37(1), 145—Deduection—The following question arose for determination “(i) Whether on the facts and circumstances of the case and in law, the additional liability arising on account of fluctuation in the rate of exchange in respect of loans taken for revenue purposes could be allowed as deduction under Section 37(1) in the year of fluctuation in the rate of exchange or whether the same could only be allowed in the year of repayment of such loans? (ii) Whether the assessee is entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balance sheet date, pending actual payment of the varied liability?” While dismissing the civil appeals, the Supreme Court held that:—”Lastly, we are of the view that amendment of Section 43A by the Finance Act, 2002 w.e.f. 1.4.2003 is amendatory and not clarificatory. The amendment is in complete substitution of the section as it existed prior thereto. Under the unamended Section 43A adjustment to the actual cost took place on the happening of change in the rate of exchange whereas under the amended Section 43A the adjustment in the actual cost is made on cash basis. This is indicated by the words “at the time of making payment”. In other words, under the unamended Section 43A, “actual payment” was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign currency, however, under amended Section 43A w.e.f. 1.4.2003 such actual payment of the decreased/enhanced liability is made a condition precedent for making adjustment in the carrying amount of the fixed asset. This indicates a complete structural change brought about in Section 43A vide Finance Act, 2002. Therefore, the amended section is amendatory and not clarificatory in nature.” CIT, New Delhi Vs. M/s. Woodward Governor India Pvt. Ltd. [2009] 11 ITCD 1 (SC)

S. 145 of the IT Act, 1961—Method of accounting—Rejection of books of account of assessee on ground that it failed to maintain separate details of yield of rice of paddy milled owned by it and paddy milled belonging to others, cannot be deemed suppression of yield of rice bran, phuck and phoose. Therefore, no addition can be made on this account untill and unless material showing suppressed sales or inflated purchase is available on record—CIT vs. R.K. rice Mills (2009)

S. 145 & 145A of IT Act, 1961—Change of method of valuation stock—In view of overriding effect of provisions of s. 145A, the assessee has to chose to adopt cost method of valuation of stock and once it is adopted and regularly employed, the assessee cannot be allowed to change it to net realisable value method in subsequent year—Ajanta Raj Proteins Ltd. vs. Dy. CIT (2009) 124 TTJ 914 (ITAT-Delhi)

S. 145 of IT Act, 1961—Method of accounting—Assessee is a manufacturer and during the survey conducted, the Assessing Officer notied that assessee has shown higher pertange of wastage. Due to these such discrepanices, Assessing Officer rejected books of account of assessee under s. 145(3) of the Act. Once higher wastage are recorded, natural inference would be that there would be excess production, which not being accounted for, would have been sold outside books of account by assessee. Therefore, to extent there was production on account of excess wastage, sale consideration worked out on such excess production has to be added separetly since the assessee had surrendered excess scrap stock—ACIT vs. Ratan Industries (P) Ltd. (2011) 131 ITD 195 (ITAT-Agra

Sec. 145 of Income tax Act, 1961—Method of Accounting—”Whether the CIT(A) was right in holding that the Assessee cannot be taxed on the basis of mercantile system of accounting as against the cash system followed by the Assessee.” While dismissing the appeal of the department the ITAT Mumbai Bench “E” held that:—”In the case of Chennai Finance Co. Ltd. (supra) it has held that the provisions of section 209(3) of the Company Act 1956 do not override provisions of section 145 of the Act. The other reasons given by the CIT(A) for coming to the conclusion that section 209(3) of the Companies Act 1956 does not override provisions of section 145 of the Act are also found to be justified. One aspect which we find missing in the CIT(A) order is the reasons given by the AO for rejecting the books of account of the assessee under section 145 of the Act. On this aspect we notice that the AO was of the view that when the assessee was following cash system of accounting there cannot be any sundry creditors appearing in the balance sheet. On this query of the AO the assessee has given a detailed reply. The AO has not dealt with that reply at all. In our opinion the reply given by the assessee justifies the action of the assessee in showing sundry creditors in the balance sheet. Therefore, this cannot be a valid basis for rejecting the books of account. We are of the view that the system followed by the assessee does not in any way detract from the cash system of accounting. We, therefore, hold that the reasons assigned by the AO for rejecting the books of account are not proper. Even with regard to the accounting standard (AS-9) of the ICAI which was the reasons assigned by the AO for rejecting the books of account of the assessee in A.Y 2006-07, we find that those accounting standards are applicable only to the assesses, who follow mercantile system of accounting. Since the assesse, in the present case follows cash system of accounting, we are of the view that the rejection of books of accounts on this basis cannot be upheld. Lastly we also agree with the submissions of the ld. counsel for the assessee that the rule of consistency will be very much applicable in the present case. As we have already seen right from A.Y 1983-84 till A.Y 2003-04 the revenue has accepted the cash system of accounting followed by the assessee and has completed the assessment on that basis. In A.Y 2004-05 the AO cannot be allowed to take a different stand. As rightly contended on behalf of the assessee there should be finality and certainty in all litigation including litigation arising out the Act. Apparently no fresh facts have been brought on record to show that the system of accounting followed by the assessee is arbitrary or perverse. In such circumstances we are of the view that the principle of consistency will apply and the revenue should not be allowed to take a different stand. For the reasons given above we are of the view that the orders of the CIT(A) do not call for any interference. Consequently the orders of the CIT(A) are confirmed and all the three appeals by the revenue are dismissed.”[2011] 20 ITCD 1 (ITAT-MUMBAI)

S. 37(1), r/w s. 145 of the IT Act, 1961—Business expenditure—Assessee adopted the mercantile accounting system which was permitted by the Assessing Officer for several years. The assessee has claimed deduction of finance commission which was charged as expenditure in the profit and loss account of the assessee in the year of hire-purchase agreement itself, irrespective of fact that amount of instalments was actually paid in subsquent year. Assessing Officer permitted the assessee to claim such benefit, therefore, such accouting system is required to be continued for relevant assessment years also—CIT vs. Kataria Road Lines (2009)

Income Tax Act, 1961, sections 10-B, 145 and 250—The withdrawal of Exemption—The appeal by the assessee against the order dated 14.3.2008, of the Ld. CIT (A), raises the following grounds:—”That the order u/s 250 dated 14.03.2008, passed by the ld. Commissioner of Income Tax-Appeals, Jodhpur, in the case of the assessee for the Assessment Year 2005-2006, is bad in law and on facts. That the ld. Commissioner of Income Tax-Appeals, Jodhpur, on the facts and in the circumstances of the case, erred in confirming the withdrawal of exemption u/s 10B made by the ld. assessing officer. The said exemption is required to be fully allowed”. While allowing the appeals, the Income Tax Appellate Tribunal, Jodhpur Bench, Jodhpur held that:—”(1) The order in the case of Arihant Tiles and Marbles (P) Ltd a third member case of Jodhpur Tribunal itself was assailed before the HonRAVIPRAJble High Court of Judicature of Rajasthan at Jodhpur by the assessee and the HonRAVIPRAJble Court thus has set aside the order of the Tribunal in aforesaid judgment. The Appellate Tribunal at Jodhpur in appellantRAVIPRAJs case before us rested its decision on the findings and conclusion arrived in the case of Arihant Tiles and marbles (P) Ltd by its own bench. This one reason also has persuaded us to hear the matter denoro for reaching independent findings of facts and conclusion thereon. The facts thus found are different from the facts found by the earlier Tribunal in appellantRAVIPRAJs case in the immediately preceding year. (2) AppellantRAVIPRAJs registration with various Govt. agencies as a manufacturing unit and the findings of fact as are reached at Para 20 hereinbefore, we hold that the appellant could be said to have undertaken business activity amounting to manufacture or production of articles in these years under appeal before us and the income thereof is thus eligible for exemption u/s 10B of the Act. The grounds raised in these appeals are thus allowed.” Kwal Pro Exports Vs. I.T.O., Ward-1 (2), Jodhpur [2009] 12 ITCD 45 (ITAT-Jodhpur)

S. 145 of IT Act, 1961—Method of accounting— When the assessee has followed percentage completion method consistently since its inception and has been declaring income/loss from year to year and same has been accepted in earlier years and further when the assessing officer has not rejected book by pointing out any defect in books maintained by the assessee, therefore, the method of accounting adopted by the assessee deserves to be upheld.— ACIT vs. Dharti Estate (2011) 129 ITD 1 (ITAT-Mum.)

S. 145 of IT Act, 1961—Method of accounting—Mere non-maintenance of RAVIPRAJstock recordsRAVIPRAJ by the assessee is not a valid ground for rejection of the book results. However, the finding recorded by lower authorities that the assessee inflated labour expenses and suppressed gross profit cannot be controverted—Neena Mahajan vs. CIT (2011)

S. 145 of IT Act, 1961—Accounts—There is no well-settled principle as to how the net profit may be computed in case where no records have been maintained. The Assessing Officer cannot make a pure guess and make an assessment without reference to any evidence or any material at all. There must be somthing more then bare suspicion to support the assessment. The Assessing Officer while relying on profit made in business of Tendu patta determined net profit at 10 per cent, however, the Tribunal modified the same to 7.5 per cent and this cannot be said to be a pure guess—Smt. Sajda Praveen vs. CIT (2011) 245 CTR 346 (Chhattisgarh)

Sec. 145 of the Income tax Act, 1961—Gross Profit rate—”Whether on the facts and in the circumstances of the case when it was an admitted fact that the provisions of section 145 of the Act did not apply the Assessing Officer could come to an estimation of gross profit by adopting an arbitrary method of valuation and the said valuation could be accepted by the Tribunal when the legal position was on the contrary and, therefore the order of the Tribunal is perverse?” While remanding the case High Court of Calcutta held that:— “We, therefore, find that all the three authorities below arrived at the figure of gross profit rate without giving any cogent reason for discarding the chart of profit rates of different businessman doing similar type of business supplied by the assessee. As an assessing authority, it was the duty of the authorities below to consider the chart of the assessee and to examine its genuineness and for that reason, could also ask the assessee to produce evidence in support of the chart. But the finding of the rate of profit by all the authorities below were based on no evidence and thus, must be branded as perverse finding of fact. It is settled law that if a finding of fact is perverse and is based on no evidence, it can be set aside in appeal even though the appeal is permissible only on substantial question of law. The perversity of the finding itself becomes a substantial question of law (Kulwant Kaur vs. Gurdial Singh Mann, AIR 2001 SC 1273).”

Method of Accounting—Sec. 145—IT ACT, 1961—PRADIP COMMERCIAL P. LTD. v. COMMISSIONER OF INCOME-TAX. [2012] 344 ITR 171 (CAL)

S. 145 of IT Act, 1961—Method of accounting—Under the Income-tax Acts depreciation is calculated on the RAVIPRAJwritten down valueRAVIPRAJ (WDV) of the asset, while in the books of accounts, under the regime set out in the companies Act, an assessee can calculate depreciation on the basis of RAVIPRAJstraight line methodRAVIPRAJ or RAVIPRAJwritten down valueRAVIPRAJ. Therefore, while calculating profits of an assessee for the purposes of the Act, adjustments are routinely made in respect of depreciation by adding depreciation in the books of account to the net profit and thereafter, deducting depreciation as calculated under the Act—Cyber Media (India) Ltd. vs. CIT (2011)

S. 145 of IT Act, 1961—Method of accounting—Till the final settlement of the accounts is made with the defaulting borrowers, it is difficult to bifurcate the intrim payments which was made by defaulting borrowers between principal and interest. Hence, when the system of accounting of bifurcation of the amount received from defaulting borrowers into principal and is being regularly followed by the assessee and unless the accounts are finally settled with the defaulting borrowers, it is difficult to apportion the interim receipts between principal and the interest—CIT vs. Haryana Financial Corporation (2012) 340 ITR 288 (P&H)

S. 145 of IT Act, 1961—Accounting—The books of account can be rejected under s. 145 of the Act only where either no method of accounting was employed or the method employed was such that it did not disclose the true profits. The business result declared by the assessee need not be interfered with by the Assessing Officer in estimating its profits by applying an arbitrary gross profit rate at 50 per cent. Merely because the profits are low compared to the earlier year that is not a circumstance or material to justify an estimate—CIT vs. Faridabad Entertainment P. Ltd. (2011) 336 ITR 129 (P&H)

S. 145 of IT Act, 1961—Method of accounting—The tag price cannot be treated as the price for determining the value of stock since the assessee is offering huge discount—CIT vs. New Palace Store (2011)

S. 145 of the IT Act, 1961—Method of accounting—The question as to what should be the gross profit for the purpose of taking such income is purely a question of fact and, therefore, it cannot be decided in appeal under s. 260A of the Act and thus, in absence of any substantial question of law, appeal is not sustainable—CIT vs. Metro Shoes Ltd. (2010)

S. 143, r/w s. 145 of the IT Act, 1961—Assessment—Since the assessee has accepted the difference between the stock in the balance sheet and the stock shown to the bank, such difference in the valuation of closing stock is to be reduced by the similar difference in the opening stock—CIT vs. Capital Tyres Mfg. Unit

Income Tax Act, 1961, section 145—Best Judgment Assessment—The following questions of law were framed in this appeal—”(1) Whether the Tribunal was right in upholding the applicability of Sec.145(3) of the Act of 1961 particularly, keeping in view the amendment brought in Sec.145 w.e.f. 1.4.1997?. (2) Whether the Tribunal was justified in upholding the additions made by the Assessing Officer on the basis of best judgment assessment which is founded on the very basis which has been the reason for rejecting the books of accounts as being not verifiable and not considering the available definite material on the basis of which best judgment could be made keeping in view other attending circumstances? “While dismissing the appeal, the Rajasthan High Court held that:—”If the books of accounts have been found to have been rightly rejected, the Assessing Officer is to proceed under Sec.144, which is best assessment judgment. Obviously, what is the best assessment judgment is a pure question of fact and the assessment has been made a subject matter of scrutiny by the two appellate forums. Thus, it clearly acquires status of brass finding of fact as recorded by the learned Tribunal. In that view of the matter, it cannot be said that it gives rise to any substantial question of law as contemplated by Sec.260A of the Income Tax Act. Thus, Question No.2 is answered in favour of Revenue.” Radhey Shyam Sita Ram & Party Vs. Dy. Commissioner of Income Tax [2007] 7 ITCD 179 (Raj.)

S. 5 & 145 of IT Act, 1961—Income—Assessee, a PSU engaged in distribution of electricity and maintained books of account of mercantile system and its rule prove levy of surcharge on belated payment of bills but at the same time payment of surcharge is subject to protest or waiver. Hence, receipt of surcharge is purely contingent and thus, tax can be levied only on the realized income and not on hypothetical income—Dy. CIT vs. Dakshin Haryana Bijli Vitran Nigam Ltd. (2012) 144 TTJ 307 (ITAT-Delhi)

S. 145 of IT Act, 1961—Method of Accounting—Assessee has right to adopt an accounting system of his choice and, therefore, interference is permissible only if accounting system adopted by the assessee is contrary to prescribed accounting standards etc., under s. 145/145A of the Act—CIT vs. Siddartha Trade Links (P) Ltd. (2012)

S. 145 of IT Act, 1961—Accounts—If any addition is made on account of difference in valuation, then the effect has to be given in subsequent year. Where there is no defect in maintenance of books of account and the method of valuation is the same as adopted in earlier year, then no addition can be made in a particular year by adopting a different method—Dy. CIT vs. Upper Rajasthan Sales & Services (P) Ltd. (2011) 140 TTJ (UO) 54 (ITAT-Mum.)

S. 145 & 260A of IT Act, 1961—Method of Accounting—Appeal filed by Revenue with the Tribunal on the issue of rejection of books of account remanded back to CIT(A). Assessee submitted that the matter should have been decided by the Tribunal itself and the matter should not have been remanded. The apprehension of the asseessee that the CIT(A) will be prejudicated by the observations made by the Tribunal while deciding the case afresh is totally baseless for the reason that the CIT(A) is bound by law while considering the case in remand. Court held that the fact remains that when the case is remanded back by the Tribunal to the CIT(A) for consideration on merits after affording opportuning of hearning to the parties, no issue as such is decided finally in favour or against any of the parties and in such a situation, no question of law, much less a substantial question of law would arise out of such an order passed by the Tribunal

S. 28(i) & 145 of IT Act, 1961—Business Loss—If the inventory had not moved for a period of three years and assessee’s stock had become scrap and incapable of further use and in the event the assessee was to sell the stock as scrap the burden of excise would be higher than the value it would realize on the sale of ‘obsolete’ stock as scrap, the loss on account of diminution in value of stock will be allowed as business loss

Income Tax Act, 1961—Sec. 69B—undisclosed income—AO treated the sale consideration of 11 bigha 8 biswa agriculture land at Rs. 5,70,000/- on the basis of statement of Sh. Ramlal as against Rs. 3,50,000/- disclosed by the assessee and added back Rs. 2,20,000/- treating the same as undisclosed income of the assesee. Tribunal while rejecting the appeal held that CIT(A) has deleted the addition on the basis that AO has not brought sufficient material to prove beyond reasonable doubt that the amount invested was much more than what was accounted for in the books of account. AO has mistook the enquiry report of the Inspector, as statement on oath, which in fact has no evidentiary value at all, and which has been later on retracted.

S. 145 of the IT Act, 1961—Method of Accounting—Since the fact of the present assessment year are the same as in the earlier year which was the first year of operation of the project, the Assessing officer cannot take a different view in the present assessment year—IRB Infrastructure Ltd. vs. ITO

S. 10B, 145 of IT Act, 1961—Export Oriented Undertaking—During the assessment, burden is on the Department to show taxability of income but for discharging that durden, it is not necessary that the Department leads evidence—Vikas W.S.P. Ltd. vs. CIT

S. 145, 187, 188 & 189 of IT Act, 1961—Accounts—Trading result of business for accounting period cannot be ascertained without taking into account the value of stock-in-trade remaining at the end of the period—ACIT vs. G.H. Reddy & Associates

S. 158BD, r/w S. 132, 145 and 158BC of IT Act 1961—Block Assessment in search cases—The provisions of S. 147 are held to be similar to the provisions of S. 158BD, as both deal with the undisclosed income. S. 147 deals with escaped income, whereas s. 158BD deals with undisclosed income arising as result of search, therefore limitation for initiating proceeding should not be beyond what is provided for the action under s. 147, thus initiation of proceedings under s. 158BD beyond the period of 6 years cannot be held as valid—Saroj Nursing Home vs. ACIT.

S. 5, r/w S. 145 of IT Act 1961—Income—While S. 4 and 5 deal with the scope of income and its charge to Income-tax, S. 145 is a procedural Section regarding the method to be followed for recording to income in the books of account—K.K. Khullar vs. Dy. CIT.

S. 145 of the IT Act, 1961—Method of accounting—Since the assessee only produced computerised cash book, ledger, journal and few vouchers, and neither stock register, nor any log book/running/distance mileage account etc. are produced, the authorities can reject the books of account—Sriram & Co. vs. ACIT )

S. 145 of the IT Act, 1961—Method of Accounting—If there is reasonable ground for changing method of Accounting of valuation of closing stock from FIFO method to average cost method on accont of practical difficulties faced by assessee, the assessee will be entitled to change method of accounting—CIT vs. H.P. State Civil Supplies Corporation Ltd. (HP)

S. 145 of the IT Act, 1961—Method of Accounting—An assessee is permitted to follow either cash system of accounts or mercantile system of accounting in view of the amended provisions of sec. 145 effective from 1.4.1997—DCIT vs. Lyka Laba Ltd. (ITAT-Mum)

S. 145 of the IT Act, 1961—Method of Accounting—Where besides noticing the deficiencies in the books of account, the Assessing officer had also formed an opinion that there were instances of various leakages of revenue in the books of account and method of accounting applied was not proper, he was justified in rejecting the books of accounts and computing assessee’s income by applying gross profit rate of estimated sale—National Plastic Industries vs. ITO (Bom)

S. 145 of the IT Act, 1961—Method of Accounting—If there are cogent reasons with the Assessing Officer that assessee is not maintaining proper books of account as there is low yield as compared to the earlier year and variation in the figure of production supplied by the assessee during the assessment proceedings, he can reject the books of account of the assessee—Rakesh Paul Sharma vs. Jt. CIT (J&K)

S. 32, 40(b), 145 of the IT Act, 1961—Method of Accounting—Unless a correct mehod of accounting is followed by the assessee, the Assessing Officer is duty bound to consider wheather or not the books disclose true state of accounts and correct the mistakes in conformity with the standard method of accounting, hence, Assessing Officer was justified in correcting the error and thereby disallowing the interest claimed by the assessee under s. 40(b) of the Act and making addition towards the interest receivable from the partners—Arthi Nursing Home vs. ITO (ITAT-Visakhapatnam)

Income-tax Act, 1961, section 145—Method of valuation—The following substantial questions of law were framed:—”Whether in the facts and circumstances of the case, the Tribunal was right in holding that the switch over from valuation as per market price to cost price was correct, being a substitution of one method by another scientific method? Whether in the facts and circumstances of the case, the Tribunal was right in holding that the assessee was right in changing over the method of valuation, when it does not reflect the true picture of profits and gains?.” While dismissing the Tax cases, the High Court of Madras held that:—”It is seen that there is no finding to the effect that the assessee had resorted to an ad hoc change in valuation merely to secure any temporary gain or advantage. The concurrent findings given by the first appellate authority as well as the Tribunal are based on valid materials and evidence. Recently, the Supreme Court in the case of Commissioner of Income-tax Vs. P.Mohanakala [2007] (291 ITR 278) held that whenever there is a concurrent factual finding by the authorities below, the same should be accepted and no interference should be called for by the High Court. Under these circumstances, we do not find any error or legal infirmity in the order of the Tribunal so as to warrant interference.” CIT, Coimbatore Vs. B. Amrithalakshmi (Mad.)…..82

Income-tax Act, 1961, section 145—Rejection of books—After rejecting the account books and invoking the provision of section 145, the AO applied n.p. rate of 11.5%. The Id. CIT (A) upheld the action of the A.O. on this score. While allowing the appeal partly, the Income Tax Appellate Tribunal: Jodhpur Bench, Jodhpur held that:—”Since n.p. rate declared by the assessee at 8.97% is better than 8.83% shown in the preceding year, we are of the considered opinion that the Id. CIT(A) was not justified in sustaining the addition made by the A.O. We, therefore, order for the deletion of this addition.” Another ground was against the sustenance of disallowance at 1/6th in respect of vehicle maintenance expenses. The ITAT held that:—” A.O. has no power to go back again to such books of account for making separate additions when he has adopted a particular n.p. rate, which is inclusive of the consideration of all expenses. We, therefore, order for the deletion of this addition.” Mohta Const. Co., Bikaner Vs. ACIT, Circle-2, Bikaner (Raj.)…..151

Income-tax Act, 1961, section 145A—Circular No. 772 dated 27.12.1998 passed by the CBDT as well as guideline note issued by the Institute of Chartered Accountants of India. Allowing the adjustment for the previous year—The following question of law was framed for consideration of the Court “Whether the Income Tax Appellate Tribunal was correct in law in allowing the adjustment of Rs. 54,83,272/- to the assessee in the opening stock for the previous assessment year 1998-99 (being a transitional year) under Section 145 A of the Income Tax Act, 1961.” While disposing of the appeal, the High Court of Delhi held that:—”We are of the opinion that in the present case, there is no question of any double benefit being given to the assessee. Paragraph 23.13 of the guidance note itself makes it clear that whenever any adjustment is made in the valuation of inventory, this will affect both the opening as well as the closing stock. It is also to be noted that if any adjustment is required to be made by a statute, (as for example Section 145 A of the Act), effect to the same should be given irrespective of any consequences on the computation of income for tax purposes. Section 145 A of the Act begins with a non-obstante clause, and therefore, to give effect to Section 145A of the Act, if there is a change in the closing stock as on 31st March, 1999, there must necessarily be a corresponding adjustment made in the opening stock as on 1st April, 1998. Paragraph 23.14 of the guidance note postulates that adjustment should be made in such a manner that no double deduction is claimed for the same expenditure. In the present case, the question of double deduction does not arise, since no adjustment was made by the Assessee in the profit and loss account for the year ending 31st March, 1998.” CIT Vs. Mahavir Alluminimum Limited (Del)…..66

S. 69 & 145 of the IT Act, 1961—Income from undisclosed sources—Since the Court of law has acquited the assessee in criminal case that the assessee did not sell acetice anhydride (“AA”) for diverting it to grey market therefore “AA” was utilized for the production of dye intermediates MG-7 and nothing adverse is found in the books of assessee in material terms and there were neither rebutted nor controverted by any evidence by AO, hence, book results of assessee are to be accepted and the addition on account of alleged sale of AA deserves to be deleted—Megatic Intermediates (P) Ltd. vs. ITO (2009) 121 TTJ 193 (ITAT-Ahd)

S. 145 of IT Act, 1961—Method of accounting—Once there is valid basis for rejecting the accounts and assessment is capricious or vindictive, the estimate has rational, some amount of guess work has to be allowed and cannot be interfered with merely because a different view can be taken—Shree Ganpati Embroidery (P) Ltd. vs. CIT (2009)

S. 37(1), r/w s. 145 of IT Act, 1961—Business expenditure—Unless and untill the approval of the Central Government is taken for the appointment of managing agents, the bar of s. 326 would operate and, therefore, any liability could not be considered to be a “legal” liability unless and untill the approval of the Central Government is taken—CIT vs. EDS Electronics Data System (India) (2009)

S. 145 of IT Act, 1961—Method of accounting—Assessee is a non-banking financial company and it may be permitted to follow a mercantile system of accounting with respect to company law and a hybrid system of accounting with respect of Income-tax—CIT vs. Shriram Transport Finance Co. Ltd. (2009) 311 ITR 165 (Mad)

S. 145 of IT Act, 1961—Method of accounting—Since the assessee is regularly maintainging the books of account and valuing work in progress on cost basis, the revenue cannot adopt the market price basis for the valuation of work-in-progress in a particular accounting period. The method of accounting cannot be substituted by the Assessing Officer merely becuase it is unsatisfactory. If the assessee wants to retract his earlier statement he should react within a resonable time and a long gap cannot be approved untill and unless the reasons given for the inordinate delay are not convincing—Ajit Chintaman Karve vs. ITO (2009) 311 ITR 66 (ITAT-Pune)

S. 131, 142, 142A, 144, 145 of the IT Act, 1961—Assessment—As per s. 144 read with s. 145, 142A and 131(1)(d) it is not mandatory for the Assessing Officer to reject the books of account first before making reference under s. 131(1)(d) of the Act or calling for a report of the valuer under s. 142A. S. 12A of the Act gives full powers to the Assessing Officer to call for a report from Valuation Officer—CIT & Anr. vs. Bhawani Shankar Vyas (2009) 311 ITR 8 (Uttrakhand)

Sec. 145 of I.T. Act 1961 – Method of Accounting – AY 1995-96-When Stock of shares are identifable and cost of purchese thereof and date of purchase is also known, shares are to be valued actual cost and not on average cost – CIT vs. Panchmahala Cement Co. Ltd.

S. 143, r/w s. 145 of IT Act, 1961—Assessment—Assessee is running a cold storage and accepted patotoes from farmers for the cold storage. Assessing officer made coertain allegations against the assessee on ground of undisclosed income. CIT(A) reduced the same. Both the assesse and revenue preferred appeals before tribunal. Appeal of revenue came to be dismissed that while prevailing market conditions were not considered at all properly in the order of the account member whoe dismissed the assessee’s appeal and allowed the case of revenue—Addl. CIT vs. Ratan Cold storage (2009) 118 ITD 31 (ITAT-Agra)

S. 4, 69 & 145 of IT Act, 1961—Income—After completion of transactions a purchaser cannot have any control over the suppliers and suppliers are always at liberty to use the money paid to them against the goods sold by them. Since there is no occasion before the Assessing Officer to deny the claim purchases especially when the genuineness of the export of goods has been accepted by the Assessing Officer, thus in absence of any positive material showing the purchases to be bogus, no addition can be made on that account—ITO vs. Kanchwala Gems (2009) 122 TTJ 854 (ITAT-JP)

Income Tax Act, 1961, section 133-A and 145(i)—Following questions of law were framed:—”(1) Whether in the facts and circumstances of the case, the conclusion recorded by the Tribunal that the Assessing Officer has accepted the sale and purchases as recorded in his books of accounts has erred because the Assessing Officer has not accepted the books of accounts produced by the assessee to be correct but has rejected the same under Section 145(1) for the purpose of computing the taxable income of the assessee arising from his business carried in the name and style of M/s. Roop Milan Saree Center? (ii) In view of the aforesaid premise, the Tribunal was right in deleting the additions made by the Assessing Officer by computing income on the basis of unexplained loose papers found in possession of the assessee at the time of survey operation under section 133-A? CIT Ajmer vs. Jai Kumar Jagetia [2007] 6 ITCD 191 (Raj)

Income Tax Act, 1961, section 145—Rejection of account books—The following substantial question of law was framed:—”Whether acceptance of GP Rate by the Tribunal is not sustainable in law because it is based on ignoring the relevant material concerning assessee’s own result of the previous year which vitiates the finding?” While dismissing the appeal, the Rajasthan High Court held that:— “Since the question as framed only comprehends the ignoring of the relevant material on the part of the Tribunal concerning of the assessee’s own results of the previous year, and that to be vitiating the finding while as noticed above, the assessee’s own result of the previous year was the G.P. rate of 2.51%, and the same has been upheld by the Tribunal for this year also.” CIT, Udaipur Vs. Inani Marbles (P) Ltd. [2008] 8 ITCD 28 (Raj.)

S. 69, 145 & 246(1)(a) of the IT Act, 1961—Income—Where an admission is wrongly recorded in the order, appeal lies to the appellate authority. In the present the assessee was aggreieved by the alleged agread addition on account of deciline in GP rate on the ground that it had not afreed to any addition and that concession was for non-maintenance of record and not for the addition. The matter of the assessee deserves to be verified by the CIT(A) whether the assessee had actually agreed to impugned addition before the Assessing offcer and to adjudicate the addition afresh in accordance with law—ITO vs. Sidhivinayak Dying & Printing Mills (P.) Ltd. (2009)

S. 2(9), 80HH, 145 of the IT Act, 1961—Deduction—The period of 12 months commencing from the first day of April every year, which is assessment year as defined under s.2(9) of the Act, would not depend upon one or the other assessee and whether or not he had a previous year relevant to a particular assessment year. It is invariable as the calendar year and the assessment year mentioned in s. 80HH must be construed in a similar manner—CIT vs. Fal Industries Ltd. (2009) 314 ITR 47 (Mad)

S. 145 of IT Act, 1961—Income—The assessee followed the mercantile system of accounting and claimed exclusion in respect of the interest accrued but not received. The term ‘accrued but not due” show that the right to receive the interest has not arisen to the assessee and that the interest is receivable only from April 1 of the next year, hence, the interest income cannot be included in the taxable income of the assessee—CIT vs. Lucas Indian Services Ltd. (2009) 315 ITR 273 (Mad)

S. 147 of IT Act, 1961—Reassessment—For reopening the assessment, the Assessing Officer must have “reason to believe” that the income has escaped assessment and the “reason to believe” but be founded upon some information of fact which was not part of the record on which assessment had been originally completed. Merely change of opinion on the same material that some income has escaped assessment, reassessment proceeding cannot be initiated—CIT vs. Krishna Textiles (2009) 315 ITR 271 (All)

S. 145 of the Act, 1961—Accounting—In absence of any change in the factual position normally the profit rate declared and accepted in the preceeding year, constitutes a good basis for working out the gross profit. Therefore, since in the earlier year the gross profit rate declared and accepted is 2.51 per cent. the same rate would be for the year in question—CIT vs. Inani Marbles P. Ltd. (2009) 316 ITR 125 (Raj)

S. 145 of IT Act, 1961—Assessment—Considering the past history and gross profit rate in subsequent year, Tribunal reduced the gross profit rate from 14 per cent to 10 per cent that looking to past history , the gross profit rate of 14 per cent. as applied by the Assessing Officer is highly excessive and without basis—CIT vs. Pawan Kumar (2009) 316 ITR 324 (P&H)

S. 29, 144, 145 of IT Act, 1961—Accounting—Where the Assessing Officer is not satisfied with the correctness or completeness of the books, he may reject them and estimate the income to the best judgment in accordance with the provisions of s. 144 of the Act. When an estimate is made to the best judgment of an Assessing Officer, he substitutes the income that is to be computed under s. 29 of the Act. Best judgment assessment is made by fixing a rate of net profit. Net profit is applied after taking into consideration all factors and it accounts for all the deductions which are referred to under s. 29 and are deemed to have been taken into consideration while making such an estimate—CIT vs. Gian Chand Labour Contractors (2009) 316 ITR 127 (P&H)

S. 35E & 145 of IT Act, 1961—Change of method—Change was brought in to apply worldwide Accounting Standards employed by assessee group and it would lead to more appropriate preparation and presentation of financial statement for the reason that the losses will not unnecessarily be carried forward as work-in-progress where there is none. Hence, change is bonafide and cannot be disallowed, inter alia, on the ground of violation of s. 35E of the Act—Dy. CIT vs. ACC RIO Tinto Exploration Ltd. (2009) 125 TTJ 92 (ITAT-Delhi)

S. 145 of IT Act, 1961—Accounts—The assessee is not entitled to compute the notional brokerage amount that would be payable on the closing stock of debentures for working out the value of such closing stock—Dy. CIT vs. Gujarat State Investments Ltd. (2010) 229 CTR 201 (Guj)

S. 145 of IT Act, 1961—Method of accounting—The institute of Chartered Accountants of India in its AS-2 has recognized under para 5, the cost or net realizble value, whichever is less, to be a permissible method for valuing the closing stock. Valuing the closing stock by net realizable value method is, therefore, duly recognized by AS-2 but the onus is on the assessee to prove that net realizable value, whatever has been shown by him, is the correct net realizable value and is less than the cost. If the assessee fails to submit any evidence to support estimated net relizable value, the method of valuation adopted by the assessee can be rejected and the Assessing Officer can value the closing stock at average cost by adopting per cent rate—D. Subhash Chandra & Co. vs. ACIT. [2010] 123 ITD 635 (AHD)

S.145 of IT Act, 1961—Best judgment assessment—Sec. 145 only provides the basis, on which computation of income is to be made for the purpose of determining the amount of tax. The provision, by itself does not deal with the addition or deletion to the income. Therefore, mere rejection of, or some deficiency in the books of account, would not mean, that it must necessarily lead to additions to the returned income. Assessing Officer while rejecting the books of account of the assessee, made an assesment under s. 145 i.e., best judgment assessment and, made certain additions under different heads. Since in support of finding of the Assessing Officer, no material is brought on record and when it is found, that no attempt was made by the assessee to suppress the professional receipts not by maintaing the indoor patient registers, the additions made under different heads applying best judgment assessment are not sustainable and deserve to be deleted—CIT vs. Dr. A.P. Bahal. [2010] 322 ITR 71 (RAJ)

S. 37, 145 of IT Act, 1961—Income—Only the real income is to be taxed and that the same income cannot be taxed twice. Since the assessee has been following the receipts basis for accounting income of lease rent, even though otherwise it was following the mercantile system, the real income is to be considered with reference to the commercial and business realities of the situation and not merely with reference to entries made in the book of account —CIT vs. V.T.C. Leasing and Finance Ltd. (2010) 323 ITR 514 (Raj)

S.145 of IT Act, 1961 — Accounts — One cannot have a stock valuation which converts a capital receipts into revenue income. Closing stock of incentive sugar has to be valued at levy price and not at cost price. — CIT Vs. Bannari Amman Sugars Ltd. [2012] 254 CTR 91 (SC)

S. 145 of IT Act, 1961—Method of Accounting—On a question of valuation of the closing stock, it is to be noted that any alleged difference or discrepancy tends to balance itself out over a period of years if the same method is consistently followed. Therefore, any alleged difference or discrepancy such as diminution in valuation of closing stock on account of impairment and defect may be allowed where same method of valuation of stock is consistently followed by the assessee and which resulting in no distortion of profit.—CIT vs. Hughes Communication India Ltd. [2013]

S. 145A, r/w s. 43B of IT Act, 1961—Method of accounting in certain cases—Sec. 145 obliges every assessee to maintain, subject to accounting standards which may be notified by the Central Government, books of account on cash or mercantile basis. Sec. 145A begins with a non obstance clause and prescribes that the value of goods shall be further adjusted to include the amount of any tax, duty, cess or fee (by whatever named called) actually paid. This provision was introduced in 1999 and overrides other provisions. Unlike in the case of s. 43B which mandates the inclusion, in the computation of income, amounts paid, towards certain liabilities, including tax, but not actually arising or accruing at the time of payment, provision of s. 145A directs inclusion of the amounts of tax, duty, etc., actually paid for the purpose of valuation alone.—CIT vs. Lakshmi Sugar Mills co. Ltd. [2013]

S.145, r/w S.144 of IT Act, 1961 — Method of accounting — Assessee made purchases more than 80 per cent which were billed and were forming part of gross receipts from contractees. Therefore, as per provisions of s.44AD, the remaining amount could not fetch 8 per cent when the assessee rendered civil contract work without material. Hence, it would be reasonable to estimate income on gross receipt at rate of 6 per cent. — Girish Chandra Nayak Vs. ITO [2013] 140 ITD 143 (ITAT-Cuttack)

Accounts—Sec. 145—IT ACT, 1961— RAJASTHAN METAL STORE vs. INCOME TAX OFFICER. [2012] 146 TTJ 12 (UO)(ITAT-JODHPUR)

S. 145 of the IT Act, 1961—Method od Accounting— LUNAR ELECTRICALS vs. Asstt. CIT. [2012]

S.145 of IT Act, 1961—Method of accounting—Assessee was following net method for valuing closing stock. Excise duty is to be excluded at the end of accounting period from value of closing stock of finished goods.—ACIT Vs. Torrent Cables Ltd. [2012]

S.145 of IT Act, 1961—Method of accounting—On following net method of valuation of closing stock, excise duty has to be excluded from value of closing stock of finished goods at the end of accounting period.—CIT Vs. Shri Ram Honda Power Equipment [2012]

Method of Accounting—Sec. 145—IT ACT, 1961— Pragati Engineering Corporation v. Income-tax Officer. [2012] 137 ITD 355 (ITAT-LUCKNOW)

S.145, r/w S.144 of IT Act, 1961—Method of accounting—The amount of TDS reflected in the TDS certificates but not debited in the balance sheet of the assessee, represents the income of the assessee.—Laxmi Ventures (Bombay) (P.) Ltd. Vs. Dy. CIT [2012]

S.145A & 194C of IT Act, 1961 — Valuation of stock — Whenever any adjustment is made in the valuation of stock, this would affect both reopening as well as closing stock. Since the Assessing Officer did not take into account the opening stock of work-in-progress, no addition can be made on account of work-in-progress. — ITO Vs. Navjivan Systhetics [2012] 20 ITR (Trib) 712 (ITAT-Ahd)

Sec.145 of the Income Tax Act, 1961 — Gross Profit Rate — Assessing authority noticed that the assessee had declared gross profit rate of 20.6% and considered the same to be low as compared to the gross profit rate of 32.72% declared by another concern viz., Anil Marbles Private Limited for the assessment year 1996-97. The A.O. came to the conclusion that the assessee, who was dealing in marble, indulged in suppression of purchase cost of marble blocks and sales of marble and, therefore, the then applicable provisions of Section 145(1) were attracted. Accordingly, while rejecting the books of account of the assessee, the A.O. made an addition of Rs.8,66,725/- by applying gross profit rate of 32.42% on the estimated sales. The A.O. made the estimate of the sales of the assessee at one and half times the total declared sales plus job receipts and increase in closing stock. The CIT(A), though found that the provisions of Section 145 of the Act had rightly been invoked by the A.O. but came to the conclusion that the comparison made by the A.O. of the assessee with the said Anil Marbles Pvt. Ltd. for estimation of sales and application of gross profit rate was not justified for the reasons that the period of working of both the companies was different and the sales declared by the assessee had been accepted by the Sales Tax Authorities. Further, the CIT(A) also came to the conclusion that the application of gross profit rate at 32.42% was not justified. However, taking the gross profit rate declared by the assessee to be on the lower side, particularly for the general trend/practice of under billing in the marble business, the learned CIT(A) put the estimate on the sales of the appellant at Rs.26 lakhs and, while applying the gross profit rate of 25% on such sales, put the sustainable addition only at Rs.12,715/-. Rajasthan High Court while dismissing the appeal of the revenue held that:- “The orders as passed by the CIT(A) and the Tribunal do not appear suffering from any perversity or from application of any wrong principle. In our view, ultimately, the matter had been of putting a reasonable estimate on the quantum of sales and on the gross profit rate while recording the findings on facts. When the authorities have recorded such findings with cogent reasons and on relevant considerations, we find no reason to interfere”[2013] 26 ITCD 16 (RAJ)

S.36(1)(iii), 80-IB, 145 of IT Act, 1961 — Accounting — Merely on the ground of consumption of electricity being abnormally high viz-a-viz the units of production, the books of account cannot be rejected. — Vishal Paper Industries Vs. Jt. CIT [2013] 21 ITR (Trib) 220 (ITAT-Chandigarh)

S.145 of Act, 1961 — Accounting — In the event the hire-purchase or leasing agreement did not give the apportionment or bifurcation of the EMIs between the principal and interest components, the interest income in relation to such agreements, recognized on the basis of the SOD system of accounting by the assessee in its books of account, represents the “real income” accrued to the assessee. — Chakra Financial Services Ltd. Vs. CIT [2013] 350 ITR 396 (AP)

S. 145 of the IT Act, 1961—Method of Accounting—CIT vs. ASHOK LEYLAND FINANCE LTD. [2012]

S.145, of the IT Act, 1961 — Accounts — Since the assessee had maintained complete books of account and all the purchases were entered in the purchase registered and sales were also entered in the sale register the addition made on account of alleged under-valuation of stock desenes to be deleted. — ACIT Vs. Sezward Exports (P) Ltd. [2012] 150 TTJ 13 (ITAT-JP)

Method of Accounting—Sec. 147—IT ACT, 1961—Pawan Kumar v. Income-tax Officer. [2012] 137 ITD 85 (ITAT-CHANDIGARH)

Method of Accounting—Sec. 145—IT ACT, 1961—Vinod Kumar v. Joint Commissioner of Income-tax. [2012] 137 ITD 48 (ITAT-CHANDIGARH)

Method of Accounting—Sec. 145—IT ACT, 1961— Assistant Commissioner of Income-tax v. National Builders. [2012] 137 ITD 277 (ITAT-AHMEDABAD)

S.145, of IT Act, 1961 — Assessment — Since the assessee had filed all the details as required by the Assessing Officer in the notice under sec.142(1)/142(2) and the department did not brought on record any evidence to demonstrate that the Assessing Officer required any other information apart from the details as mentioned in the notice under sec.142(1)/143(2) and more so when the Assessing Officer failed to point out a single defect in the details furnished by the assessee, the additions made by the Assessing Officer on the ground that the net profit was very low deserves to be deleted. — ITO Vs. Sai International [2012] 20 ITR (Trib) 1 (ITAT-Delhi)

S. 145 of the IT Act, 1961—Method of Accounting— CIT vs. DYNAVISION LTD. [2012]

S. 145 of IT Act, 1961—Method of accounting—The method of valuation of closing stock cannot be changed midway. Each year being self contained unit and taxes of a particular year being payable with reference to the income of that year, as computed in the terms of the Act. The method adopted by the assessee has been found to be such that the income cannot properly be deduced therefrom. Therefore, the Assessing Authority was right in adding the excise duty in the valuation of the closing stock.—Krishi Discs (P) Ltd. Vs. CIT. [2013

S. 145(1) of IT Act, 1961—Books of account—The assessee is a company maintaining its account books regularly and its books of accountant were duly audited by the chartered Accountant and same were also submitted before the Assessing Officer. Since there was no finding that the assessee was not employing a method of accounting and that entries in the books were not correct and, therefore, rejection of accounts books by no cogent reason by invoking provisions of s. 145(1) is not justified.—Mahakoshal Pottaries Vs. CIT. [2013] 354 ITR 149 (MP)

S. 145(3) of IT Act, 1961—Accounts—The Assessing Officer was not justified in making the addition in the valuation of the closing stock particularly when the same valuation of the stock had also been accepted by VAT authorities and CIT in their respective assessment orders. The Assessing Officer while rejecting the books of account of the assessee by invoking the provisions of s. 145(3) did not give any other reason except the observation that the proportionate expenses incurred by the assessee on account insurance on goods in transit, freight and handling, entry-tax (purchase) and channel finance interest, were to be added. The Assessing Officer failed to point out any specific defect in the books of account or the method of accounting consistently followed by the assessee. Therefore, provisions of s. 145(3) were not applicable to the facts of the case of the assessee.—Drillcon (RAJ)(P) Ltd. Vs. Addi. CIT. [2013] 154 TTJ 620 (ITAT-JD)

Section 145 Income-tax Act, 1961 – Method of accounting – CIT Vs. Mangal Engg. Works. [2006]

Section 145 Income-tax Act, 1961 – Method of accounting – Mathur Marketing (P.) Ltd. Vs. CIT. [2006]

Section 145 Income-tax Act, 1961 – Method of accounting – CIT Vs. Sunil Talwar Murlidhar & Party. [2006]

Section 145 Income-tax Act, 1961 – Method of accounting – K.S. Mehta (HUF) Vs. CIT. [2006]

Section 145 of the Income-tax Act, 1961 – Method of accounting – CIT Vs. K. Ravindranathan Nair. [2005]

Section 145 of the Income-tax Act, 1961 – Method of accounting – Suresh Chand Talera Vs. UOI.[2006]

Section 145 of the Income-tax Act, 1961 – Method of accounting – CIT Vs. Karur Vysya Bank Ltd. [2006]

Section 145 of the Income-tax Act, 1961, read with section 209 of the Companies Act, 1956 – Method of accounting – CIT Vs. Pradeshiya Industrial & Investment Corpn. Ltd. [2005]

S. 145—Method of Accounting—IT ACT, 1961—Omax Shoe Factory Vs. CIT. [2005]

Section 145 of the Income-tax Act, 1961 – Method of accounting – Sanjeev Woollen Mills Vs. CIT. [2005]

Section 145— Income-tax Act, 1961 – Method of accounting – CIT Vs. Saatal Kattha & Chemicals (P.) Ltd. [2006]

Section 145 of the Income-tax Act, 1961 – Method of accounting –Juggilal Kamlapat Udyog Ltd. Vs. CIT. [2006]

Section 145, read with section 143, of the Income-tax Act, 1961 – Method of accounting – Ram Partap Oil Extractions (P.) Ltd. Vs. Asstt. CIT. [2006]

Section 145 of the Income-tax Act, 1961 – Method of accounting –Geo Tech Construction Corpn Vs. Deputy CIT. [2006] 155 TAXMAN 86 (KER.)

Section 145 of the Income-tax Act, 1961 – Method of accounting –H.M. Sarif & Sons vs. CIT. [2006]

Section 145 of the Income-tax Act, 1961 – Method of accounting –CIT vs. Ema India Ltd. [2006]

Section 145 of the Income-tax Act, 1961 – Method of accounting –Sangrur Vanaspati Mills Ltd. vs. CIT. [2007]

Section 145 of the Income-tax Act, 1961 – Method of accounting-Axia Engg. Works vs. CIT. [2007]

Section 145 of the Income-tax Act, 1961 – Method of accounting – Echo Shella vs. CIT. [2007]

Section 145 of the Income-tax Act, 1961 – Method of accounting – Bimal Kumar Anant Kumar vs. CIT. [2

[2007] Section 145 of the Income-tax Act, 1961 – Method of accounting – CIT vs. M.K. Kathiresan. [2007]

Section 145 of the Income-tax Act, 1961 – Method of accounting – CIT vs. Hindustan Zinc Ltd. [2007]

Section 145 of the Income-tax Act, 1961 – Method of accounting – CIT vs. Anand Kumar Deepak Kumar. [2007]

Section 145, read with section 144, of the Income-tax Act, 1961 – Method of accounting – CIT vs. Vijay Constructions. [2007]

Reference: – As Per Section 145 of the Income Tax Act 1961

Method of accounting under section 145:

(1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the Assessee.

(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.

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