ITAT: Assessee Following Unrecognized Method for Computing Taxable Income Cannot Be Estoppel
The Income Tax Appellate Tribunal (ITAT), Bangalore Bench, on 23 March 2021, ruled in the case titled M/s Monarch Plaza Comforts Pvt. Ltd. (Appellant/ Assessee) v. the Asst. Commissioner of Income Tax (Respondent/ Revenue) that a mere unrecognized method followed by the assessee to compute taxable income cannot be estoppel.
The ITAT coram comprising of Chandra Poojari and Beena Pillai held that the method adopted by the assessee that was not a recognized method, for computing additional income by the Assessing Officer (AO) is also uncalled for. It added that "We rely on Circular No.14 of 1955 dated 11.04.1955 issued by CBDT, wherein it is expressed that assessing officers are expected to educate the assessee and allow claims that alleged timidly due to assessee, even when such a claim is not made."
The factual background of the case is that the appellant is a developer and filed its return of income on 26 July 2017 wherein it declared a total income of Rs.1,03,29,370/-for assessment year 2011-12.
The case was subsequently reopened through issuance of notice under Section 148 of the Income Tax Act, 1961 (IT Act). The assessee filed a letter replying that the original return may be treated as a return in response to notice under Section 148 of the Act.
Subsequently, notice under Section 143(2) was issued to the assessee. The assessee declared income at 15 percent as Work in Progress. The assessee adopted a method of determination of income that is unknown to law or the approved accounting standards.
The contention on behalf of the assessee was that the AO instead of adopting correct methods to determine income in the hands of the assessee estimated the income as a percentage of Work in Progress (WIP), which is also erroneous and in law unapproved.
The assessee also objected regarding the observation of lower authorities, and stated that the addition is done which is not based on approved accounting standards. The assessee has only 2 options, either follow the project completion method or percentage completion method, which is the generally accepted accounting principles.
The assessee stated that the AO estimated the income and computed addition on an ad-hoc basis, which is not recognized either by the accounting standards or under the IT Act.
An appeal was filed before the ITAT and it observed that the AO ought to have guided the assessee for adopting one of the recognized methods of accounting to arrive at the correct income vis-a-vis the method of accounting adopted by the assessee in the previous assessment year or the immediately succeeding assessment year.
The Appellate Tribunal put reliance on the Supreme Court's judgment in the case of CIT v. British Paints India Ltd., reported in 188 ITR 44, wherein it observed that the assessee was valuing the WIP and finished products at raw material cost by excluding other overriding expenditure. The Court held the method adopted by assessee therein was not acceptable, as it was not a recognized method and that the AO should guide the assessee with this.
The ITAT remanded the issue back to AO to consider it afresh. The AO shall resort to either of the recognized methods of accounting standards acceptable under the IT Act to compute the income in the hands of the assessee if any for the year under consideration.