Rejection of Accounting Method followed by Assessee which was accepted in Assessment of earlier Year

Method of Accounting regularly followed by the taxpayer which was accepted by the Tax Officer in past cannot be rejected in future years without expressing the dissatisfaction about the correctness or completeness of the accounts of the taxpayer

Recently, the Madras High court in case of CIT Vs. SAS Hotels & Enterprises Limited [Appeal No. 1030 of 2010] (Madras High Court) held that the Assessing Officer (AO) should not reject the method of accounting which is in accordance with Section 145(1) (Refer Note-1) of the Income-tax Act, 1961 (the Act) and is regularly followed by the taxpayer.

Further the High Court held that before invoking Section 145(3) of the Act, the AO must necessarily express his dissatisfaction about the correctness or completeness of the accounts of the taxpayer and also note that such system of accounting was not regularly followed by the taxpayer. Also, the High Court distinguished the facts in the case of CIT vs. N.M. Associates [2002] 256 ITR 141 (Mad) relied upon by the tax department, where the taxpayer did not maintain proper accounts and where Section 145(3) was invoked.

Facts of the case

• The taxpayer was engaged the business of building construction apart from its other business activities. The taxpayer was following mercantile system of accounting and in respect of on-going projects and followed “Completed Contract Method” for accounting profits of construction work and thus the income was assessed in the relevant year in which the contract was completed.

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