The ITAT Ahmadabad in the case of Ms. Ambuja Oil Industries vs. the Income Tax Officer, 2014 (11) TMI 647, held that the regular method of accounting of an assessee cannot be rejected only due to the reason that it gives him the advantage and the Assessing officer considers the other method as a better one. The method of accounting followed by the assessee cannot be substituted by the department only because it is not satisfied with the same.
It was further held that the Income Tax Department is bound by the method which the assessee chooses regularly unless the method fails to reveal the correct income of the assessee.
It was expressed clearly by the ITAT, Ahmadabad that what matters for the purposes of section 145 of the Income Tax Act, 1961 is, the method should reveal the true income and profits of the assessee. It is not required for the Revenue to opt a different method only because the Assessing Officer prefers the same.
The Revenue in the instant case failed to show that the assessee did not choose the average market rate of the previous month of the relevant year for valuation of its closing stock regularly for the purposes of its accounts. It was contended that the lower authorities were wrong in valuing the closing stock of the assessee based on the purchase bills at the end of the year instead of the method followed by the assessee.
The order of the CIT (A) was set aside by the ITAT. The appeal was decided in favour of the assessee.
Provisions of section 145 of the Income Tax Act:
Any person carrying on business is allowed according to the Law to follow any system of accounting. Generally there are two systems of accounting adopted by the businessmen.
The first system of accounting is called the Mercantile System and the other system is popularly called the Cash System. To start a new business, the choice is upon the businessman to follow the method of accounting.
There is no fixed rule farmed by the Tax Department for maintaining the accounts. But the corporate assessees are required to maintain the accounts as per mercantile basis.
Section 145 of the Act provides that if the accounts are not properly maintained, the books of account can be rejected by the department and the income will be computed as per the best judgment of the Assessing Officer.
Regarding the valuation of the closing stock of an enterprise, Section 145A of the Act further provides that the valuation of the stock should include the amount of any debt, etc. paid or incurred to gather the goods to the place of business.