The AO wants to substitute my method of accounting for one that suits him better. What does he have to establish first?
That the method you follow distorts profits. The Supreme Court held that recognition of income is achievable by more than one method, that an assessee is entitled to arrange its affairs and follow the method the department has accepted in earlier years, and that only where the department records a finding of distortion can it insist on substitution. The case arose on chit discount and the completed contract method over assessment years 1991-92 to 1997-98.
Decided by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy, JJ. (judgment by Kapadia, J.), Civil Appeal Nos. 1625 to 1632 of 2008) on 2008-02-27, reported as [2008] 299 ITR 1 / 168 Taxman 95 / 215 CTR 201 (SC); Civil Appeal Nos. 1625 to 1632 of 2008. It bears on section 145 of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
The usual assessment order does not record a finding of distortion at all — it records a preference. It says the percentage completion method reflects income better, or that the accounting standards have moved on, and recomputes. This case makes the department's own earlier acceptance a positive part of the assessee's case rather than a mere plea of consistency, and it puts the burden of establishing distortion where it belongs. It is the authority that sits behind the freedom to choose, which the corpus otherwise covered only from the other end, through s.145(3) rejection.
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The assessees were private limited companies whose business was subscribing to chits. A chit fund is a savings scheme in which a fixed number of subscribers each contribute a fixed sum every month for as many months as there are subscribers; the monthly pool is auctioned among them, the lowest bidder takes his bid and the balance is distributed to the others as premium, the manager taking a percentage for expenses and for conducting the auction. What was in dispute was the tax treatment of the difference between what a subscriber contributed and what he received. The assessees kept their accounts on the mercantile basis and computed profit or loss at the end of the chit period on the completed contract method, which the department had accepted over several years. For assessment years 1991-92 to 1997-98 the Assessing Officer took the view that the completed contract method did not accurately recognise income and that chit discount should instead be treated as deferred revenue expenditure spread on a proportionate basis - in substance, percentage of completion. The department's case was that chit dividend accrued during the year while the liability for chit discount arose over the remaining instalments. The Commissioner (Appeals) and the Tribunal upheld the Assessing Officer. On reference the Madras High Court upheld the Tribunal on chit dividend but reversed it on chit discount, holding the completed contract method valid there and the spreading of the discount erroneous. The department appealed. Before the Supreme Court the assessees accepted the view taken below on chit dividend, so only chit discount remained in issue.
The department's appeals were dismissed and the Madras High Court's judgment affirmed. Two limbs have to be kept apart. On chit dividend the assessees had themselves accepted before the Supreme Court that the completed contract method was not correct, so that part of the controversy was settled and was not decided afresh. What the Court decided was chit discount: the completed contract method the assessees had used for it, and which the department had accepted for years, was not to be displaced. The Court gave two reasons together - the Assessing Officer had recorded no finding that the completed contract method distorted the profits of a particular year, and on the statements produced the change of method was revenue neutral when the chit scheme was read as one integrated scheme spread over a period of time. The rule stated in the judgment is that an assessee is entitled to follow a method of accounting the department has earlier accepted, and the department can insist on substitution only where it records a finding that the method results in distortion of profits.
The Court first set the two methods against each other. Recognition of income is attainable by several methods of accounting and the same result may be reached by any one of them. Under the completed contract method revenue is not recognised until the contract is complete; costs accumulate during it and the profit or loss is established in the last accounting period and taken to the profit and loss account, which the Court said produces an objective assessment of the result of the contract. The percentage of completion method instead seeks periodic recognition of income to reflect current performance, the revenue recognised being measured by the stage of completion, which can be looked at as the proportion that costs incurred to date bear to estimated total costs. Having drawn that difference, the Court took from the Bombay High Court's decision in Taparia Tools Ltd. v. Jt. CIT the proposition that in every case of substitution of one method by another the burden is on the department to prove that the method in vogue is not correct and that it distorts the profits of a particular year, and applied it: in these cases the Assessing Officer had recorded no such finding. Two further matters carried the result - a chit scheme is one integrated scheme spread over a period of time, sometimes exceeding twelve months, and examination of the computation of tax effect showed the whole exercise to be revenue neutral. Only then did the Court state the rule that an assessee may arrange its affairs and follow a method the department has earlier accepted, subject to the single exception of a recorded finding of distortion. Before concluding, the Court noted that accounting standards framed by the Institute of Chartered Accountants of India had been adopted under s.211(2) of the Companies Act and that the department had argued from AS 22 and from the concept of timing difference; it said those developments were of recent origin, that it was open to the department to consider them in future chit cases, expressly expressed no opinion on them, and observed that they had not been invoked in this batch of appeals.
Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method.
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Handle my notice → Ask a CA on WhatsAppThat the method you follow distorts profits. The Supreme Court held that recognition of income is achievable by more than one method, that an assessee is entitled to arrange its affairs and follow the method the department has accepted in earlier years, and that only where the department records a finding of distortion can it insist on substitution. The case arose on chit discount and the completed contract method over assessment years 1991-92 to 1997-98. This was decided by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy, JJ. (judgment by Kapadia, J.), Civil Appeal Nos. 1625 to 1632 of 2008) and bears on section 145 of the Income Tax Act 1961. It is reported as [2008] 299 ITR 1 / 168 Taxman 95 / 215 CTR 201 (SC); Civil Appeal Nos. 1625 to 1632 of 2008. The usual assessment order does not record a finding of distortion at all — it records a preference. It says the percentage completion method reflects income better, or that the accounting standards have moved on, and recomputes. This case makes the department's own earlier acceptance a positive part of the assessee's case rather than a mere plea of consistency, and it puts the burden of establishing distortion where it belongs. It is the authority that sits behind the freedom to choose, which the corpus otherwise covered only from the other end, through s.145(3) rejection. If it applies to you, the first step is this: Put the department's own history on record — the earlier assessments, scrutiny or otherwise, in which the same method was accepted, and say for how many years.
The assessees were private limited companies whose business was subscribing to chits. A chit fund is a savings scheme in which a fixed number of subscribers each contribute a fixed sum every month for as many months as there are subscribers; the monthly pool is auctioned among them, the lowest bidder takes his bid and the balance is distributed to the others as premium, the manager taking a percentage for expenses and for conducting the auction. What was in dispute was the tax treatment of the difference between what a subscriber contributed and what he received. The assessees kept their accounts on the mercantile basis and computed profit or loss at the end of the chit period on the completed contract method, which the department had accepted over several years. For assessment years 1991-92 to 1997-98 the Assessing Officer took the view that the completed contract method did not accurately recognise income and that chit discount should instead be treated as deferred revenue expenditure spread on a proportionate basis - in substance, percentage of completion. The department's case was that chit dividend accrued during the year while the liability for chit discount arose over the remaining instalments. The Commissioner (Appeals) and the Tribunal upheld the Assessing Officer. On reference the Madras High Court upheld the Tribunal on chit dividend but reversed it on chit discount, holding the completed contract method valid there and the spreading of the discount erroneous. The department appealed. Before the Supreme Court the assessees accepted the view taken below on chit dividend, so only chit discount remained in issue. The matter was decided on 2008-02-27 by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy, JJ. (judgment by Kapadia, J.), Civil Appeal Nos. 1625 to 1632 of 2008). On those facts the Supreme Court held as follows. The department's appeals were dismissed and the Madras High Court's judgment affirmed. Two limbs have to be kept apart. On chit dividend the assessees had themselves accepted before the Supreme Court that the completed contract method was not correct, so that part of the controversy was settled and was not decided afresh. What the Court decided was chit discount: the completed contract method the assessees had used for it, and which the department had accepted for years, was not to be displaced. The Court gave two reasons together - the Assessing Officer had recorded no finding that the completed contract method distorted the profits of a particular year, and on the statements produced the change of method was revenue neutral when the chit scheme was read as one integrated scheme spread over a period of time. The rule stated in the judgment is that an assessee is entitled to follow a method of accounting the department has earlier accepted, and the department can insist on substitution only where it records a finding that the method results in distortion of profits.
The Court first set the two methods against each other. Recognition of income is attainable by several methods of accounting and the same result may be reached by any one of them. Under the completed contract method revenue is not recognised until the contract is complete; costs accumulate during it and the profit or loss is established in the last accounting period and taken to the profit and loss account, which the Court said produces an objective assessment of the result of the contract. The percentage of completion method instead seeks periodic recognition of income to reflect current performance, the revenue recognised being measured by the stage of completion, which can be looked at as the proportion that costs incurred to date bear to estimated total costs. Having drawn that difference, the Court took from the Bombay High Court's decision in Taparia Tools Ltd. v. Jt. CIT the proposition that in every case of substitution of one method by another the burden is on the department to prove that the method in vogue is not correct and that it distorts the profits of a particular year, and applied it: in these cases the Assessing Officer had recorded no such finding. Two further matters carried the result - a chit scheme is one integrated scheme spread over a period of time, sometimes exceeding twelve months, and examination of the computation of tax effect showed the whole exercise to be revenue neutral. Only then did the Court state the rule that an assessee may arrange its affairs and follow a method the department has earlier accepted, subject to the single exception of a recorded finding of distortion. Before concluding, the Court noted that accounting standards framed by the Institute of Chartered Accountants of India had been adopted under s.211(2) of the Companies Act and that the department had argued from AS 22 and from the concept of timing difference; it said those developments were of recent origin, that it was open to the department to consider them in future chit cases, expressly expressed no opinion on them, and observed that they had not been invoked in this batch of appeals. In the words reproduced by the source cited on this page: "Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method." The decision followed or applied Taparia Tools Ltd. v. Jt. CIT [2003] 260 ITR 102 / 126 Taxman 544 (Bom.) - the burden on the department to show the existing method distorts profits is taken from this decision and applied (para 19); J.K. Industries Ltd. v. Union of India [2007] 165 Taxman 323 (SC) - paras 82 and 83 on the matching concept reproduced (para 14).
It was decided by the Supreme Court on 2008-02-27 and is reported as [2008] 299 ITR 1 / 168 Taxman 95 / 215 CTR 201 (SC); Civil Appeal Nos. 1625 to 1632 of 2008. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 145, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The department's appeals were dismissed and the Madras High Court's judgment affirmed. Two limbs have to be kept apart. On chit dividend the assessees had themselves accepted before the Supreme Court that the completed contract method was not correct, so that part of the controversy was settled and was not decided afresh. What the Court decided was chit discount: the completed contract method the assessees had used for it, and which the department had accepted for years, was not to be displaced. The Court gave two reasons together - the Assessing Officer had recorded no finding that the completed contract method distorted the profits of a particular year, and on the statements produced the change of method was revenue neutral when the chit scheme was read as one integrated scheme spread over a period of time. The rule stated in the judgment is that an assessee is entitled to follow a method of accounting the department has earlier accepted, and the department can insist on substitution only where it records a finding that the method results in distortion of profits. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 145 of the Income Tax Act 1961, and was decided by Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy, JJ. (judgment by Kapadia, J.), Civil Appeal Nos. 1625 to 1632 of 2008. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Make the officer state, in terms, what the distortion is and how he measures it; a finding that another method is preferable is not a finding of distortion. Show the method has been followed regularly and consistently, because that is what s.145(1) requires and what this case protects. Check first whether s.43CB governs your contract, because for a construction contract or a service contract the choice this case protects has been taken away by statute — the corpus page 's-43cb-percentage-of-completion-and-the-ninety-day-service-contract' sets out the boundary. Do not run this case against an addition made after a proper s.145(3) rejection; that is a different fight, dealt with in 'rejecting-the-books-and-estimating-the-income'.
Still good law. Still applied as the governing rule on substitution of an accepted method — itatonline's digests show the Karnataka High Court following it in CIT v. Banjara Developers and Constructions Pvt. Ltd. (2020) 425 ITR 673 / 272 Taxman 438 (Karn)(HC), where the department could not displace a consistently followed completed contract method, and in CIT v. Prestige Estate Projects Pvt Ltd (2022) 440 ITR 343 (Karn)(HC), where an assessee's own revenue-neutral change to percentage completion was upheld; a 2026 Mumbai Tribunal order reported on taxheal applies it to a project completion method. The qualification is statutory, not judicial: s.43CB now prescribes percentage of completion for construction contracts and for service contracts (with the exception for contracts of not more than ninety days and certain indeterminate-act contracts), so within that field the choice this case protects no longer exists. Outside it — chit discount, other trades, and the general question whether an accepted method may be displaced — the case runs unimpaired. The Court expressly declined to decide anything about accounting standards, so it is not authority for or against ICDS; on that, see 'chamber-of-tax-consultants-v-uoi-icds'. That finding was checked against a published source, which is linked on this page, on 2026-08-25. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment was read in full in a law report, and the holding, the reasoning and the quoted sentence now come from its numbered paragraphs. Three things in the earlier note were wrong and are corrected here. The bench is S.H. Kapadia and B. Sudershan Reddy, JJ., the judgment is Kapadia J.'s, the date is 27 February 2008 and the appeals are Civil Appeal Nos. 1625 to 1632 of 2008. The proposition that in every case of substitution of one method by another the burden lies on the department to prove the method in vogue is not correct and distorts the profits of a particular year is not a commentator's extrapolation: it is in para 19, where the Court takes it from the Bombay High Court in Taparia Tools Ltd. v. Jt. CIT [2003] 260 ITR 102 and applies it to these facts. And the result did not rest on the acceptance point alone - the Court also found, from the statements produced, that the change of method was revenue neutral when the chit scheme was read as one integrated scheme, which is a fact-specific support that anyone citing the case should notice. The chit dividend limb was conceded by the assessees before the Court and so was not decided. What the earlier note said about accounting standards holds and is now taken from para 21 of the judgment itself: the Court recorded that the department had argued from AS 22 and timing difference, said it was open to the department to raise those concepts in future chit cases, and expressly expressed no opinion, so the decision is authority neither for nor against ICDS. The decision affirms Bilahari Investments (P.) Ltd. v. CIT [2007] 164 Taxman 443 (Mad.), dated 19 June 2006. It does not tell you what evidence amounts to a finding of distortion, whether a distortion finding for one year lets the department change the method for all years, how the rule works where the assessee itself initiates the change, or what happens where the department accepted the method only in returns processed under s.143(1). It also leaves open how far the rule survives without the revenue-neutrality finding that supported it here, and the Court deliberately said nothing about the effect of accounting standards. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The department's appeals were dismissed and the Madras High Court's judgment affirmed. Two limbs have to be kept apart. On chit dividend the assessees had themselves accepted before the Supreme Court that the completed contract method was not correct, so that part of the controversy was settled and was not decided afresh. What the Court decided was chit discount: the completed contract method the assessees had used for it, and which the department had accepted for years, was not to be displaced. The Court gave two reasons together - the Assessing Officer had recorded no finding that the completed contract method distorted the profits of a particular year, and on the statements produced the change of method was revenue neutral when the chit scheme was read as one integrated scheme spread over a period of time. The rule stated in the judgment is that an assessee is entitled to follow a method of accounting the department has earlier accepted, and the department can insist on substitution only where it records a finding that the method results in distortion of profits.
TaxSphere, “CIT v Bilahari Investment Pvt Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-bilahari-investment-method-of-accounting/ (validity last checked 2026-08-25)
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