2012 (12) TMI 281 - AT - Income Tax

Tax audit u/s 44AB - inclusion of advances in the turnover to calculate the prescribe limit for audit - held that - no equation between advances and turnover/receipts - The mischief of section 44AB shall only become operative if the turnover or business receipts exceed Rs. 40,00,000/-. The section does not mention anything with regard to advances received from its customers and that too conditional - CIT(A) had correctly interpreted the provisions of section 44AB and also reversed the decision of the AO for rejecting the books of accounts of the assessee, solely on the ground that the books had not been audited by the C.A. - Decided in favor of assessee. Addition on account of estimation of income at 10% on the advances received - alleged that assessee is following project-completion method Held that - There was no work done during the year and no amount was received towards flats. What was received from prospective buyers was only in the nature of loans, a good portion of which was repaid between 1985 and 1986 and therefore, could not be considered as amounts received towards price of the flats intended to be sold - AO was wrong to treat the advances received as sales - AO was wrong to add back adhoc notional income @ 10% of the advances and deleted the same - Decided in favor of assessee.

Issues Involved:
1. Deletion of addition of Rs. 41,35,900/- by CIT(A) based on estimation of income at 10% on advances received.
2. Rejection of books of accounts by AO under section 145 due to non-audit as per section 44AB.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 41,35,900/- by CIT(A):

The solitary issue in this appeal is the deletion of Rs. 41,35,900/- by the CIT(A). The facts reveal that the assessee was involved in two projects under construction and had shown a net closing balance in work-in-progress at Rs. 8,58,20,129/-. The AO concluded that the turnover/receipt exceeded Rs. 40,00,000/-, necessitating an audit of accounts, which the assessee failed to do. Consequently, the AO rejected the project completion method, rejected the books of accounts under section 145, and estimated the profit at 10% of the advances received, adding Rs. 41,35,900/-.

The assessee contested this action before the CIT(A), arguing that advances cannot be equated with gross receipts, sales, or turnover, and therefore, there was no violation of section 44AB. The CIT(A) agreed with the assessee, noting that the AO had wrongly equated advances with sales. The CIT(A) emphasized that the work-in-progress included various expenditures related to the project, not just construction costs. The CIT(A) found no genuine reason to treat advances received from prospective buyers as sales and concluded that the AO's estimation of profit at 10% was not justified.

The CIT(A) referenced the case of D.K. Enterprises v. ITO 39 ITD 394 (Bom), where it was held that advances from prospective buyers should not be treated as sales. The CIT(A) also cited the case of Champion Construction Company 5 ITD 495, which stated that profits from a project should be computed year-wise unless it is impossible to do so. The CIT(A) concluded that the AO's addition of Rs. 41,35,900/- was not genuine and directed its deletion.

2. Rejection of Books of Accounts by AO under Section 145:

The AO rejected the books of accounts under section 145, citing the failure to audit the accounts as required by section 44AB. The CIT(A) disagreed, stating that the rejection of books solely on the basis of non-audit was not proper. The CIT(A) noted that the AO had not pointed out any substantial defects in the books of accounts or any incorrect entries. The CIT(A) found the assessee's claim of maintaining regular books of accounts disclosing full entries of business transactions to be genuine and convincing.

The CIT(A) emphasized that the provisions of section 145 could not be invoked merely due to non-audit unless substantial defects were found in the books of accounts. The CIT(A) concluded that the AO's rejection of the books was baseless and not supported by any evidence of defective books of accounts.

Conclusion:

The ITAT upheld the CIT(A)'s decision, agreeing that there was no equation between advances and turnover/receipts. The ITAT noted that section 44AB becomes operative only if the turnover or business receipts exceed Rs. 40,00,000/-, and advances from customers do not fall under this category. The ITAT found that the CIT(A) had correctly interpreted the provisions of section 44AB and rightly reversed the AO's decision to reject the books of accounts.

Regarding the deletion of the adhoc addition, the ITAT agreed with the CIT(A) that the AO was wrong to treat advances as sales and add notional income at 10%. The ITAT found no infirmity in the CIT(A)'s order and dismissed the appeal filed by the department. The appeal was thus dismissed, and the CIT(A)'s order was sustained.

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