2018 (3) TMI 313 - HC - Income Tax

Rejection of books of accounts - non presenting true and correct picture - Held that - The issues are squarely covered by the decision of this court in CIT Central Jaipur vs. M/s Unique Builders And Developers Jpr (2017 (5) TMI 1505 - RAJASTHAN HIGH COURT) as held merely because of non maintenance of a detailed qualitative and quantitative register alone, the same could not be a valid reason to reach a finding that books of account do not present true and complete picture of accounts and financial transactions. The finding by the assessing authority being perverse is, therefore, set aside. The perusal of the impugned order reveals that this was only a prima facie view which the assessing authority entertained before issuing a show cause notice to the assessee for rejecting its accounts by invoking provisions of section 145(3) of the Act. He has not been able to point out as to which of these payments in respect of direct expenses could not be verified by him nor the Assessing authority is shown to have required the assessee to get payment of any specific amount of direct expenses verified. Merely for saying it could not be taken a lacuna in the books of account of the assessee and take the same as a reason for rejecting the books of account that were maintained by assessee in regular course of its business. The finding of on-money transactions in the appellant s case by the authorities below is found without any basis and found perverse on facts. It, therefore, could not be a reason for rejecting the books of account maintained by the assessee in regular course of business. The same, therefore, could not be taken a valid basis for change of method regularly employed by the appellant. The Income-tax Authority, therefore, has no option or jurisdiction to meddle in the matter either by directing the assessee to maintain its account in a particular manner or adopting a different method for valuing work-in-progress. It also cannot recompute income by adopting any method other than that regularly employed by the appellant in a case like this nor make the same as basis to reject its accounts. - Decided in favour of assessee.

Summary

Issues Involved:
1. Justification of the Tribunal in deleting the addition made by the Assessing Officer (AO) by applying the Percentage Completion Method.
2. Justification of the Tribunal in holding that the AO rejected the accounts solely for not following Accounting Standards AS-7 and AS-9.
3. Error of the Tribunal in confirming deletion of disallowance under Section 40(a)(ia) and 40A(3).

Detailed Analysis:

1. Justification of the Tribunal in Deleting the Addition Made by the AO by Applying the Percentage Completion Method:
The Tribunal's decision to delete the addition made by the AO by applying the Percentage Completion Method was challenged. The AO had observed that the appellant, a real estate developer, had not prepared a Profit & Loss (P&L) account and had capitalized all direct and indirect expenses, which led the AO to re-cast the trading and profit and loss account. The AO believed that the actual receipts on the sale of flats could be ascertained based on sale/allotment agreements, and that the appellant had contravened AS-7 and AS-9, thus not following AS-1 as provided in Section 145(2) of the Act.

The court referenced several judgments, including the Supreme Court's decision in S.N. Namasivayam Chettiar vs. The Commissioner of Income Tax, Madras, which emphasized the necessity for the AO to provide concrete reasons for rejecting the accounts. The court also cited the Supreme Court's ruling in Commissioner Of Income Tax vs. M/S Bilahari Investment (P) Ltd., which upheld the validity of the Completed Contract Method as a recognized accounting method. The court concluded that the AO's basis for rejecting the accounts was unfounded and not supported by substantial evidence.

2. Justification of the Tribunal in Holding that the AO Rejected the Accounts Solely for Not Following AS-7 and AS-9:
The Tribunal held that the AO rejected the accounts solely because the appellant did not follow AS-7 and AS-9 for revenue recognition. The court observed that the AO had not provided any specific defects in the accounts or demonstrated that the method adopted by the appellant resulted in an underestimation of profits. The court referenced the decision in Pandit Brothers vs. CIT, which stated that the absence of a stock register alone could not justify the rejection of accounts unless coupled with other material defects.

The court also cited the Hon'ble Kerala High Court's ruling in St. Teresa’s Oil Mills vs. State of Kerala, which emphasized that accounts regularly maintained in the course of business should be accepted as correct unless proven otherwise. The court found that the AO's rejection of the accounts based on AS-7 and AS-9 was not justified, as the appellant had consistently followed the Project Completion Method, a recognized accounting method.

3. Error of the Tribunal in Confirming Deletion of Disallowance Under Section 40(a)(ia) and 40A(3):
The Tribunal's confirmation of the deletion of disallowance under Section 40(a)(ia) and 40A(3) was also challenged. The AO had made disallowances on the grounds that the appellant had included expenses in work-in-progress, which were to be claimed as revenue expenses subsequently. The court referenced the decision of the Gujarat High Court in CIT vs. Amar Corporation, which held that additions based on extrapolation or guesswork without concrete evidence were not justified.

The court further cited the Supreme Court's decision in CIT vs. Bilahari Investment Pvt. Ltd., which emphasized that the method of accounting regularly employed by the assessee should be accepted unless it distorts the profits. The court concluded that the Tribunal's decision to confirm the deletion of disallowance was correct, as the AO had not provided sufficient evidence to support the disallowances.

Conclusion:
The court dismissed the appeals, holding that the Tribunal was justified in its decisions. The issues were answered in favor of the assessee, with the court emphasizing the importance of consistent and recognized accounting methods and the necessity for the AO to provide substantial evidence when rejecting accounts or making disallowances.