2025 (3) TMI 282 - AT - Income Tax

Rejection of books of accounts - AO estimating 8% of turnover - HELD THAT - AO has observed that the assessee had not submitted the Profit and loss account for the few projects of the clients and hence decided to reject the entire books of accounts which is not permissible as per law. AO on one hand rejects the books of accounts of the assessee and on the other goes on to adopt the contract revenue declared by the assessee in its books of accounts for the purpose of estimation of revenue at 8% which only goes to prove that the AO accepts the value of turnover reported by the assessee in its books and has only arbitrarily rejected the books of accounts without giving any cogent reasons in doing so. In the present case the AO has not given any specific finding that the assessee has not followed continuously accounting method. As in the case of CIT Vs. Woodword Governor 2009 (4) TMI 4 - SUPREME COURT held that the accounting method followed by an assessee continuously for a given time period has to be presumed to be correct till the AO comes to know the reasons to be given that system does not reflect the true profits. we are of the considered view that the AO has grossly erred in rejecting the books of accounts of the assessee in the above factual matrix. We also gone through the reasons given for rejecting the books of accounts by the AO is not as per the provisions of Section 145 of the Act and allegations made in the AO s order is dehors the facts. Further it is noted that the Assessee has furnished the details of all the projects giving true picture of turnover and the corresponding loss / profit earned in the respective projects in the consolidated statement showing the percentage of completion method by offering revenues on year-on-year basis by following the AS 7 along with ICDS prescribed under the Act. Thus addition made by the AO based on the estimation of profit @ 8% on the turnover derived from the books of accounts is not justified and arbitrary. Addition on account of difference in contract receipts as per 26AS and Books of accounts - CIT(A) deleted addition - HELD THAT - On perusal of the submission made by the Ld.AR we note that the assessee has maintained the project wise details of all the clients for having executed the projects reported the turnover and profit based on percentage completion method. Further it is also noted that the assessee has furnished the reconciliation of the turnover of the clients before ld.CIT(A) wherein the AO had not accepted the explanation of the assessee in respect of 4 clients in remand report. On perusal of the statement of turnover calculation as per AS 7 for the A Y 2018-19 we find the argument of the Ld.AR as submitted the reconciliation of the Turnover along with 26AS has been carried out correctly. Therefore we are of the view that the addition made by the AO is not justified on this issue and hence dismiss the ground of the revenue by affirming the impugned order of the Ld.CIT(A) on this issue. Addition in respect of waiver of loan as income under the head profits and gains of business or profession - CIT(A) deleted addition - HELD THAT - Addition being only the principal portion of the loan being waived cannot be taxed as income under the head profits and gains of business or profession and hence cannot be subject to tax as per the provisions of section 28(iv) by treating the same as income of the assessee. The reliance made by the ld.AR upon the decision of Mahindra and Mahindra Ltd. 2018 (5) TMI 358 - SUPREME COURT wherein in respect of application of section 28(iv) which refers to nonmonetary benefit or perquisite whether convertible into money or not it was held that in the context of waiver of loan the provisions of section 28(iv) would not be applicable since the benefit derived is in the form of money. Therefore in the present case the nature of loan would be of no relevance since the interest paid on loan has been regularly claimed and allowed as expenditure and hence nature of loan cannot be disputed at this juncture and accordingly the exercise of ascertaining the purpose of loan as contended by the Revenue does not arise. Revenue appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment are:

• Whether the rejection of the books of accounts and the estimation of revenue at 8% by the Assessing Officer (AO) was justified.
• Whether the deletion of the addition of Rs. 28,92,01,373/- towards the difference between the receipts as per books of accounts and receipts as per Form 26AS was appropriate.
• Whether the waiver of the loan amount of Rs. 23,91,28,611/- should be treated as taxable income under the head "profits and gains of business or profession."

2. ISSUE-WISE DETAILED ANALYSIS

A. Rejection of Books of Accounts and Estimation of Revenue

• Relevant legal framework and precedents: Section 145 of the Income Tax Act governs the method of accounting and conditions under which the AO can reject the books of accounts. The AO must be dissatisfied with the correctness or completeness of the accounts or the method of accounting not being regularly followed.
• Court's interpretation and reasoning: The Tribunal found that the AO did not provide cogent reasons for rejecting the books of accounts. The AO accepted the turnover declared by the assessee, which contradicted the rejection of the books.
• Key evidence and findings: The assessee maintained detailed project-wise accounts and followed the percentage of completion method as per AS-7 and ICDS III. The AO's reasons for rejection were found to be arbitrary.
• Application of law to facts: The Tribunal held that the rejection of books was not justified as the AO did not demonstrate that the accounting method did not reflect true profits.
• Treatment of competing arguments: The Tribunal considered the AO's reasons for rejection and the assessee's detailed submissions and evidence, concluding that the AO's actions were arbitrary.
• Conclusions: The addition based on the estimation of profit at 8% was deleted.

B. Difference in Contract Receipts as per 26AS and Books of Accounts

• Relevant legal framework and precedents: The reconciliation of contract receipts as per books and Form 26AS is crucial for determining undisclosed income.
• Court's interpretation and reasoning: The Tribunal found that the assessee provided a detailed reconciliation of differences, which was accepted by the CIT(A) after a remand report from the AO.
• Key evidence and findings: The assessee explained discrepancies with supporting documents, and the AO accepted most explanations except for a few clients.
• Application of law to facts: The Tribunal agreed with the CIT(A) that the reconciliation provided by the assessee was satisfactory.
• Treatment of competing arguments: The Tribunal considered the AO's objections and the assessee's detailed reconciliations, siding with the latter.
• Conclusions: The addition of Rs. 28,92,01,373/- was deleted.

C. Waiver of Loan Amount

• Relevant legal framework and precedents: Section 41(1) of the Income Tax Act relates to the cessation of trading liabilities. The Supreme Court's decision in CIT v Mahindra & Mahindra Ltd. was pivotal.
• Court's interpretation and reasoning: The Tribunal found that the waiver pertained only to the principal portion of the loan, which is a financial liability, not a trading liability.
• Key evidence and findings: The loan waiver was part of a one-time settlement, and the interest was fully paid. The waiver was not taxable under Section 28(iv) as it was not a non-monetary benefit.
• Application of law to facts: The Tribunal applied the Supreme Court's ruling that waiver of principal does not attract tax under Section 28(iv) or Section 41(1).
• Treatment of competing arguments: The Tribunal dismissed the Revenue's reliance on the overruled Delhi High Court decision in Logitronics Pvt. Ltd. v CIT.
• Conclusions: The addition of Rs. 23,91,28,611/- was deleted.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: The Tribunal emphasized that the waiver of loan was only the principal amount, not a trading liability, thus not taxable under Section 41(1).
• Core principles established: The rejection of books of accounts requires cogent reasons, and the waiver of principal loan amounts is not taxable under Section 28(iv) or Section 41(1).
• Final determinations on each issue: The Tribunal upheld the CIT(A)'s decision to delete the additions related to the estimation of revenue, difference in contract receipts, and waiver of loan amount.