2012 (12) TMI 362 - AT - Income Tax

Compute profit u/s 44AE by rejecting the books u/s 145 - Whether AO applies presumptive tax rate in case where books are maintained by assessee - Assessee being builder regularly follows project completion method and book revenue only when possession of the constructed building is given - Same was accepted by revenue in earlier years AO reject the books in view that revenue is to be recognized in the year in which it has been earned and the same cannot be postponed on the ground of following projection completion method - Held that - As per AS-9 which gives the option of proportionate completion method and completed service contract method, out of which one is following by the assessee. AO rejected the books without any justification. Whereas project completion method followed by the assessee, and the entire profit of the project has been offered to tax by the assessee. Appeal decided in favour of assessee.

Summary

Issues:
Common issue in both years: Estimated profit taken at 8% on total cost instead of project completion method.

Analysis:
1. The assessee consistently followed the project completion method for determining profit from a project. The Assessing Officer (AO) observed a change in accounting standards and estimated profit at 8% of total cost, alleging that the assessee was creating a loss to revenue by following the work completion method.

2. The CIT (A) upheld the AO's decision, stating it was correct to bring the deemed profit to tax in the current years rather than in the assessment year 2007-2008, considering it as tax liability postponement.

3. The assessee contended that as a builder, they followed Accounting Standard AS-9, providing options for proportionate completion method and completed service contract method. The AR argued against the estimation of income at 8%, citing that the books were maintained correctly, and the estimation was not legally permissible.

4. The ITAT analyzed the situation, emphasizing that the AO did not reject the books or find them incorrect, making the estimation of income at 8% impermissible. Referring to relevant case laws, the ITAT concluded that the chosen method of accounting must be accepted unless it does not reflect true income. The ITAT rejected the revenue authorities' approach of substituting the accounting method and estimation.

5. Ultimately, the ITAT set aside the CIT (A) order and directed the AO to delete the additions made in both years, accepting the results declared by the assessee. The appeals were allowed, ruling in favor of the assessee.