2013 (10) TMI 274 - AT - Income Tax

Rejection of books of accounts maintained u/s 145 of the Income tax act Held that - No specific defects has been pointed out by the Assessing Officer in the books of accounts and since the Assessee has been consistently following the Project Completion Method of accounting in the year under appeal and in earlier years and on the basis of the same, the Assessee has been allowed deduction under 80IB in the past in the assessment framed u/s. 143(3) - A.O. was not justified in rejecting the books of accounts - Further even the estimated an addition of Rs. 8 lakhs upheld by CIT(A) is not supported by any specific finding of CIT(A) or material on record - No rejection of books is called for year under appeal Reliance has been placed upon the judgment of the Hon ble Gujarat High Court in the case of CIT vs Symphony Comforts System Ltd. 2013 (10) TMI 258 - GUJARAT HIGH COURT - Decided against the Revenue.

Summary

Issues:
Appeal by Revenue against CIT(A) order for A.Y. 2009-10; Grounds of appeal by Revenue and Assessee; Rejection of accounts by Assessing Officer; Dispute on gross profit calculation; Percentage Completion Method followed by Assessee; Consideration of work in progress (WIP) profits; Correct method for calculating gross profit; CIT(A) decision on rejection of accounts and gross profit addition; Arguments before ITAT; ITAT decision on rejection of books of accounts; Reference to Guj. High Court decision; Final decision of ITAT.

Analysis:

1. Background and Appeal:
The case involves an appeal by the Revenue and a Cross-Objection (C.O.) by the Assessee against the CIT(A) order for the Assessment Year (A.Y.) 2009-10. The Revenue challenged the CIT(A)'s decision on the calculation of gross profit, while the Assessee disputed the rejection of accounts by the Assessing Officer.

2. Rejection of Accounts and Gross Profit Dispute:
The Assessing Officer rejected the Assessee's books of accounts, alleging failure to produce necessary records for income computation. The dispute primarily centered around the calculation of gross profit, with the Assessing Officer determining a higher profit margin than what the Assessee had reported.

3. Percentage Completion Method and Work in Progress Profits:
The Assessee claimed to follow the Percentage Completion Method for accounting, including estimated profits in the Work in Progress (WIP). The CIT(A) noted that the Assessee's gross profit ratio for the current year was higher than in previous years, indicating inconsistencies in profit estimation.

4. CIT(A) Decision and Gross Profit Addition:
The CIT(A) upheld the rejection of accounts due to inaccuracies in profit estimation but deemed an addition of Rs. 8 lakhs as reasonable. The CIT(A) emphasized the need for a holistic view on revenue recognition and profit margins.

5. Arguments Before ITAT and Decision:
During the ITAT proceedings, the Revenue relied on the Assessing Officer's order, while the Assessee highlighted consistent accounting practices and previous deductions under Section 80IB. The ITAT, considering the lack of specific defects in the Assessee's accounts, dismissed the Revenue's appeal and allowed the Assessee's C.O.

6. Reference to Guj. High Court Decision:
The ITAT referred to a decision by the Gujarat High Court, emphasizing that rejection of book results and enhancement of gross profit rate require specific defects in accounting maintenance, which were absent in this case.

7. Final ITAT Decision:
Based on the totality of facts and the Guj. High Court decision, the ITAT ruled in favor of the Assessee, dismissing the Revenue's appeal and allowing the Assessee's C.O. The ITAT concluded that the rejection of the Assessee's books of accounts was unwarranted.

Overall, the ITAT's detailed analysis focused on the accuracy of profit estimation, adherence to accounting methods, and the absence of specific defects in the Assessee's accounts, leading to the dismissal of the Revenue's appeal and the allowance of the Assessee's Cross-Objection.