2017 (1) TMI 1210 - AT - Income Tax

Applicability of 44BBB(2) - rejection of books of accounts - Held that - We uphold the findings of ld. CIT(A) that the assessee fulfilled all conditions prescribed u/s 44BBB(2) of the IT Act and also has followed one of the recognized methods prescribed for determination of stage of completion of contract as prescribed in para 29 of the Accounting Standard-7 Construction Contracts as recognized by the ICAI and the Central Government. Assessee has followed correct method of accounting in terms of Section 44BBB(2) read with Section 145(1) & (2) of the IT Act. Consequently we hold that the ld. AO s action of rejecting books of accounts in terms of Section 145(3) of the IT Act and assessing income u/s 44BBB(1) of the IT Act on presumptive basis is not justified, the order of ld. CIT(A) is upheld. Our view is fortified by Delhi ITAT judgment in the case of Royal Jordanian airlines (2008 (8) TMI 392 - ITAT DELHI-A ) which after dwelling over all relevant aspects of charging and mechanical provisions, statutory mandate, and jurisprudence of regular assessment vis-a-vis presumptive assessment and catena of judicial precedents as detailed in this order. - Decided against revenue.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(3) of the Income Tax Act.
2. Applicability of Accounting Standard AS-7 to a foreign company.
3. Invocation of presumptive provisions under Section 44BBB(1) of the Income Tax Act.
4. Determination of revenue recognition method.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3) of the Income Tax Act:
The Assessing Officer (AO) rejected the assessee's books of accounts under Section 145(3) on the basis that the method of accounting followed by the assessee as per AS-7 was not correct and proper income could not be determined. The AO invoked presumptive provisions of Section 44BBB(1), estimating profits at ?232,55,33,438 and determining income at ?23,25,53,344 (10% of the estimated profits). The assessee contended that the books were duly maintained and audited as per Sections 44AA and 44AB. The CIT(A) held that the rejection of books was unjustified as the assessee fulfilled all conditions prescribed under Section 44BBB(2) and followed a recognized method of accounting.

2. Applicability of Accounting Standard AS-7 to a Foreign Company:
The AO argued that AS-7 was not applicable to the assessee, a foreign company. However, the CIT(A) clarified that as per Section 594 of the Companies Act, 1956, a foreign company with a business establishment in India must prepare its financial statements as per the Companies Act, making AS-7 applicable. The assessee followed the percentage completion method for revenue recognition, which is a recognized method under AS-7.

3. Invocation of Presumptive Provisions under Section 44BBB(1) of the Income Tax Act:
The AO's action of invoking Section 44BBB(1) was challenged by the assessee, who argued that they maintained proper books of accounts and got them audited, thus qualifying for assessment under regular provisions as per Section 44BBB(2). The CIT(A) upheld this contention, stating that the AO's action of applying presumptive provisions was not justified when the assessee met all conditions for regular assessment.

4. Determination of Revenue Recognition Method:
The AO suggested that the assessee should have followed the method of 'completion of a physical proportion of the contract work' based on milestones for payment. However, the CIT(A) noted that the assessee's method of recognizing revenue based on the proportion of contract costs incurred to the estimated total contract costs was appropriate and in line with AS-7. The CIT(A) also pointed out that the AO's suggested method would have resulted in lower revenue recognition for the year, which was not in the interest of revenue.

Conclusion:
The CIT(A) concluded that the assessee had maintained proper books of accounts, followed a recognized method of accounting, and fulfilled all conditions under Section 44BBB(2). Therefore, the rejection of books and invocation of presumptive provisions by the AO were unjustified. The CIT(A)'s decision to uphold the assessee's method of accounting and revenue recognition was supported by various judicial precedents, including the Gujarat High Court's decision in CIT vs. Advanced Construction Co. (P) Ltd., which emphasized the assessee's right to choose their method of accounting, provided it is regularly followed and compliant with statutory requirements. The appeal by the Revenue was dismissed.