2022 (4) TMI 690 - HC - Income Tax

Net profit estimation - percentage completion method for calculating the profits of the Assessee - tribunal determining the net profit @ 6.45% on the value of unsold closing stock - HELD THAT - There is merit in contention of the Assessee that there cannot be an estimate of net profit on the basis of the value of unsold closing stock . Without there being sales of the stock it would not be possible to estimate the net profit. Moreover, there has been no rejection of the books of account of the Assessee which reflects the Completed Services Contract Method of accounting consistently followed by the Assessee. This was lost sight of by the ITAT as well as the CIT (A). That this has been the consistent practice of the Appellant was easily verifiable from the returns already filed in the earlier AYs. The questions framed by this Court are answered in favour of the Assessee and against the Department by holding that the ITAT was not justified in following the percentage completion method for calculating the profit of the Assessee for the AY in question and determining the net profit @ 6.45%. The ITAT also erred in declining the Appellant Assessee an opportunity of producing its books of account. The impugned order of the ITAT and the corresponding orders of the CIT (A) and the AO on this point are hereby set aside.- Decided in favour of assessee.

Summary

Issues:
1. Justification of using the percentage completion method for calculating profits.
2. Denial of time for production of books of account.

Analysis:
1. The appellant, engaged in real estate business, contested an order by the Income Tax Appellate Tribunal (ITAT) for the Assessment Year 2015-16. The Tribunal had used the percentage completion method to determine the net profit at 6.45%. The appellant argued that without actual sales, estimating profit based on the value of unsold closing stock was unjustified. The Assessee had consistently followed the 'Completed Services Contract Method' of accounting, accepted by the Department in previous years. The Court agreed with the Assessee, emphasizing that without sales, estimating net profit was not feasible. The ITAT's decision was deemed unjustified, and the Assessee's appeal was upheld.

2. The Assessee also challenged the denial of an opportunity to produce books of account. The Assessee had submitted audited accounts, bank statements, and other relevant documents to the Income Tax Officer. Despite this, the AO estimated profit at 15% on the closing stock, leading to the subsequent appeal. The Court noted that the Assessee's accounting method had been consistently accepted by the Department, and there was no valid reason to deny the Assessee the opportunity to present books of account. Consequently, the ITAT's decision to decline the Assessee time for production of books of account was set aside.

In conclusion, the High Court ruled in favor of the Assessee, holding that the ITAT's use of the percentage completion method for profit calculation was unjustified. Additionally, the denial of an opportunity to produce books of account was deemed inappropriate. The Court set aside the impugned orders and disposed of the appeal in favor of the Assessee.