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TMI Blog2012 (6) TMI 622X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. Best judgement assessment - Estimation of Profits of the STP Units - held that:- the AO and the CIT(A) have not done the best judgment in the manner provided in section 144 of the Act. There are large number of judicial precedents in operation on the issue of 'best judgment' referred to in section 144 of the Act. In principle, the best judgment does not mean wild and unreasonable estimations. The very expression 'best judgment assessment' imply the judgment of the AO and the said judgment must be supported by the material or data gathered by him for this purpose both from internal as well as the external sources. Thus, we can not approve the 'best judgment assessment' made by the AO and sustained by the CIT(A) in the present form. Therefore, we are of the considered opinion, the AO must make 'best judgment assessment' as per the manner provided in section 144 of the Act and for this we have decided to set aside the order of the CIT(A) for this limited purpose. It goes without saying that the AO must grant reasonable opportunity of being heard to the assessee. - IT APPEAL NOs. 401& 402 (Pune) of 2007 - - - Dated:- 7-9-2011 - Sailendra Kumar Yadav, D. Karunakara R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the income to ₹ 5,41,17,010/- by filing revised return of income. During the scrutiny proceedings, AO noticed certain errors in the books of accounts with reference to the allocation of expenses to the STP units and others and thus, AO invoked the provisions of section 145 of the Act. 3. Relevant questionable parameters for the AO are given in this following table as under: Segment wise turnover and profits for the year (Rs. In crores) Domestic STP Unit Total Turnover 258.80 17.09 ₹ 275.89 Profits as per computation of income 5.41 11.95 ₹ 17.36 Percentage of profit on sales 2.09% 69.92% 6.29% Percentage of profit on cost 2.13% 232.49% 6.71% Resultantly, the AO made assessment of its income by determining the total income at ₹ 15,05,05,103/- as against the revised income of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory and idle time man-hours were not captured. Hence, the allocation of salary to the extent of this has been understated. We believe that idle time/supervisory man-hours are around 10% to 151% of the total man-hours available. Hence, it would be far to assume that the salary costs attributable to STP1 are understated to the extent of 15% and what should have got charged to STP1 was around 54% of the same, which translates approximately to ₹ 38 lacs. 2.3.3. It was thus admitted that salary cost to the extent of 15% was not allocated to STP units which amounted to approximately to ₹ 38 lacs. Although, vide order sheet entry dt.17-2-2004, Shri Sowni had admitted that around 75% of the total salary cost would be a fair allocation to the STP units-difference working out to ₹ 1.36 crores. 2.4 Wrong figures of man-hours taken: 2.4.1. The extract of data from Primavera Software for F.Y.2000-01 submitted by the assessee is as under. Total CEE employees (Incl. Contracts) 169 Total available MH for per week 373490 Billable MH for exports ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 crores includes a sum of ₹ 54 lacs by way of Debit Note . Vide order sheet entry dt.4-3-2004, it was explained by Shri Sowani that this represented the discount given by the travel agent on the foreign travel undertaken by the employees of the company, which was fully reimbursed by Honeywell Inc. At the original bill price of the travel agent. However, by letter dt.10-3-204, it as submitted as under. In our submission dt.26-2-2004, we had stated that the amount of ₹ 54 lacs is received towards the reimbursement of expenses and included in the total revenue. As explained to you, the debt notes for reimbursements are raised by us completion of individual tours as of 31st arch every year. There are unfinished tours for which debit notes are not raised as a matter of consistent accounting practice. The company treats the expenditure as costs incurred and does not classify such cots as pre-paid expenses. In the subsequent year when the debt notes are raised, the income gets accounted. This phenomena does not result in any excess income/costs in any particular year as this happens every year and the same practice is followed consistently every year. 2.6.2. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated as the number of hours taken for allocation were based on the offshore and on-site work only. Vide order sheet entry dt.11-3-2004, Shri Sowani accepted that some salary/manpower cost should further be allocated to the STP Units against the Sale through Physical , the quantification of which was not possible at this stage. It is similarly seen that the manpower costs relating to the NODCO sales of ₹ 1.79 crores and others ₹ 42 lacs, is similarly not been debited/allocated in the STP Profit and Loss account. 2.9 Discrepancy between Annual Reports to STP1 and P L account: As stated earlier, the assessee company in the Compensation revision Proposal submitted to Honeywell Inc. USA had stated the manpower costs incurred during F.Y.2001-02 to be 28.62% of the turnover, according to which, for the current turnover of 17.10 crores, the manpower costs should be approximately ₹ 4.89 crores. However, the manpower costs shown in the Profit and Loss account, are at only ₹ 2.96 crores. In this connection, the assessee was asked to provide details of the information/periodical reports submitted by them to the Software Technology Parks of India, the gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer costs and no DTA Sales: It is also noticed that the total Salaries and Wages shown in the Annexure II to the Profit and Loss account of the STP units, come to ₹ 4.65 cr. Out of this only 45.7% has been allocated o the SATP units and remaining salary expenses have been allocated to the domestic business of he assessee company. It was stated by Shri Sowani that such an allocation has never been done n the past nor in future, after the A.Y.2001-02. In this connection, it is also seen that the STP units are required to be Custom Bonded and he sales made from the STP units in the domestic tariff area should be reported Software Technology parks of India. In the current F.Y. the assessee company has not reported any domestic tariff area sales to the Software technology parks of India. 2.11. Admission by the assessee company: 2.11.1. From all the above, it is seen that the assessee has admitted the following errors/mistakes with respect to the manpower costs allocated to the STP units: Sn Particulars Amount(Rs.) 1. Non allocation and Idle time and supervisory costs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... billable man hours; (iii) wrong allocation Hi Spec salaries; (iv) Learning Development costs; (v) allocation of manpower costs towards sale through physical (vi) non consideration of the reimbursement of the expenses to the extent of ₹ 54 lakhs etc. Thus, as per the AO, failure to make proper debit of the correct expenditure, the profits of the STP units are inflated. In response to the same, the assessee admitted the same and submitted that these mistakes are inadvertent and due to software deficiencies. Assessee made written submission in this regard as detailed in para 4.18 and 4.19 of the impugned order. These are extracted as under for completeness of the order. They are: 4.18 Pursuant to the enquiry made by me regarding the manner in which the assessing officer came to ascertain the exact amounts of mistakes in the allocation of expenses and the causative factors thereof, following submissions have been filed before me in the course of appellate proceedings. a. Non-allocation of idle tie/supervisory costs (page 5 of the assessment order, para 2.3) In the Profit Loss account of the STP unit, the salary cost was charged off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -STP unit came to be clubbed together. During the year under consideration, the Company had also provided high end services to its customers through Hi Spec division. The employees for this division were identified separately and their salary of ₹ 31.57 lacs was considered in total salary correctly. However, while applying the proportion of 45.7%, the same was erroneously applied to the Hi Spec division's salaries of ₹ 31.57 which resulted into understatement of Hi Spec salaries by 54.3% (i.e. 100% less 45.7%) which resulted into lower cost allocation off ₹ 17.14 lacs (i.e.311.57 lacs 54.3%) d. Learning Development costs (page 8 of the assessment order, para 2.7) Total learning and development costs during the year under consideration were ₹ 556.57 lacs, which comprises of ( i ) Foreign Trainings Expenses Rs.3.39 lacs ( ii ) Inland Training Expenses Rs.53.18 lacs As all training facilities/programs area arranged by one of the support departments, i.e. Human Resources and Administration, the accounting for the same does not happen sepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the reimbursement of travel claims, as income of the undertaking in A Y 2001-02 though the same pertained to A Y 2000-01; (c) There were errors in the returns filed with the STP authorities, as stated by the AO; (d) The profit/costs percentage in the compensation revision proposal for F Y 2001-02 relevant to A Y 2002-03 was 40% as against profit ratio of 232.49% in A Y 2001-02. Finally, the AO invoked the provisions of section 145 of the Act. Aggrieved with the above, the assessee raised this issue before the CIT(A) and made various submissions. The case of the assessee in their own words on this issue are enlisted as under: (Para 4.18 Page 11/17, Para 4.19/Pg 13 of CIT(A) order are relevant. (1) The errors were caused due to inadvertent errors due to sheer human fallibilities in applying the allocation principles. (2) Regarding travel costs reimbursement of ₹ 54 lacs, it was urged that there was no dispute about the eligibility of exemption thereof; the only issue was that the though the claim was increased to that extent in A Y 2001-02, there was corresponding understatement of claim in A Y 2000-01. In other words, it was timing difference only. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Honourable Members in the course of the hearing, written clarifications dated 7th July, 2011 have been filed and placed on the records. (4) The nature and extent of errors are overwhelmingly suggestive of human fallibilities and the probability of inadvertence combined with the absence of allegation of fudging of accounts by the lower authorities should extricate the case of the assessee from the provisions of Section 145(3) of the Act. (5) The lower authorities have not refuted the correctness of the clarifications submitted in respect of STP returns and other related issues. (6) The AO did not find any flaw, in the course of remand proceedings, regarding the clarifications, explanations and reconciliation provided with reference to the alleged dichotomy between the profits/costs percentage as calculated in the compensation revision proposal for F Y 2001-02 vis-a-vis actual numbers for that year relevant to A Y 2002-03, as noted by the CIT (A). (7) The appellant is a public limited company quoted on the stock exchange whose accounts are audited by statutory auditors. The company has drawn up its accounts by adopting well recognised method of accountin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirmed by the Supreme Court. In other words, omission to enter the sales invoices of just 19 nineteen days led to the rejection of the books of account. Therefore, the plea of the assessee that the extent and effect of the errors were trivial which did not warrant rejection of the books of account was not acceptable; 5) The details (of reimbursements) were never filed before the A.O. during the course of assessment proceedings for A.Y. 2001-02 which is the lead year of investigation on the issue; 6) In the remand report (page 29 to 36 of the paper book filed by the assessee), the A.O submitted that the same cannot be treated as profit derived by the undertaking on which exemption/deduction u/s 10A of I.T.; 7) It is inconceivable that such a proposal was prepared and sent by the marketing department without the concurrence of account department in a reputed organization; 8) The learned CIT(A) has accepted the details filed before him on the issue but does not seem to have verified and adjudicated upon the issue; 9) The learned counsel of the assessee has also stated that since learned A.O. has not commented adversely in respect of reconciliation dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were rejected after finding a number of defects in allocation of various expenses which were intended to artificially inflate the exempted profit of the undertaking u/s 10A of the Act. The assessee had no option but to accept the defects. Once the defects in allocation to the tune of ₹ 1.20 crores were noticed and admitted by the assessee the books of accounts automatically lost its sanctity. The learned counsel of the assessee states that the defects represented only 6% of total expenses and therefore, there was no reason for rejection of the books of accounts. He further submitted that the errors were unintended and it was not the case of the A.O that accounts were fudged or manipulated. He also submitted that these were arithmetical mistakes being of inadvertent nature. The submissions of the learned counsel are bereft of merit. The books of accounts of the assessee were audited and despite resource crunch and paucity of time the A.O was able to detect a number of defects in allocation of various expenses. The argument that the defect represented only 6 % of total amount and therefore trivial in nature is also needs to be rejected. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys only. In percentage term 19 days works out at 5.5 % of total 365 days in a year. The Hon'ble Apex court also awarded cost against the assessee. In fact the above quoted decision supports the case of the department. Therefore, It is submitted that the there is no merit in the ground taken by the assessee. Strong reliance is also placed upon the order of A.O/CIT(A). Submitted ....... 11. Further, during the time of rebuttal, Ld assessee's counsel filed the following issues wise replies to the issues raised by the DR in his arguments and the same are produced as under. 1. The errors of allocation of expenses were not trivial; rather, they were horrible. Replies : The nature and effect of the errors should lead any authority to a fair and reasonable conclusion that they were caused by human fallibilities. Preponderance of probability weighs in favour of this conclusion rather than the proposition canvassed by the learned DR. It is submitted that the appellant is a public limited company quoted on the stock exchange whose accounts are audited by statutory auditors. The company has drawn up its accounts by adopting well recognised method of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f just 19 nineteen days led to the rejection of the books of account. Therefore, the plea of the assessee that the extent and effect of the errors were trivial which did not warrant rejection of the books of account was not acceptable. Replies a. In the case decided by the Supreme Court, the flying squad of the sales tax department inspected the business premises of the assessee and found that sales invoices for a period of 19 days were not entered in the books of account. b. The assessee, in that case, initially protested that the bill books did not belong to him but later admitted that that the sale invoices contained in the said bill books were not entered in the accounts. c. Based on above, the authorities reached an uncontroverted finding that the assessee in that case had dealings outside the accounts and therefore, the accounts were rejected and finally, the Supreme Court confirmed this finding. d. It is respectfully submitted that the facts of the case decided by the Supreme Court are materially distinct from the facts of the case before the Honourable Tribunal. By no stretch of imagination, the assessee could have contended, in that cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause specifically provides that the assessee shall be reimbursed the expenses, at actual, incurred or arising out of the engineering services. c. Without prejudice, the reimbursement of expenses is not of income character at all since it represents the recoupment of actual costs which reduce the expenses that are charged to the profit and loss account. The effect on the profits will be neutral in either case. Reliance in this behalf is placed on the decision of the Delhi High Court in the case of Perot Systems- 2010-TIOL- 672-HC-DEL-IT, a copy of which is enclosed herewith. (7) It is inconceivable that such a proposal was prepared and sent by the marketing department without the concurrence of account department in a reputed organization. Replies At the very initial stage before the AO the then CFO of the assessee company had made submission in writing that the compensation revision proposal was not validated or confirmed by the accounts department. Please see para 2.12.2 on page 11 of the assessment order. (8) The learned CIT(A) has accepted the details filed before him on the issue but does not seem to have verified and adjudicated upon the issue. Repl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) has also discussed the comparable two cases and has come to the finding that that the AO has already given heavy discount after discussing comparable cases and arriving at the profit of cost plus 50% in the Assessment Order. The concluding remark of the Ld. CIT(A) (last line on page 27) is worth mentioning which reads as under: It is vitally important to consider that the Assessing officer has already given sufficient set off for reasons of high profit by restricting the profits @ 50% as against 20-25% in other comparable cases which is more than enough to take care of any reason given by assessee in general for earning higher profits. Such a heavy discount having already allowed by the Assessing Officer, in my opinion no further relief is deserved by the Appellant on this score. Therefore, while deciding the issue besides examining the issue of reimbursable expenses finding on the issue of two comparable cases which also happen to be the basis for arriving at the profit margin of cost plus 50% by the AO and also approved by the learned CIT(A) is a must. Replies (a) First, the concluding part of the contentions advanced by the learned DR need to be dealt with. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that it is not a fit case for invoking of the said provisions and therefore, books should not have been rejected in this case considering the triviality of the errors etc. Thus, from the assessee's point of view, the AO invalidly assumed jurisdiction u/s 145 of the Act and CIT(A) erred in confirming the same. On the other hand, the case of the revenue is that the books are not only incomplete but also inaccurate and thus the correct profits of the assessee/undertaking cannot be computed arrived at with the help of the books, which are full of mistakes. Therefore, it is a fit case for rejection u/s 145 of the Act. We need to sort out this deadlock and for this purpose, we have travelled to elucidate the scope of the provisions of section 145 of the Act. The amended provisions apply to this case and the said amended provisions read as under: 13. Section 145 relating to Method of accounting'. Section 145 as applicable to AY 91-92 reads as under : (1) Income chargeable under the head Profits and gains of business or profession or Income from other sources shall be subject to the provisions of sub-section (2), be computed in accordance with either cash or merc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trading or any other day-to-day activities of the business. For this order, there is no need for explaining much on the definition of books of accounts as the present dispute in our opinion, relates to only on the completeness or correctness aspects. Therefore, we restrict the present discussion only on the meanings of expressions 'correctness' and completeness of assessee's accounts. C. Regarding the completeness of accounts, in our opinion, it not only refers to the list of the books of accounts to be maintained by the assessee as per the statute, but also to all the accounting entries for all the transaction done during the previous year. In other words, the failure of the assessee to maintain relevant registers or any other books described in the list with all the transactions properly recorded in accordance with the set principles of accounting, makes the accounts of the assessee incomplete. Regarding the correctness of the accounts, in our opinion, it refers to the quality or accuracy or reliability of the accounts maintained by the assessee and it covers the reconcilable mistakes or errors in accounts. Thus, the completeness refers to list of books of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crutiny u/s 143(2) of the Act? The assessee would have gone with the claim of higher and inflated exemptions u/s 10A of the Act. In alternative, if the present falls in the category of compulsory scrutiny, the assessee still guilty of not maintaining the books accurately. It is the law that the books can be rejected either for default of incomplete books or for inaccurate books. In our opinion, the triviality of the default is no excuse as per the amended provisions of section 145 of the Act. Further, the default, which is quantified to be around ₹ 1.24 cr in our opinion, cannot described trivial in this case as it is the case of exemption u/s 10A of the Act and the assessee is expected to be extremely responsible in matters of maintenance of the books of such exempt undertakings. Without going into the reasons, whether bona fide or otherwise, we are of the considered opinion, the AO has rightly rejected the books as per the provisions of section 145(3) of the Act. Accordingly the relevant grounds of the appeal are dismissed. Issue of Estimation of Profits of the STP Units 15. In the preceding paragraphs, we have upheld the AO's decision in rejecting the books o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit on cost 2.13% 232.49% 6.71% Table showing profit margin @ 40% on the cost vide the CRP Particulars Costs -CRP Cost -P L A/c for FY 00-01 Sale 100% 100% Total cost 74.53% 30.04% Profit Margin @ 40% on cost 28.556% 69.96% Total 100% 100% 16. AO asked the assessee to justify the above claims of the assessee and proposal to adopt the profit margins as per the CRP. In response, assessee contended that that the (i) the figures of CRP are supplied by the Marketing Department unconfirmed by the Finance Accounts Department and therefore, they are not correct and credible figures; and (ii) CRP is meant for FY 2001-02 and not for the year under consideration. Further, the AO asked the assessee to confirm the cost analysis leading to 232.49% margin of the STP units. In response, the assessee filed the following response, i.e. we confirm and reiter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntage point variation in favour of the assessee. This is on the premise of increase in cost over successive years. 2.12.9 Thus the exemption u/s 10A is allowable at 5,69,99,894/- as against ₹ 11,95,79,294/- claimed in the return of income. The difference, being ₹ 6,25,79,400/- is disallowed and added to the total income returned. Thus, the AO made addition of ₹ 6,25,79,400/- with which the assessee is aggrieved and filed an appeal before the CIT(A). 18. Assessee submitted that the profit margins of domestic and STP segments are incomparable as they are of different business activities and the turnovers. Further, the assessee argued that the AO failed to find any specific conceptual defects in the method adopted by the assessee in computing the profits of the STP units. Assessee further mentioned that the mistakes if any in allocation of expenditure amounts to only ₹ 1.24 crores which is negligible. Further, the assessee found fault with the AO decision to rely on the so called comparable i.e. Wipro and Geometric Software companies and attempted to demonstrate that they are incomparable Para 4.44 to 4.48 of the impugned order are relevant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me conclusively. Finally, the CIT(A) held that the AO is reasonable in granting relief of 10% over and above 40% proposed in the CRP of the assessee. Such huge discount already allowed by the AO, the CIT(A) refused to grant further relief to the assessee and at the end of the first appellate proceedings, the CIT(A) confirmed the disallowance of ₹ 6,25,79,400/-. Aggrieved with the same, the assessee is in the appeal before us. 21. During the proceedings before us, Ld counsel for the assessee elaborately detailed all the arguments that were taken before the lower authorities and prayed that the book results must be accepted without any amendment. The written submission on the issue of estimation is reproduced as under: Estimation of Income Exempt Under Section 10a 1) ** ** ** (2) The submissions, in this behalf, are as under: (a) The profit ratio of 40% of F Y 2001-02 stated in the compensation revision proposal is reconciled with the actual profits at 195% of costs for that year as per the finding of the CIT(A) in paras 4.31 to 4.39 on pages 17 to 21 of the appellate order a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se facts have been stated on page 10 of the appellate order. Second, it is demonstrably untenable to invoke the provisions of Section 10A(7) in the facts of the assessee's case since it will be inconceivable to allege the motive to a shareholder, holding 40% stake in the capital, of transferring excessive profits to the investee company from which 60% will be for the benefit of the non-associate shareholders. Revised estimate of the profitability based on the reconciled ratio of profits in the compensation revision proposal: (a) If the estimate of the profits, as per AO's stand, is to be reworked based on the reconciled profitability of the compensation revision proposal, the result will be as under. (b) Page 28 of the paper book may be referred to where the profits/costs ratio of 40%, as per the compensation revision proposal, has been reconciled to the actual ratio of 195% (pre-correction ratio), relating to A Y 2002-03, after considering the reimbursement of expenses and the actual billing rate. However, it bears notice that the costs considered in the said reconciliation are before the correction of allocation of expenses considered in the accounts of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filled by the assessee. In fact due to very same reasons reimbursement of expenses was not considered by the assessee while sending the revision proposal where profit was worked out at 40 % plus cost. It is inconceivable that such a proposal was prepared and sent by the marketing department without the concurrence of account department in a reputed organization. Therefore, the theory of debit notes over and above what has been considered by the A.O is nothing but an afterthought and needs to be rejected. The learned CIT (A) has accepted the details filed before him on the issue but does not seem to have verified and adjudicated upon the issue. Had he verified and accepted the reconciliation he would have also accepted the computation submitted by the assessee in respect of profit margin. Since CIT (A) has dismissed the appeal on merit too, it can be safely concluded that the Learned CIT (A) has rejected the reconciliation in respect of Profit Margin submitted by the assessee. The learned counsel of the assessee has also stated that since learned A.O has not commented adversely in respect of reconciliation during the course of reassessment proceedings for A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... besides examining the issue of reimbursable expenses finding on the issue of two comparable cases which also happen to be the basis for arriving at the profit margin of cost plus 50 % by the A.O and also approved by the learned CIT (A) is a must. Since reimbursements are claimed to be based on actual, there cannot be profit element and in order to arrive at the real profit of the undertaking eligible for benefit under section 10 A of the I.T.Act , the same needs to be excluded. Without prejudice to the above even if there is any profit element the same cannot be said to be profit derived by the undertaking and still needs to be excluded for the purpose of benefit u/s 10A. Profit margin @195% plus cost as claimed by the assessee on page 28 of paper book filed by the assessee and which is being requested to be considered by the learned counsel of the assessee is too high to be adopted in assessee's case in view of comparative cases discussed by the A.O as well as revision proposal sent by the assessee itself. Strong reliance is placed on the order of A.O as well as CIT (A) on the issue. Therefore, in view of the above submissions and total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on COST @ 50% is reasonable. This is against the 40% as per the CRP made by the assessee during the AY 2002-03. Further, the AO relies on the comparable cases of Wipro and Geometric Software companies, of course, the CIT(A) summarily rejected without proper analysis or reasoning. Per contra, the case of the assessee is that the said comparable cases are in fact not comparable ones considering the services, product lines etc. Further, as per the assessee, the profit % of 232.49 has to be adjusted downwards, if the 'reimbursement of expenditure' is considered. In that case, the gap is reduced marginally. Considering the above divergent positions, we have perused the order of the CIT(A) and find that the same has not met various arguments of the assessee. Even during the proceedings before us, the parties have failed to demonstrate various aspect relating to the said reimbursements and its impact on the profit margin of ₹ 232.49%. Thus, so far as the 'reimbursed expenditure' is concerned, we find there is lack of factual clarity. It is not clear why only ₹ 54 lakhs were mentioned n the books initially, which was subsequently revised to ₹ 2.29 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In adopting the figure of 50% over the cost, neither of the revenue authorities has giving reason for granting the leverage of 10% over the 40% mentioned in the CRP in the best judgment assessment. What is the justification for the said 10% margin and for what it is given to the assessee? Will this margin granted by the AO quantitatively accounts for (i) the defects or inaccuracies found in the books or (ii) set off claims of 'reimbursed expenditure' of the assessee? Why this 10% of additional relief must be granted to the assessee, when AO has resorted to the cost plus profit principle? There is no convincing reply from the revenue before us. In alternative, the orders of the revenue are also deficient on the reasoning on these queries. Whether the principles of best judgment permit the AO grant such unjustified reliefs ignoring the principles of consistency? In that case, why the figures of the comparable cases ei Wipro and Geometric Software companies, were not considered after making reasonable adjustments based on the sound logic? Therefore, in our opinion, the AO and the CIT(A) have not done the best judgment in the manner provided in section 144 of the Act. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, Ld Counsel for the assessee demonstrated that this addition is confirmed by the CIT(A) for the first time ignoring the fact of actuarial-basis-centric creation of the provision and the ruling Apex Court's judgment in the case of Bharat Earth Movers Ltd. v. CIT [2000] 112 Taxman 61/245 ITR 428 SC. On the other hand, Ld DR relied on the order of the CIT(A). We have heard the parties on this issue and perused the relevant material on record. It is a fact that the assessee's provision is created based on the actual method. The same is not disputed by the AO. AO and the CIT(A) have routinely distinguished the said apex court's judgment. We have perused the said judgment and the apex court has on facts dealt with the issue of 'leave encashment' and upheld the case of the assessee and the following held portion is extracted as under. The law is settled. If the business liability has definitely arisen during the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a later date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X
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