2017 (5) TMI 1505 - HC - Income Tax

Tribunal Rules in Favor of Assessee on Accounting Method Dispute

The Tribunal held that the rejection of the assessee's books of accounts under Section 145(3) of the IT Act was unjustified. It found that the assessee ... Rejection of books of accounts - non presenting true and correct picture - Held that:- Merely because of non maintenance of a detailed qualitative and quantitative register alone, the same could not be a valid reason to reach a finding that books of account do not present true and complete picture of accounts and financial transactions. The finding by the assessing authority being perverse is, therefore, set aside. Invoking provisions of section 145 - non verification of some of the vouchers relating to payment in respect of direct expenses - Held that:- The perusal of the impugned order reveals that this was only a prima facie view which the assessing authority entertained before issuing a show cause notice to the assessee for rejecting its accounts by invoking provisions of section 145(3) of the Act. He has not been able to point out as to which of these payments in respect of direct expenses could not be verified by him nor the Assessing authority is shown to have required the assessee to get payment of any specific amount of direct expenses verified. Merely for saying it could not be taken a lacuna in the books of account of the assessee and take the same as a reason for rejecting the books of account that were maintained by assessee in regular course of its business. Search proceedings revealed incriminating documents which contained nothings of receipt of cash 'out of books' by the members of Unique Group of which the assessee is an important member - Held that:- There is also a feeble observation inthe orders of the authorities below for rejecting the accounts that in the trade of real estates 'notorious trade practices' are prevailing. The Ld. Counsel for the assessee has placed reliance on the judgment by Hon'ble Apex Court in the case of Lalchand Bhagat Ambica Ram vs. CIT (1959 (5) TMI 12 - SUPREME Court) in which the practice of making additions in the assessment on mere suspicions and surmises or by taking note of the 'notorious trade practices' prevailing in trade circles has been disapproved. Having considered the aforesaid view, the finding of 'on-money transactions' in the appellant's case by the authorities below is found without any basis and found perverse on facts. It, therefore, could not be a reason for rejecting the books of account maintained by the assessee in regular course of business. Assessee has not followed Accounting Standards 9 & 7 which tantamount to not following Accounting Standard-1 as prescribed under section 145(2) - Held that:- Completed contract method followed by the appellant, therefore, could not be faulted with by the revenue and the assumptions made by the Assessing Officer that by not following AS-9 & 7 the same tantamount to not following prescribed AS1 under section 145(2) of the Act are found misplaced, unnecessary and uncalled for besides being contrary to principles of interpretation of the statutory provisions. The same, therefore, could not be taken a valid basis for change of method regularly employed by the appellant. The Income-tax Authority, therefore, has no option or jurisdiction to meddle in the matter either by directing the assessee to maintain its account in a particular manner or adopting a different method for valuing work-inprogress. It also cannot recompute income by adopting any method other than that regularly employed by the assesseeappellant in a case like this nor make the same as basis to reject its accounts. Issues Involved:1. Rejection of books of accounts under Section 145(3) of the IT Act.2. Application of 'Percentage Completion Method' versus 'Project Completion Method'.3. Acceptance of 'on-money' and specific seized documents.Detailed Analysis:Issue 1: Rejection of Books of Accounts under Section 145(3) of the IT ActThe Tribunal held that the Assessing Officer (AO) and CIT(A) erred in rejecting the books of accounts of the assessee under Section 145(3) of the IT Act. The Tribunal noted that the assessee maintained complete books of accounts, duly audited by a Chartered Accountant, and consistently followed the Project Completion Method. The AO's rejection was based on the non-maintenance of a detailed qualitative and quantitative stock register and non-verification of some vouchers. However, the Tribunal found that the assessee kept both quantitative and qualitative details of material purchased, and all expenses were charged to project/work-in-progress and directly taken to the balance sheet. The Tribunal emphasized that the AO did not point out any defect in the valuation of project/work-in-progress and that the accounts were found duly audited with no adverse comments. The Tribunal cited several judgments, including the Supreme Court's decision in the case of S.N. Namasivayam Chettiar vs. CIT, to support its conclusion that the absence of a stock register alone could not justify the rejection of books of accounts. The Tribunal also relied on the decision of the Gujarat High Court in Jaytick Intermediates (P.) Ltd. vs. ACIT, which held that not maintaining a day-to-day stock register is not a ground to reject the books of accounts.Issue 2: Application of 'Percentage Completion Method' versus 'Project Completion Method'The Tribunal rejected the AO's application of the Percentage Completion Method, noting that the assessee consistently followed the Project Completion Method, which is a recognized method for real estate developers. The Tribunal cited the Supreme Court's decision in CIT vs. Bilahari Investment (P) Ltd., which held that both the Project Completion Method and the Percentage Completion Method are recognized methods of accounting, and the choice of method lies with the assessee. The Tribunal also referred to the Delhi High Court's decision in CIT vs. Manish Buildwell Pvt. Ltd., which emphasized that the Project Completion Method is a recognized method for real estate developers and that the AO cannot change the method of accounting without just and reasonable cause. The Tribunal concluded that the AO's change of method was based on irrelevant considerations and that the assessee's method of accounting should be accepted.Issue 3: Acceptance of 'On-Money' and Specific Seized DocumentsThe Tribunal found that the AO's reliance on seized documents indicating receipt of 'on-money' was unfounded. The Tribunal noted that the statements given by the partners of the assessee firm during the search were related to their independent business transactions and not the joint business with the assessee. The Tribunal emphasized that the separation of the two groups occurred in 2006, prior to the date of the search, and that the 'on-money' received by the partners was disclosed and applied to their independent business transactions. The Tribunal relied on the Gujarat High Court's decision in CIT vs. Amar Corporation, which held that addition on account of 'on-money' should be based on specific evidence and not on guesswork or extrapolation. The Tribunal concluded that the AO's rejection of the books of accounts based on 'on-money' transactions was without basis and perverse on facts.Conclusion:The Tribunal's detailed analysis and reliance on various judicial precedents led to the conclusion that the rejection of the assessee's books of accounts under Section 145(3) was unjustified, the Project Completion Method adopted by the assessee was proper, and the AO's reliance on 'on-money' transactions was unfounded. The Tribunal's findings were upheld by the High Court, which dismissed the Department's appeals and answered all issues in favor of the assessee.