2012 (6) TMI 622 - AT - Income Tax

Tribunal decision on accounts accuracy, leave encashment provision, and interest applicability

Honeywell Automation India Ltd. Versus Deputy Commissioner of Income-tax, Circle 7, Pune

The Tribunal partly allowed the appeals by upholding the rejection of books of accounts due to substantial inaccuracies but remanded the issue of profit ... Rejection of books of accounts - estimation of deduction u/s 10A - there is undisputed and excess mistakes in the accounts. - It is a fact the said inaccuracy amounts to ₹ 124.04 lakhs and works out to nearly 6% of the profits and the assessee describes the same as trivial and ignorable. Stand of revenue in this regard is that the AO has only to establish the inaccuracy in the books of accounts maintained by the assessee and the triviality of otherwise is not the issue. - held that:- 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. 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. Issues Involved:1. Rejection of books of accounts and estimation of profits under Section 10A.2. Disallowance of provisions towards leave encashment.3. Applicability of interest under Section 234D.Issue-wise Detailed Analysis:1. Rejection of Books of Accounts and Estimation of Profits under Section 10A:The assessee, a listed company, claimed exemption under Section 10A for its Software Technology Parks (STP) units. The AO rejected the books of accounts citing discrepancies in the allocation of expenses, leading to inflated profits for the STP units. The discrepancies included non-allocation of idle time/supervisory costs, wrong adoption of billable man-hours, wrong allocation of Hi Spec salaries, and non-allocation of learning and development costs.The AO compared the profit margins of domestic and STP units, finding the latter exorbitantly high. The AO invoked Section 145 due to these inaccuracies and estimated the profits of the STP units at 50% of the cost, significantly lower than the assessee's claim. The CIT(A) upheld this decision, rejecting the assessee's argument that the errors were inadvertent and due to software deficiencies.The Tribunal agreed with the AO and CIT(A) on rejecting the books of accounts, citing substantial inaccuracies. However, it found the AO's estimation of profits lacking clarity, especially concerning the treatment of reimbursed expenses. The Tribunal remanded the issue back to the AO for a detailed examination of the nature of these reimbursements and their impact on the profit margins.2. Disallowance of Provisions Towards Leave Encashment:The assessee created a provision for leave encashment based on an actuarial basis, which the AO disallowed, ignoring the fact that the CIT(A) had allowed such claims in earlier years. The CIT(A) mechanically confirmed the disallowance.The Tribunal reversed the decisions of the AO and CIT(A), citing the Supreme Court's judgment in Bharat Earth Movers Ltd. v. CIT, which upheld the creation of provisions for leave encashment based on actuarial estimates. The Tribunal allowed the assessee's claim, emphasizing that the liability was certain and capable of being estimated with reasonable certainty.3. Applicability of Interest under Section 234D:The AO charged interest under Section 234D for the period beginning from 1.6.2003. The assessee contended that the provisions were applicable prospectively from AY 2004-05.The Tribunal referred to the Special Bench decision in ITO v. Ekta Promoters, which held that Section 234D is applicable from AY 2004-05 and not retrospectively. Consequently, the Tribunal ruled that the interest could not be charged for AYs 2001-02 and 2002-03, granting relief to the assessee.Conclusion:The Tribunal partly allowed the appeals, upholding the rejection of books of accounts but remanding the issue of profit estimation for a detailed examination. It allowed the provision for leave encashment and ruled against the applicability of interest under Section 234D for the relevant assessment years.