ITAT rules for assessee, directing AO to delete additions. Chosen accounting method must be accepted unless it distorts income. The ITAT ruled in favor of the assessee, setting aside the CIT (A) decision and directing the AO to delete the additions made in both years. The ITAT ...
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ITAT rules for assessee, directing AO to delete additions. Chosen accounting method must be accepted unless it distorts income.
The ITAT ruled in favor of the assessee, setting aside the CIT (A) decision and directing the AO to delete the additions made in both years. The ITAT emphasized that the chosen method of accounting must be accepted unless it does not reflect true income, rejecting the revenue authorities' approach of substituting the accounting method and estimation. The appeals were allowed, ultimately ruling in favor of the assessee.
Issues: Common issue in both years: Estimated profit taken at 8% on total cost instead of project completion method.
Analysis: 1. The assessee consistently followed the project completion method for determining profit from a project. The Assessing Officer (AO) observed a change in accounting standards and estimated profit at 8% of total cost, alleging that the assessee was creating a loss to revenue by following the work completion method.
2. The CIT (A) upheld the AO's decision, stating it was correct to bring the deemed profit to tax in the current years rather than in the assessment year 2007-2008, considering it as tax liability postponement.
3. The assessee contended that as a builder, they followed Accounting Standard AS-9, providing options for proportionate completion method and completed service contract method. The AR argued against the estimation of income at 8%, citing that the books were maintained correctly, and the estimation was not legally permissible.
4. The ITAT analyzed the situation, emphasizing that the AO did not reject the books or find them incorrect, making the estimation of income at 8% impermissible. Referring to relevant case laws, the ITAT concluded that the chosen method of accounting must be accepted unless it does not reflect true income. The ITAT rejected the revenue authorities' approach of substituting the accounting method and estimation.
5. Ultimately, the ITAT set aside the CIT (A) order and directed the AO to delete the additions made in both years, accepting the results declared by the assessee. The appeals were allowed, ruling in favor of the assessee.
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