2013 (11) TMI 223 - AT - Income Tax

Book rejection u/s145 and AS-7 WIP valuation for future losses claim; disallowance deleted, taxpayer's method upheld.

Rejection of books under s. 145 was held unsustainable because a mere increase in expenditure compared to the preceding year does not evidence defective ... Rejection of Books of accounts - Incomplete books of accounts - CIT deleted rejection - Held that:- if the AO was not satisfied with the quantum of expenses, he could have proceeded to disallow them on adhoc basis. Simply because the volume of expenses have increased during the year vis-à-vis earlier year that cannot be a ground for rejecting the books of account. - it is difficult to accept that the books of accounts of the assessee are defective or incomplete from which the correct profit cannot be deduced. The books of accounts are audited, the auditors have not given any adverse comments in the maintenance of books of account or stock registers - Decided against Revenue. Disallowance of future losses - 100% loss claimed even when project was not 100% completed - AS-7 Followed - Held that:- It is a fact that AS-7 has not been notified by the Central Government. This does not mean that the assessee is precluded from following AS-7. A perusal of the provisions of Sec. 145 show that Accounting Standards which have been notified by the Central Government have to be mandatorily followed by the assessee. But this does not mean that the assessee cannot follow the other Accounting standards issued by ICAI. ICAI being the highest accounting body of the country, created by an Act of Parliament, Accounting Standards issued by it cannot be brushed aside lightly. On the contrary, if an assessee is following the Accounting Standards issued by ICAI, it would give more credibility and authenticity to its account The matching principle is of relevance where income and expenditure, both are to be considered together. However, in the instant case, the effect of valuation of WIP would automatically affect the profits of subsequent years accordingly. Therefore, there was no reason for not accepting in principle the assessee’s claim as being allowable - Following decision of Jacobs Engineering India (P.) Ltd. Versus Assistant Commissioner of Income-tax 8(2), Mumbai [2009 (5) TMI 601 - ITAT MUMBAI] - Decided against Revenue. Issues Involved:1. Whether the accounts of the assessee were incorrect or incomplete, justifying the rejection of the books of account under Section 145(3) of the I.T. Act.2. Whether the estimation of business income at 5% of turnover by the AO was justified.3. Whether the future losses recognized by the company as per Accounting Standard-7 (AS-7) should be disallowed.Issue-Wise Detailed Analysis:1. Accounts of the Assessee:The Revenue contested the CIT(A)'s decision that the assessee's accounts were not incorrect or incomplete. The AO had identified several discrepancies in the books of account, including non-maintenance of day-to-day registers, unbilled work-in-progress not included in turnover, partial confirmations from suppliers, substantial increases in expenses, lack of supporting evidence for certain expenses, and unavailable ledger accounts. The AO, after issuing a show-cause notice and considering the assessee's clarifications, rejected the books under Section 145(3) and estimated the business income at 5% of the turnover.The CIT(A), however, found the assessee's explanations satisfactory and noted that the discrepancies were reconciled during the remand proceedings. The CIT(A) concluded that the books were correct and complete, following the prescribed accounting standards, and thus, the rejection of the books was unwarranted.2. Estimation of Business Income:The AO's estimation of business income at 5% of turnover was based on the perceived unreliability of the books of account. The CIT(A) disagreed, stating that the AO should have disallowed specific expenses rather than rejecting the entire books. The Tribunal supported the CIT(A)'s view, noting that the business's nature and the maintenance of project-wise accounts justified the assessee's accounting practices. The Tribunal found no evidence that the books were incorrect or incomplete, nor that the accounting method was improper. Thus, the estimation of income at 5% of turnover was deemed unjustified, and the appeal by the Revenue was dismissed.3. Disallowance of Future Losses:The assessee argued that the CIT(A) erred in upholding the AO's request to disallow future losses recognized as per AS-7. The AO had questioned the recognition of 100% loss for incomplete projects and sought to disallow the excessive loss. The CIT(A) supported the AO, stating that future losses were contingent and not allowable under Section 37(1) of the Act. The CIT(A) emphasized that accounting standards could not override statutory provisions.The Tribunal, however, highlighted that AS-7, though not notified by the Central Government, provided credibility and authenticity to the accounts. The Tribunal referred to previous decisions, including those of Mazagaon Dock Ltd., Jacobs Engineering India Pvt. Ltd., and Dredging International, which supported the allowance of foreseeable losses under AS-7. The Tribunal concluded that the assessee's recognition of future losses was justified and directed the AO to recompute the business profits by allowing the losses provided in the books. Consequently, the appeal by the assessee was allowed.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the correctness of the assessee's books and rejecting the estimation of income at 5% of turnover. The Tribunal allowed the assessee's appeal, recognizing the future losses as per AS-7 and directing the AO to recompute the business profits accordingly. The judgment emphasized the importance of adhering to accounting standards and provided a detailed rationale for the decisions on each issue.