Section 145 of the Income-tax Act, 1961 - Method of accounti

ITAT DELHI BENCH ‘I’ Deputy Director of Income-tax, Intl. Taxation, Cir.1(1), New Delhi v. Bumi Hiway (M) SDN BHD I.B. BANSAL, JUDICIAL MEMBER AND K.G. BANSAL, ACCOUNTANT MEMBER IT APPEAL NO. 2083 (DELHI) OF 2006 [Assessment year 2001-02] January 25, 2008 Section 145 of the Income-tax Act, 1961 - Method of accounting - Rejection of accounts - Assessment year 2001-2002 - Assessee company was incorporated under Laws of Malaysia - It got a contract from Haryana Irrigation Department for replacement of Pathrala Dam for a sum of Rs. 18.39 crores in August 1999 - Assessee started worked in October, 1999 and completed same on 21-8-2001 - Assessee was following percentage completion method of accounting in respect of its construction activities as prescribed by Accounting Standard 7 by Institute of Chartered Accountant of India - For relevant assessment year, assessee returned a loss of Rs. 5.51 lakhs - Assessing Officer having noticed assessee did not follow stipulated conditions of AS-7 and had simply drawn its financial statements for contract and had arrived at a loss, that assessee had not quantified excluded profit from project and had also not furnished exact percentage of completion of project as on accounting date, and that method of accounting employed by assessee was such that its income could not be correctly determined, rejected account books of assessee by invoking provisions of section 145(3) and further estimated net profit of assessee - Whether since no material had been brought or record by Assessing Officer that claim of assessee that it had incurred losses while performing contract was contrary to facts and on contrary material on record showed that assessee had incurred loss in performing such a contract, Assessing Officer was wrong in rejecting account books of assessee by invoking provisions of section 145(3) and further estimating net profit - Held, yes FACTS The assessee-company was incorporated under the Laws of Malaysia. It got a contract from Haryana Irrigation Department for replacement of Pathrala Dam for a sum of Rs. 18.39 crores in August, 1999. The project was to be completed in 15 months. The assessee started the work in the middle of October, 1999 and it was completed on 21-8-2001. The assessee was following percentage completion method of accounting in respect of its construction activities as prescribed by Accounting Standard 7 by the Institute of Chartered Accountant of India. For the relevant assessment year, the assessee returned a loss of Rs. 5.51 lakhs. The Assessing Officer having noticed that the assessee did not follow the stipulated conditions of AS-7 and had simply drawn its financial statements for the contract and had arrived at a loss that the assessee had not quantified the excluded profit from the project and had not furnished the exact percentage of completion of the project as on the accounting date and that the method of accounting employed by the assessee was such that its income could not be correctly determined, rejected the account books of the assessee by invoking the provision of section 145(3) and further estimated the net profit of the assessee at 10 per cent of the gross receipts. The Assessing Officer therefore, made certain addition to the income of the assessee. On appeal, the Commissioner (Appeals) held that the Assessing Officer was not justified in rejecting the account books of the assessee without bringing on record any cogent reasons and infirmities in the maintenance of books of account by the assessee and in applying provision of section 145(3) and thereby estimating the net profit at the rate of 10 per cent of gross receipts. He, therefore, deleted the impugned addition made to the income of the assessee. On revenue’s appeal to the tribunal. HELD The assessee had never shown any profit out of the contract and the loss shown by the assessee was accepted by the lower authorities in the immediately preceding year and succeeding year. Thus, according to the accounts, the assessee had never earned profit from this contract. The accounts of the assessee were audited and it was not the case of the revenue that the assessee did not furnish details regarding accounts maintained by it. No defects whatsoever had been found in the account books maintained by the assessee. What can be assessed as income under the Act is income. If there is an existence of income then only it can be estimated. Therefore, not going into the controversy whether the accounting standard AS-7 was properly employed by the assessee or not, it would be considered that whether Assessing Officer was justified in assessing the net profit of the assessee from such contract ate the rate of 10 per cent. There was no substance in the argument of the revenue that the assessee was under an obligation to maintain its account on the basis of the accounting standard AS-7, as the said accounting standard was not mandatory for the assessee for the year under consideration. Even if the percentage of completion method was held to be applicable to the case of the assessee, then the question would arise that what would be the basis for estimate. It is well established law that the estimate made must be honest and fair. There must exist reasonable nexus between the available material and the estimate. Thus, the only question for determination arose whether there existed some material on the basis of which it could be said that application of net profit rate of 10 per cent was appropriate. It was the contention of the assessee that it had incurred losses while performing the contract. No material had been brought on record by the Assessing officer that such contention of the assessee was contrary to the facts. Addition had been made without indicating any material or basis on which it could be decided that application of net profit rate of 10 per cent was appropriate. On the contrary, material was on the record to show that the assessee had incurred loss in performing such a contract. Therefore, the Assessing Officer was not justified in rejecting the books of account by invoking the provisional of section 145(3) without bringing on record any cogent reasons and infirmities in the maintenance of books of account of the assessee and further estimating the net profit. [Para 13] Therefore, the Commissioner (Appeals) had decided the issue correctly. CASE REVIEW: CIT v. Woodward Governors India (P.) Ltd. [2007] 294 ITR 451/162 Taxman 60 (Delhi.) and P.M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 (SC) Distinguished.