ITAT Ahmedabad Removes Addition as Income Estimated Using Profit Margin Process

While upholding the addition, the Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) ruled that A.O. did not reject the books of accounts under Section 145 but instead assessed the income on the basis of the Profit Margin Method.

While dismissing the department’s arguments, the T.R. Senthil Kumar (Judicial Member) and Waseem Ahmed (Accountant Member) Bench noted that the additions made by the Assessing Officer do not hold up taking into the account the Tribunal’s ruling in the assessee’s case for the earlier Assessment Year 2014–15 and the A.O.’s acceptance of the assessee’s PCM offer as the correct method for the 2017–18 Assessment Year 2017-18.

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The respondent assessee is a private limited company doing building and real estate development. The assessee submitted a Return of Income on September 28, 2015, declaring a total income of Rs. 3,11,94,560 for the assessment year 2016–17. The case was chosen for examination, and the assessment was completed under Section 143(3).

The Assessing Officer determined that the assessee in principle accepted the percentage completion method (PCM) and returned a profit of Rs. 3,11,94,560, as opposed to the Assessing Officer’s earlier assessment year 2015-16, which estimated the profit at 9.31% under the profit margin method (PMM). There was an increase of Rs. 2,76,69,223. Additionally, it was rejected by the assessing officer to provide interest totalling Rs. 1,06,64,058 and demanded tax on it.

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The assessee argued that the Additional Commissioner advised the A.O. to accept the manner of the assessee’s company in recognizing income because it is sound and in line with the Guidance Note published by the ICAI concerning construction activity businesses and has no flaws or weaknesses.

The ITAT rejected the department’s appeal and removed the addition.