TMI Blog2019 (10) TMI 1378X X X X Extracts X X X X X X X X Extracts X X X X ..... ks of accounts and supporting bills and vouchers and on that basis assessment should have been framed. Since, many of the evidences were filed by the assessee as additional evidences before DRP (no doubt these were referred to AO for verification and remand report which eventually was given by the AO), which have not been gone into as demonstrated by the assessee before us now. Hence, we set aside the very first issue of rejection of books of accounts to the file of the AO, who will go into the books of accounts afresh and will compute the income on the basis of books of accounts as per law. No doubt, the books of accounts do not confirm to the provisions of section 145 of the Act, the AO can reject the books of accounts. But the AO has to give finding and to consider whether or not the books disclose the true state of accounts and the correct income can be reduced there from. For this, the AO has to give a categorical finding in this regard. Hence, this issue of the assessee s appeal is remanded back to the file of the AO for fresh adjudication. The orders of the lower authorities are set aside and the appeal of the assessee is allowed for statistical purposes. - ITA No. 7414 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery year (i.e. either to offer income under deemed taxation or on basis of actual books of accounts); 2.3.3 erred in concluding that the expenses are not recorded correctly merely on the basis that stamp for acknowledging receipt of the invoices is Shelf Group evidencing that there is a centralized receiving system for the bills and processing payments, without appreciating the fact that the invoices mentioned the legal name of the entity on which it was raised; 2.3.4 erred in concluding that there was no basis for determining which payments were made by the head office of SDJTA on behalf of project office, without appreciating that the fact that this aspect not relevant as the project office is a mere extension of head office and payment pertains to India operations: 2.3.5 erred in not appreciating the fact that the project office, being taxable in India under section 44BB(3) of the Act, is required to maintain books of accounts and not the head office 3. erred in assessing the income of the Assessee at ₹ 4,34,79,980 based on 10% of the Assessee s receipts under section 44BB(1) of the Act; 3.1 erred in not allowing deduction of expenses under the head Repairs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of providing services or facilities in connection with or supplying plant and machinery on hire used, or to be used, for the prospecting, or extractions or production of mineral oils i.e. charter hire of drilling rig and drilling services. The assessee claim before AO and explained that the facts are that for AY 2013-14 and for AY 2015-16 i.e. preceding year and succeeding year filed its return of income on gross basis under section 44BB of the Act as the assessee is eligible entity to be governed by special provisions of assessment under section 44BB of the Act. But during the assessment year 2014-15 relevant to FY 2013-14, the assessee incurred repair expenses on its drilling of rig JT Angel which exceeded its contractual revenue and hence, there was an overall business loss. As a result of the same, the assessee exercise the option available under section 44BB(3) of the Act to claim profit lower than prescribed under the section at the rate of 10%, the assessee opted for net basis of taxation of books of accounts as per section 44AA of the Act and audited as per requirement of section 44AB of the Act. The AO on the basis of directions of DRP gave various findings and f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n report is only a draft and unsigned. (viii) The company has not inventorised stores and spares. The auditors have stated that this policy is not in accordance with the Accounting Standard 2 on Valuation of inventories. The impact of the above on the financial statements is not currently ascertainable and accordingly we are unable to comment on the effect thereof on the financial statements. (ix) Wrong claim of depreciation in the current year in relation to the alleged addition to capital asset before 31.3.2014 and thereby creating artificial losses in the current year. (x) Certain expenses of capital nature have been claimed as revenue expenditure. (xi) Expenditure pertaining to subsequent years claimed in this year. (xii) Expenditure unrelated to assessee s business claimed. (xiii) The refurbished rig has not been put to use during the year and the period of refurbishing (inactive period of the rig) is not proved. (xiv) No regular maintenance of books of accounts. In the previous and the next year, the assessee has not maintained books of accounts and has opted to be assessed u/s 44B8 in AY 15-15 and AY 16-17. (xv) The assessee also failed to produce all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . f) In a case where books are maintained and the same were audited it is the rule that the AO shall accept the said books so long as he has not found out any defects or incompleteness of transactions or discrepancies or any inaccuracies, whatever may be the name given to them. However, the rejection of books in this case is not based on mere suspicion S The auditor of the assessee himself has shed his responsibility when It comes to stores, spares, opening WDV, creditors and debtors in the books of the assessee. The assessee is not following the same method of accounting and accounting standard as notified, regularly and consistently. Admitted that, it is the rule that the AO shall accept the said books so long as he has not found out any defects or incompleteness of transactions or discrepancies or any inaccuracies, however in this case, there are serious defects in maintenance of accounts by the assessee and the books suffer from unreliableness incompleteness and in inaccuracies. The inaccuracies are reflected over the transactions which form the majority part of its expenses. Further, nowhere in the preceding paras has a case been made out of low profitability and the boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts but the respective head offices are not maintaining any books of accounts. 7.8.19 It is also pertinent to mention that maintaining books of accounts is a continuous process and opening balance, closing balance, WDV of the assets for claiming depreciation, outstanding balance of payables and receivables are brought forward from earlier years and carried forward to subsequent years as per the books of accounts. [knee, it is not possible to compute these figures accurately if the. books of accounts are not maintained continuously for all the years of operations. This fact is evident from the observation of the auditor itself. His observation in Para 5 of the form 3CEB of the Project Office is as below: These are the flint set of audited financial statements of the company prepared for compliance of section 3 of the Income Tax Act, 1961 for the year from April 1, 2013 to March 31, 2014 Hence, the opening balances as at April 7, 2013 of assets, liabilities and head office account are derived from unaudited management accounts. As a result, we have been unable to conclude or; the completeness or accuracy of the opening balances of assets, liabilities and head office accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is higher. The company claimed to have used the following rates to provide depreciation on its fixed assets; Category Depreciation Rate/ Useful Life Rig related equipment 5.30 to 20.00% Drill Pipe and Drill Collar 10% to 20% Top Drive 5% to 7.5% Computers 33.33% Leasehold Improvement 5 Years Furniture and fixtures 10% In this regard it is most important to note that the depreciation as per the provision of the Income- tax Act has to be calculated as per Written Down Value (WDV) and there was no way the AO could have verified or ascertained WDV of multiple equipments of the Rig when the assessee has not maintained any books of accounts for earlier assessment years and even the auditors of the assessee has observed that they were unable to conclude on the completeness or accuracy of Me opening balances of assets, liabilities and head office account, and adjustments that may be required to these opening bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2014-15 2. Annexure3-Tax Audit Report 2014-15 3. Annexure4- Financial Statement 2014-15 4. Annexure5- Computation of income 2014-15 5. Copy of acknowledgement of return of income 2013-14 6. Computation of income 2013-14 7. Copy of invoices with respect to revenues earned 2013-14 8. Copy of acknowledgement of return of income 2015-16 9. Computation of income 2015-16 10. Copy of invoices with respect to revenues earned 2015-16 11. Summary of contracts executed by Shelf Drilling JT Angel Limited 12. Annexure 3- copy of agreement between Shelf Drilling JT Angel Limited and Shelf Drilling Offshore Services India Private Limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e books of accounts of the assessee in great detail and have express the opinion that the financial statements are given true and fair view of the state of affairs of the operations of the company and the balance sheet and the profit and loss account of the year end consideration are in agreement with the books of accounts of the assessee. He referred to WDV for assessment year 2014-15 and stated that the difference pointed out by the AO, he has compared the cost as on 01.04.2013 for rig and related equipment as per financial statements, where the figure is given at ₹70,89,65,840/-, with the opening WDV as per tax audit report is at ₹68,66,22,438/-. It was explained that the said figure will not match as different rates of depreciation has been provided under the Companies Act and that of the Income-tax Act, that can be verified by the Assessing Officer. He further pointed out that AO has compared the opening gross block for AY 2014-15 along with closing net block for AY 201314 and the said amount will not match as the gross block refers to actual cost and the net block refers to cost less depreciation. He referred to the financial statements at page 59 of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of books of accounts. Without prejudice, he argued that the AO could have followed an appropriate method instead rejecting the books of account. It was explained by the learned Counsel that during AY 2014-15 Shelf Drilling JT Angel Limited transferred capital work in progress amounting to ₹19,41,65,370/- to fixed assets. The said amount was transferred to head Rig and related equipment amounting to ₹18,73,09,429/- and furniture and fittings amounting to ₹68,55,941/-. He stated that the AO has compared the Capital work in progress transfer with additions to head Rig and related equipment only and has not considered transfer other heads. 10. In regard to sample purchased orders and verification of invoices it was stated that the sample purchase orders for additions to fixed assets purchased showing that these invoices were raised for Indian operations and for this the assessee filed Additional evidence on 27.01.2017 and this was examined by the AO in its remand report. Further, he stated that refurbishing of rig was purchased from Transocean in November 2012, and used for contract with ONGC. This Rig was already put to use during AY 2013-14 itself. Me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... face of assessment order, however, AO stated that the invoice is dated 25.12.2014 and thereby alleging that the assessee has claimed expenses pertaining to subsequent years in the current assessment year. The description of expenses on the invoice is purchase of clamps, plates and packing charges. These expenses do not result in creation of any capital asset and hence, cannot be treated as capital in nature. The invoice raised in November dated 29.04.2014 submitted by the assessee is reproduced by the AO in assessment order. It is pertinent to note that while the said invoice was raised by November in the subsequent year, the purchase order pertaining to the said invoice is dated 01.02.2014. This evidence proves that this expense was incurred in AY 2014-15 itself. Accordingly, the contention of the AO that these expenses are inflated with subsequent years is erroneous in nature. 14. We noted that Shelf Drilling JT Angel Limited has a master service agreement with G1 Offshore wherein G1 Offshore supplies manpower to Shelf Drilling JT Angel Limited. A copy of the agreement between G1 Offshore and Shelf Drilling JT Angel Limited was submitted as Additional evidence which has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has prepared these financial statements to comply in all material respects with the accounting standards as notified under the Companies (Accounting Standards) Rules, 2006 and the relevant provisions of the Companies Act, 1956. Even the accounts are audited and the same is evidenced from the tax auditors report furnished along with the return of income as well as before the AO. The opening balances of assets, liabilities and head office accounts are prepared based on the income offered under section 44BB of the Act in the preceding assessment year 2013-14 and the relevant bills and vouchers of earlier years. The assessee is primarily service company and not a manufacturing / trading company and there is a limited requirement with respect to stores and spare parts of rig at any given point of time, which are relatively insignificant in value. In such circumstances, the AO has to prove that the books of accounts are incomplete or incorrect and the basis for the same. In view of the above facts, we find that both the authorities below i.e. AO and DRP have erred in rejecting the books of accounts without considering the books of accounts and other documentary evidences as noted above b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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