9911796707
TMI Blog2019 (10) TMI 1378X X X X Extracts X X X X X X X X Extracts X X X X ..... the income after rejecting the books of account under section 44B of the Act at Rs. 4,34,79,980/- as against the loss returned by assessee at Rs. 120,18,44,672/-. For this assessee has raised the following grounds: - "General Ground 1.1 erred in assessing the income under section 446B of the Income-tax Act, 1961 (Act') at Rs. 4,3479,980 as against allowing the returned loss of Rs. 1,20,18,44,672; Rejection of books of accounts 2.1 erred in failing to complete the assessment as required under section 44BB(3) of the Act; 2.2 erred in holding that the Act permitted the department to ignore section 44BB(3) of the Act on the grounds of rejecting the Assessee's books of account, method of accounting or otherwise. 2.3 erred in rejecting the Assessee's books of account in the facts and circumstances of the case: 2.3.1 erred in concluding that the date of put to use of the rig after refurbishment, as submitted by the Assessee, is inaccurate, without appreciating that 'date of put to use is not relevant in the subject AY; 2.3.2 erred in rejecting the books of accounts on the various reasons. inter alia, that in the earlier year and subsequent years, return of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n invoices submitted under the head Hire Charges" are not related to the business activities of the Assessee. 4.6 erred in concluding that the auditor has conducted only a system audit and therefore, it can be inferred that the Assessee has not got the books of accounts audited as per provisions of section 44AB of the Act: Non-admission of additional evidence tiled before the DRP 5.1 erred in not accepting additional evidence filed by the Assessee even after obtaining a remand report on the same from the learned AO: 5.2 erred in holding that the details filed as additional evidence were not absolutely material and relevant for deciding whether the books of accounts ought to be rejected;" 3. Briefly stated facts are that the assessee is a company incorporated in Cayman Islands. During the year under consideration, the assessee was awarded contracts in India for charter hire of its offshore drilling rig "J.T. Angel". The assessee company in order to facilitate the operations of these contracts, has established a project office in Mumbai, India. The assessee maintained the books of accounts in this year, which were produced before the AO during the draft assessment proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent year it is claiming to maintain accounts based on accounts of preceding year as per the management certification only and then again in subsequent year it has switched back to the method where it does not maintain audited accounts and offers its income on presumptive basis under section 44BB(1) of the Act . Thus the assessee is changing its position from having no account case from preceding year to maintaining accounts in current year and then again switching to having no accounts in subsequent years i.e. AY 2015-16 and AY 2016-17. (v) The valuation report in respect of the old rig purchased is from a foreign party but in absence of the agreement of purchase given by assessee, it is not known whether the seller and purchaser ever relied upon such valuation report to decide the purchase consideration of the old rig. (vi) The purchase/sale transaction between two parties may be carried out at a lower/ higher rate from that of the valuation report depending on the health, longevity, utility and commercial expediency of the asset being transacted. This is especially true in the present case, as the rig had to be sent for major refurbishment within one year of purchase of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period of the contract. Thus this is not a case where there are only minor mistakes in the books of accounts and difficulty in apportionment of profits of the assessee. The AO noted that there is suspicion without any positive evidence. Hence, he noted that there are positive and specific findings as to how and where, there are defects in the method of accounting in the books maintained by the assessee. Accordingly, the AO rejected the books of accounts after summing the above factors as under: - "The sum and substance of the above cases, is that: a) The job of the Assessing officer is to make a fair and reasonable assessment. b) The case of the Assessing officer cannot be based merely on suspicion. c) Assessing officer is not empowered to act arbitrarily when assessee as furnishing an explanation, which is supported by the relevant entries and other documents d) When the assessee furnished an explanation, which is sought to be supported by evidence. the onus Would then shift back to the revenue. e) Low profit in a particular year in itself cannot be a ground for invoking the powers of best assessment without support of any material on record. The system of accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Some of the group concerns are claiming to have maintained books of account whereas some of those are not maintaining any books of account. In the given circumstances of the case, it is very easy and convenient to shift expenditure of those concerns who are filing return as per provisions of section 441313 and hence, not maintaining any books of account to those concerns which arc claiming 'lower profit' as per provisions of section 44BB(3) of the Act. In the given facts of the case, when the assessee has claimed that two of the project offices of the group concerns, including the assessee is maintain books of accounts whereas the project offices of other group concerns are not maintaining any books of accounts and head office of none of the said group concerns are maintaining books of accounts, it is impossible to verify the reliability and genuineness of individual payments and individual books of accounts of the project offices of these two concerns as it is evident that only the transactions but all the modalities of transactions of the group concerns are common and closely interlinked and there is no reason or justification to accept the claim as to completeness and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion that these figures could not be derived from the books of accounts with desired certainty and accuracy so as to accept that the assessee was maintaining books of account properly. Further, as per the observation of the Auditor, there is inventory of stores and spares. The findings of the Auditors in this regard is as below: "The company does not inventories stores and spares. 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. 7.8.21 In the case of a Rig where stores and spares are also very expensive and those usually comprises substantive pan of the expenditure of the company and when as per Auditor itself the impact of the above on the financial statements is not currently ascertainable the financial statements of the company cannot be taken as reliable. 7.8.22 On perusal of the audited financials of the project office it is found that the depreciation is claimed to have been provided using the straight line method as per the useful lives of the tangib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antiate its claim vide submissions dated 27.01.2017 and 17.08.2017. The DRP forwarded these additional evidences to the AO for verification and comments on the merits of the submissions as well as admissibility of the additional evidences vide letter dated 20.07.2017. The AO submitted his remand report dated 11.08.2017 providing his comment thereon and analyzing the additional evidences submitted by the assessee and called for additional documents/ information from the assessee. It was contended that during the remand proceedings also, the AO has verified the books of accounts of the assessee in detail but rejected the books of accounts without any basis. He explained that the entire documents are available with the assessee and for this, he referred to the assessee's factual paper book consisting pages 1-479, wherein the following documents are filed: - Sr. No. Particulars For AY 1. Annexure2-Return of income along with acknowledgement 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. Cop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red the cost as on 01.04.2013 for rig and related equipment as per financial statements, where the figure is given at Rs.70,89,65,840/-, with the opening WDV as per tax audit report is at Rs.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 assessee's paper book and page 42 of the assessee's paper book, where form No. 3CB i.e. tax audit report is enclosed. The assessee argued that for AY 2014-15, which is the first year in which assessee has maintained the books of accounts under the Act and offered the income under section 44BB(3) of the Act, opening balance are derived from unaudited books of accounts of the assessee and accordingly, auditors is bound to clarify more with respect to opening balances i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Rs.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. Merely undergoing repairs in AY 201415 does not require that the rig should have to comply with the requirements of put to use once again. The assessee stated that a summary of contracts prior to repair and subsequent to repair was filed thereby it was explained that the rig was already in use and therefore, there is no requirement for the rig to be put to use again in AY 2014-15. 11. It was submitted that in regard to major repairs at shipyard at Pipavav that signed agreement be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 examined by the AO in its remand report. The AO failed to appreciate the fact that certain manpower is required on the rig on a continuous basis (Irrespective of whether the rig is rider repair or operation) for overall maintenance and upkeep of the rig. This manpower is sourced by Shelf Drilling JT Angel Limited from G1 Offshore. The AO in final assessment order has failed to appreciate that G1 Offshore supplies manpower to Shelf Drilling JT Angel Limited throughout the year and the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by us in this order. The complete details were available before the AO and AO should have examined the same on the basis of books 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 befor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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