2010 (2) TMI 71 - HC - Income Tax

Construction Contract completed or incomplete project method of accounting - While completing the assessment the assessing officer adopted the incomplete project method of accounting and thereby estimated an additional income with regard to the assessee s incomplete project shown as work-in-progress. CIT(A) and ITAT decided in favor of assessee - Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was right in holding that the Assessing Officer was not justified in computing the profits from the assessee s business of construction contracts including the profits accrued on the incomplete projects? held that - Tribunal and the Commissioner of Income Tax (Appeals) have concurrently held that from the inception the assessee had been following the completed contract method of accounting and the returns were filed only adopting the said method of accounting till the assessment year in question and there was no defect or inconsistency in the said accounting method adopted by the assessee. As pointed out by the revenue the assessee has also shown the incomplete project in the form of work-in-progress in the books of accounts upon which the assessing officer estimated the income at the rate of 10%. Decision in CIT v. N.M.Associates 2008 -TMI - 12590 - MADRAS High Court distinguished Decision of Supreme Court in CIT v. McMillan & Co. 2010 -TMI - 75376 - SUPREME COURT followed - If the method adopted by the assessee is consistent and regular the revenue should not have insisted the assessee to adopt a particular method of accounting or valuation.

Summary

Issues involved:
Appeal against order of Income Tax Appellate Tribunal for assessment year 2003-2004 - Whether Assessing Officer justified in computing profits from construction contracts including profits accrued on incomplete projects?

Analysis:
The appeal in question was filed by the revenue against an order related to the assessment year 2003-2004. The respondent-company, engaged in civil construction contracts, had its assessment completed under Section 143(3) of the Income Tax Act. The assessing officer estimated additional income based on incomplete project method of accounting for the assessee's work-in-progress project. The assessee challenged this order before the Commissioner of Income Tax (Appeals), which ruled in favor of the assessee. Subsequently, the revenue appealed to the Tribunal, which also rejected their claim, leading to the current tax case appeal.

Both the Tribunal and the Commissioner of Income Tax (Appeals) concurred that the revenue did not dispute the fact that the assessee had consistently followed the completed contract method of accounting since 1996-97. The revenue had accepted the returns filed by the assessee using this method until the assessment year in question. No defects or inconsistencies were found in the assessee's accounting method. The incomplete project, shown as work-in-progress, was added to the income by the assessing officer, but the Tribunal and the Commissioner found no fault with the assessee's accounting approach.

The court emphasized that the assessee has the freedom to choose different accounting methods for various income sources, and the taxing authorities cannot enforce a specific method. Referring to the Supreme Court's decision in CIT v. McMillan & Co., it was established that as long as the chosen method is consistent and regular, the revenue cannot compel a change. The revenue's argument citing a previous case was dismissed as the circumstances were different. In this case, the assessee had consistently followed the completed contract method, and there were no issues with their accounting practices. Given the nature of civil construction business where profits are challenging to ascertain using incomplete accounting methods, the court upheld the Tribunal's decision and dismissed the tax case appeal.