TMI Blog1995 (10) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 1,54,00,000 agreed upon was as under : (1) Execution of entire work Rs. 105.75 lakhs on turn key basis (2) Custom duty on items to Rs. 44.25 lakhs be imported (approximately) (3) Port Trust charges Rs. 4.00 lakhs ---------------------------- Total: Rs. 1,54,00,000 ---------------------------- One of the terms of the contract is that the assessee has to deposit Rs. 20,000 as earnest money. Another term of the contract was that the assessee would be paid by the D.D.A. Mobilisation advance of Rs. 10,57,000 against which represent 10% of Rs. 1,05,75,000 against furnishing a bank guarantee of any scheduled bank for a like amount which should not bear any interest charges. The said amount of advance would be recovered on a pro rata basis in such a manner that the whole amount is adjustable by the time when 90% work is completed. Another important term of the contract was about the time of completion of work. According to para 6 of the letter dated 28-5-1981 addressed by the Project Engineer, Project Division No. 3 to the assessee, the time of completion would be calculated from the date of issue of import licence which would be 20 weeks for delivery of material an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment and ancillaries that would be incorporated in the partition. Shop drawings, may be prepared by us on the basis of designs and details given by our foreign collaborators. All drawings and designs shall be subject to the approval of the DDA. Shop drawings if prepared in India will be approved by the collaborators." "We would also confirm that our foreign collaborators shall supply the operating system of the drives, gears and control and also such components which may be considered necessary to be imported by the DDA while approving the designs." "The collaborators will also give a fist of the parts/equipments which could be manufactured in India. This will be subject to the approval of the DDA. We also confirm that our foreign collaborators shall supply the accoustic membrance material with the ancillaries required for the joints of poly vinyl fabric and fastening the same unto the frame." "We agree to delete the words 'if made from vinyl fabric'. We confirm that the curtain above the cat walk level up to the bottom of the trusses shall be in four layers of reinforced Poly vinyl fabric." 5. As per the letter of the Project Engineer dated 1st July, 1981 addressed to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed during the year of account relevant to the assessment year 1983-84. By various order sheet entries, the assessee was asked to furnish details and information regarding non-disclosure of income from its contract with DDA. The assessee sent its reply through its letter dated 26-2-1986, a copy of which was furnished at pages 1 2 of the paper book No. 1 filed by the assessee. The case of the assessee in that letter was that it had given performance guarantee for a period of 2 years to satisfy the DDA about the operation of the partition. Taking advantage of the said guarantee, the DDA deferred the acceptance of the contractual work till the ASIAD-82 is over. The guarantee period would be over in Sept., 84. In 1984, the assessee is stated to have felt that the partition was working successfully and the contractual work was completed by them and therefore they have treated the contract work as over by 31-3-1984. The letters dated 3-3-1983, 16-4-1983, 7-5-1983 and 19-5-1983, which the DDA addressed to the assessee, copies of which were furnished at pages 3 to 6 of the paper book No. 1 was only to show that even beyond 31-3-1983, the DDA was insisting the assessee to perform additiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see to postpone the accounting of income under the contract in question to the subsequent assessment years of loss, to get the income derived under the contract set off against losses of other heads. The IAC(A) found that the income declared by the assessee from the contractual work was Rs. 9,39,057.54 for assessment year 1984-85. He decided to include the said income of Rs. 9,39,057.54 in the total income for assessment year 1983-84 for the above cited reasons. Thus, as against the returned income of Rs. 8,95,930 he determined the total income of the assessee for assessment year 1983-84 as Rs. 30,35,194 as per his assessment order dated 23-3-1986 passed under section 143(3). 8. Aggrieved against the addition of Rs. 9,39,057.54 the assessee went in appeal before the CIT(A). On the basis of the material adduced before him as well as before the IAC(A), the Ld. CIT held that the assessee had been accounting from the income from the contract on the basis of their completion and the IAC(A) had not disputed this position. He held that the IAC(A) was not justified in concluding that the contract was over during the accounting period relevant to assessment year 1983-84 merely because th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DA for inspection and completion certificate. The DDA instead invoked guarantee and asked for removal of defects which went on as per correspondence up to May 1993 further incurring expenditure of Rs. 80,000 (approximately) and receipt of Rs. 30,000 (approximately). According to the assessee job was substantially completed and taken as income in March 1984. It is also stated that the Chief Engineer, DDA did not issue the completion certificate in March 1983 and did not also accept, the completion of the contract. That is why the CIT(A) said 'in fact the DDA did not accept the stadium as complete .... question of accounting by March 1983 did not arise'. It is argued by the Ld. D.R. that the assessee had received the following amounts under the contract relevant for assessment years 1982-83, 1983-84 and 1984-85 respectively :--- "Up to March 1982 Rs. 15,40,000 Up to March 1983 Rs. 1,01,23,968 Up to March 1984 Rs. 19,32,131." The issue before the Tribunal is whether Rs. 1,01,23,968 accrued to the assessee during the year. As per clause No. 2 of the contract, the compensation is to be paid for the delayed execution of the contract at 1 % or such smaller amount as the Chief Proj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out only when the time limits strictly set out in clause No. 6. If any defect memos are served beyond the limits set out in clause 6, the contractor is not under an obligation to comply with them and they are ultra vires to the contractual terms. Thus the letters at pages 3 to 6 can be ignored from consideration. It is contended by the Learned D.R. that there is no clinching proof adduced by the assessee that it has been following a consistent method whereunder it is disclosing income derived under a particular contract only after the completion of the contractual work and not in the intervening accounting period. He argued that it is not one of the terms of the contract that the full and final payment under the contract shall be payable only after the guarantee period is over and not at any time before. On the other hand, the assessee was fully responsible for the operation and maintenance of partition till 31st December, 1982 i. e. till the ASIAD-82 games are over. The DDA did not issue any defect memo to the assessee alleging that it had not maintained or operated the partition till ASIAD-82 is over. A combined reading of clause No. 6 of the contract and clause No. 13 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to estimate the profit on the basis of receipts in each year of construction although the contract was not complete. Hence, according to the said authority which is binding upon the Tribunal even during the pendency of the contract, income can be computed from out of the contract undertaken. In Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC) at page 740 it is held as under : " The dictionary meaning of the word 'accrue' is to come as an accession, increment, or produce, to fall to one by way of advantage; to fall due. The income can thus be said to accrue when it becomes due. The postponement of the date of payment has a bearing only in so far as the time of payment is concerned, but it does not affect the accrual of income. The moment of the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately. There also arises a corresponding liability of the other party from whom the income becomes due to pay that amount. The further fact that the amount of income is not subsequently received by the assessee would also not detract from or efface the accrual of the income, although the non-receipt may, in appropriate cases, be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 52 of the paper book No. 1 filed by the assessee and he argued that the amount of Rs. 9,39,058 is accounted for and also taxed in the subsequent assessment years, namely 1984-85. The method of accounting adopted by the assessee is to account for the income derived under each contract on the completion of that contract. It is a valid method of accounting and this method is being regularly followed by the assessee. When once the method was accepted by the Department for earlier years and later years for purposes of computing the business income of the assessee, the method cannot be disturbed in a middle assessment year. It cannot be said that different method of accounting should have been followed than the one adopted by the assessee regularly in assessment year 1983-84. Both under the head 'Business' as well as under the head 'Other sources' unless and until it is shown that the real profits cannot be ascertained, it is open to the assessee to adopt any method of accounting consistently year after year. Shri Ganesan submitted that the assessee had not shown any amounts which it had received as and when they have been received, and it used to show them only as advances. Taxability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned counsel for the assessee argued that the learned CIT(A) is perfectly justified in his conclusion and his order appealed against is worthy to be upheld. 11. After hearing both the sides, we hold that the appeal is worthy to be allowed. Our reasons are as follows: There is no conclusive evidence to establish that the assessee has been following a consistent method of accounting, namely, returning the income after the complete execution of the contract. The contract in this case was entered into on 1-7-1981 as can be seen from page 205 of the paper book No. 2 filed by the assessee. The first of the assessment year in which the income is derived under this contract would have come up for consideration in assessment year 1982-83. If really the assessee has been following method under which the income is returned under the completed contract method and not in the accounting year during the execution of the contract, he would have stated explicitly in his income-tax return for the assessment year 1983-84 that for the reason the assessee has not returned anything as income derived under the contract. However, in this case the assessee did not choose to file the assessment order for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... client would arise in the year in which the work is completed. Even if the date of final bill under the terms of the contract stipulated between the parties is taken into consideration then also the amount due under the contract easily may be said to have fallen due in assessment year 1983-84. Clause No. 6 of the contract at page 11 of the paper book No. 2 which is already extracted in above paras may be noticed at this juncture. This clause stipulates that a contractor who had completed his work under a contract should give notice in duplicate reporting about the completion to the Engineer-in-charge who shall inspect the work and if there is no defect in the work, he shall furnish the contractor with a certificate of completion. Otherwise, a provisional certificate of completion indicating defects shall be issued. The defect memo may be of two kinds. It may indicate : (1) the defects which can be rectified by the contractor, or (2) the defects for which the payments shall be made at reduced rates. As can be seen from the above clause that as soon as the work under the contract is reported to the Engineer-in-charge we shall have no option except to issue completion certifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by end of March 1983. Even according to this the full amount under the contract is realisable by 31st March 1983 which falls in assessment year 1983-84 and not in assessment year 1984-85. In our considered opinion, the amount due under the contract would become payable on the completion of the contract work or 10 days thereafter when the completion should be reported to the Engineer-in-charge, who is obliged to visit the work and who is obliged to issue completion certificate or provisional certificate of completion indicating defects. The distinction between the accrual and the date of payment is well brought out by the Hon'ble Supreme Court in Morvi Industries Ltd.'s case. The relevant portion obtaining at page 840 is already extracted in above paras of this order and it may be referred at this juncture. 14. In CIT v. British Paints India Ltd [1991] 188 ITR 44 in the following law adumberated by the Hon'ble Supreme Court at page 46, the relevant portion of the head note reads as follows :--- " The question to be determined by the A.O. in exercise of his power under section 145 is whether or not income can properly be deduced from the accounts maintained by the assessee, eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as on 31-3-1984 on which date it was squared up. At page 56/ 30,31 32, we find that the account in the name of Project Engineer, Project Division No. 2 Indoor Stadium, DDA. If we look into the account of a credit of Rs. 15,40,000 appears as on 31-3-1982 and the same figure is continued to be the credit as on 31-3-1983. However, on 31-3-1984, the account was squared up. Thus the alleged incurring of Rs. 80,000 towards additional work executed by the assessee at the contract site or towards the contract work is not substantiated and it is also not substantiated by the set of accounts filed by the assessee. Further the assessee itself did not bona fide believe that the contract work should be deemed to be over only after the completion of the guarantee period of two years that means in September 1984. If really the contract work was completed, according to the version of the assessee only in September 1984 which falls in assessment year 1984-85 and there is no reason why the assessee had itself recorded in its books of account that the contract work was completed even in March 1984. Therefore, there is neither any truth nor bona fides contained in the allegations made by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take several years. Each year's profit shall have to be in the nature of things, computed on an estimate, having regard to the work completed during each year. The method of valuation is set out as follows : If a contract is nearly complete and only a small portion of the work remains to be done and estimate will be made of the further expenditure on the portion remaining to be done, and an allowance will also be made for the margin of profit on that portion. This estimate should be added to the amount already expended to the contract, and the total will represent the cost of finishing the whole work. This cost should be compared with the contract price, and if the latter exceeds the former, the excess will represent profit on the completed portion of the contract. If a contract has not reached a sufficient stage as to enable one to make a reasonable estimate of remaining portion of the work, the profit or loss on the portion already completed is ascertained thus. The cost of the work completed will be represented by the total of the debit side on the Contract A/c, less the cost of stores, materials and plant on hand. This net cost should be compared with the amount of work cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 1972-73." 17. We have studied the whole of the report and in our understanding the case is an authority for the proposition that the change in method of accounting is permissible in later years and the bona fides of such change in accounting need not be insisted upon before accepting such change. We are primarily concerned as to the date of accrual of income under the completed contract system and this decision does not in any way help decide any matter in that regard and, hence, it is not relevant for our purposes. The ratio of the decision reported in Investment Ltd.'s case was already extracted in the above paras and it is unexceptional. However, we are not very much on the point of the method of accounting. We are concerned with the finding out of the taxable event, assuming that the method adopted, namely, completed contract system is the correct method to be adopted in this case. However, we may observe that there is some conflict between the ratio laid down in Investment Ltd.'s case on the one hand and British Paints India Ltd.'s case relied upon by the Department on the other. In our understanding the ratio of the later Supreme Court decision prevails than over the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and erecting them at the site so as to constitute a 'three motion electrical, over-head and travelling crane' and there was no transfer of property in it made by the manufacturer to the customer as a chattel. The case before the Hon'ble Supreme Court concerns about the levy of sales-tax. The question before us does not depend upon in deciding whether it is a contract for sale or a contract for work and labour. Therefore, the decision, in our humble opinion, is not relevant for our present purposes. 19. The question is whether the contract was completely executed or not cannot depend upon the fact that whether DDA accepted the work as complete or not. It depend upon, in our opinion, the contractual terms in the contract between parties and what legally follows from out of such contractual terms. However, the learned CIT (Appeals) did not bother himself to discuss any stipulation in the agreement or did not come to the conclusion on the basis of such a stipulation. He stated that the assessee had been following completed contract system of accounting and the IAC(A) had not disputed his position. However, we are unable to find anything from the assessment order passed by the IAC ..... X X X X Extracts X X X X X X X X Extracts X X X X
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