9911796707
TMI Blog2002 (1) TMI 269X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the payment should be taxable under the head "Salaries" and it should be paid outsideIndia. 4. On the facts and in the circumstances of the case, the CIT (Appeals) has erred in deleting the addition of Rs. 2.80 crores made on account of supply of barges during the year under consideration. Later on the department has requested to substitute a new ground in place of ground No. 1, which is as under: "On the facts and in the circumstances of the case, the learned CIT (Appeals) erred in directing that the interest income of Rs. 8,87,522 assessed under the head "Income from other sources" should be considered as business income and assessed as such." 2. Regarding the substitution of new ground the learned DR submitted that the ground originally taken against the direction of CIT (Appeals) in regard to rental income of Rs. 72,252 was taken inadvertently, as the same was already restored by the CIT (Appeals) by following his order for earlier year. In reply the learned counsel stated that this is not a legal ground. The department now wants to raise a fresh ground, which is not permissible as per law. The learned DR fairly admitted that of course, this is not a legal ground but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and on protective basis in next year i.e., assessment year 1989-90. The CIT (Appeals) after discussing the issue in detail deleted this addition. Against the deletion of this addition, the department has filed appeal and assessee has filed cross objection here before the Tribunal. The Cross Objection filed by assessee is late and reason was given that the, appeal memo filed by the department was received late. Therefore, the cross objection was filed late. The learned Departmental Representative did not make any objection in condoning the delay. Accordingly the delay was condoned and the same was announced in the open court. 7. After hearing rival submissions and perusing the material on record, we find that CIT (Appeals) was correct in deleting the addition, The assessee entered into an agreement in 1984 and the method of accountancy was regularly maintained and followed as in past. The assessee adopted the completed work method and accordingly he has shown the profit when the contract was completed in assessment year 1989-90. The Assessing Officer during this year disturbed the accounting method followed by the assessee year after year and by holding that the assessee had shift ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivery of two barges was possible. The other 4 barges were delivered in the immediately succeeding year when the appellant had shown the total profits on this project. The reference to the licence issued by the Import Trade Control Authorities indicates that it is a consolidated licence for import of these six unfinished barges. The reference to the terms and conditions for registration of Export contract also indicates that each single contract is registered and in the instant case the registration is one for this contract, which is for supply of six barges. The political risk covered by Export Guarantee Corporation of India Ltd. also indicates that it is for the one contract with Sudo import,USSRfor export of this sea-going barges. The premium is worked out on the total value of the contract and not on individual price of the ship. The cash incentive on export is also claimed after supply of all the six barges which is with reference to the FOB value of the total contract and not with reference to the FOB value of individual ships. It is true that expenses incurred prior to the year of delivery and subsequent to the year of delivery cannot be apportioned shipwise and have to be ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t licence from Government of India for six unfinished barges of total value of Rs. 2992.00 lakhs carrying export obligation for the export of six barges to the tune of Rs. 4054.14 lakhs, and the company supplied two barges worth Rs. 13.38 crores to M/s. Sudo-Import, Moscow in the year under consideration and billed the same. The total expenditure of Rs. 1,95,44,241.31 spent up to December, 1987 was capitalised as attributable to and incidental to the supply of all barges. The company received various advance amounts starting from the year 1984 and these were shown under the head "Advance account". According to assessee, it was following "Completed contract method" of accounting as prescribed by the Institute of Chartered Accountants of India in Accounting Standard No. 7. The Company supplied the last barge in assessment year 198990 and accordingly accounted for entire income in respect of six barges, in the assessment year 1989-90. On the basis of directions given by D.C.C.R.-II, the Assessing Officer proceeded to assess the income in respect of two barges supplied during the year, in the year under consideration. The assessee was requested repeatedly to furnish the details of expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o segregate expenses with respect to each vessel separately. The learned counsel for the assessee reiterate the submissions as advanced before the first appellate authority and on the basis of his reasoning urged that his order be maintained. 6.1 The learned counsel relied on the terms of contract which are placed at the assessee's paper book pages, 109 to 135. To buttress the point that the contract entered into by the assessee with the Russian party was a single contract more specifically, he relied on pages 124 and 125 of the Paper Book to emphasize that if the assessee failed to fulfil the terms and conditions of the contract, it was bound to refund to the buyer immediately all amounts together with interest at the rate of 8 per cent per annum from the date of receipt of these amounts up to the date of refunding them, as also to pay penalty at the rate of 8 per cent. The learned counsel emphasized that in accordance with the terms and conditions of the contract, if there occurred any failure at any point of time, the assessee was under obligation to refund the entire amount received by the assessee in connection with this contract as a whole. 6.2 The learned counsel further s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the plinth level; then in stage three, construction is raised up to the roof level; in stage four, roofing is done; and in final stage, plastering of roofs and walls and laying of floors are done. In "Contract completion method", in contrast to percentage of completion method, income is recognised only when the contract is completed or substantially completed, i.e., when the last stage of laying floors, etc. is reached. Till that stage arises, no income is accounted for. It implies that the income is to be reckoned only when the last stage of the contract is fulfilled. When these features of contract completion method are applied to the facts under consideration, it comes to light that the assessee had not only reached the last stage of completing the barges but had also supplied the same to the buyer and had also billed it. 7.3 As regards the contention advanced by the learned counsel for the assessee that the entire profit in respect of six barges has been accounted for in the assessment year 1989-90 and therefore, there is no need to tax the income in respect of two barges in the relevant assessment year, it is noted that each year is a separate and independent unit of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder consideration. Clause 5 of the contract at page 110 of the assessee's paper book reads as under:-- "5. The price of one vessel is Indian Rs. 67,569,000 (Rs. Sixty Seven Million Five Hundred Sixty Nine Thousand Only), inclusive of spare parts worth Rs. 669,000 (Rs. Six Hundred Sixty Nine Thousand) only. The total Contract price for the 6 (six) Vessels is Rs. 405,414,000 (Rs. Four Hundred Five Million Four Hundred Fourteen Thousand) only." From this clause it is palpable that the price had been settled for each vessel separately and not a lump sum consideration for the contract as a whole is fixed. 7.5 The next relevant question to be decided is that if the buyer is not satisfied with regard to the working of the vessels, would he be entitled to refuse all the vessels taken together or on individual basis. Clause 49 at page 121 reads as under:-- "If the stability of any vessel does not satisfy the requirements of the regulations of the RS, the Buyer has the right to refuse the acceptance of the Vessel" Clause 51 at page 122 further reads as under:-- "Should the shortage of deadweight be higher than 6 (six) per cent the Buyer is entitled to refuse acceptance of such a Vesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngle policy to cover the export contract for the six barges and also the licence for import for the composite value and also the cash compensatory support was available only on the completion of the supply of six barges, is devoid of merit. In order to determine the taxability of income in the relevant assessment year, the important thing is the terms and conditions of the contract and not that what is stated on behalf of the assessee. If the terms of contract stipulate that there are different contracts embedded in one contract, then other circumstances like one insurance policy for all these contracts, etc. become extraneous considerations. 7.8 If a person enters into a contract for supply of its entire production for seven years to a particular supplier and during the course of seven years, not only he raises the bill after supplying the goods but also receives the payment, would it mean that the entire sale will be taken into consideration at the end of seventh year only? Would it not be out of place to defer the income of the earlier six years to the last year? 7.9 The plea of the learned counsel for the assessee that the Assessing Officer was not justified in rejecting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances, it would meet the ends of justice if the matter of determination of the expenses and the consequential profits on these two barges along with the claim for deductions under Chapter VI-A of the Income-tax Act, in accordance with law, is restored to the file of the Assessing Officer with direction to decide these issues afresh after affording an opportunity of being heard to the assessee. 8. In the result, the ground No. 4 of the appeal by the revenue and the cross-objection by the assessee are allowed for statistical purposes. REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT TO THE HON'BLE PRESIDENT ON POINT OF DIFFERENCE. Since there is a difference of opinion between the Members of the Bench, we state following point of difference and refer the same to the Hon'ble President for further necessary action as envisaged under section 255(4): "Whether on the facts and in the circumstances of the present case "the Contract Completion Method" will be applicable or not?" REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT TO THE HON'BLE PRESIDENT ON POINT OF DEFFERENCE. Since there is a difference of opinion between the Members of the Bench, we state the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich were to be delivered to the company in unfinished state. The company was to work upon them at Vizag and the ships were to be delivered to M/s Sudo Import,Moscow. The first barge was delivered in October, 1987 i.e. after a period of three years. During the accounting year ended31-12-1987relevant to assessment year 1988-89, the assessee supplied two Hopper Barges worth Rs. 13.38 crores to M/s Sudo Import. The entire amount spent up to31-12-1987was Rs. 1,95,44,241.31 which was capitalised and shown under the head "Ship Export Project". The amount advanced to FELS,Singapore, the sub-contractor amounting to Rs. 15,44,71,825.32 stood debited in advances. Against this the advances received by the assessee from the buver are as follows: 31-12-1985 401,40,000 31-12-1986 200,70,000 31-12-1987 1,204,20,000 --------------- &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT (Appeals) who accepted the claim of the assessee and deleted the addition. 7. Aggrieved by the said order, the Revenue came up in appeal before the Tribunal contending, among other things, that the CIT(A) erred in deleting the addition of Rs. 2.80 crores made on account of supply of barges during the year under consideration. 8. The learned Judicial Member concurred with the CIT (Appeals) and held that he was correct in deleting the addition. According to him the assessee entered into an agreement in 1984 and the method of accountancy was regularly maintained and followed as in the past. The assessee adopted the completed work method and accordingly the profit was shown when the contract was completed during the previous year relevant to assessment year 1989-90. The Assessing Officer simply interfered with the accounting method followed by the assessee year after year by applying the ratio of the decision of the Hon'ble Supreme Court in the case of British Paints India Ltd. While doing so, he estimated the expenses made by the assessee on manufacturing etc. which according to him was totally wrong as the assessee was maintaining complete books of account and no defects of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... item is composit or divisible contract, the relevant factors are: (i) whether the contract is for a lump sum price or with reference to each item separately; (ii) on a default being committed by either party for a particular item, whether the whole contract would be repudiated or only with reference to that particular item; and (iii) whether the payment, billing, etc. would be done with reference to each item or for all the items taken together. 11. Coming to the first test, it was his view that the price of each vessel was specified in the contract at Rs. 67,569,000. The total contract was also was indicated at Rs. 405,414,000 for six vessels. Clauses 49 and 51 further reveals that the buyer has the right to refuse acceptance of any particular vessel and not all the vessels to be supplied under the contract. Even on default the refund or interest on the refund has to be determined in each case and not on the whole contract. The learned Accountant Member further held that the insurance of the entire export contract by a single policy or the issue of a composite import and export licence for the import and export of six barges does not lead to the contract being one composite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uses of the contract agreement entered into by the assessee with Sudo Import to show that the contract was a composite contract for supply of six vessels and the consideration for the said supply has to be taken as a whole. As per clause 1, the contractor undertakes to get built out of his materials and deliver to the buyer six Sea Going Hopper Barges. The supply is for six vessels. If the contract is for six different contracts then the contract number, the terms of the delivery and the payment will have to be specified. However, as per clauses 5 and 6 read with clause 53, the total contract price was to be paid by advance instalment at IO per cent of the contract price for the supply of six vessels initially. The second, third and fourth part of this clause lists out the payment to be made subsequently. The final payment has to be made at 75 per cent of the total contract price calculated at percentage of each vessel. 15. Similarly, the contract with F.E.L.S. Singapore was on identical lines for supply of six barges as a single contract. 16. The learned counsel further drew our attention to the possible loss on account of contractual obligation with the customers. According to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding to the revenue as there is no res judicata and each assessment year is a separate assessment. There is no denying the fact that the assessee supplied two barges during the year. The assessee also received full amount for the said'supply of the two barges. In such a case the Assessing Officer is fully justified in assessing the income from the said two barges earned during the year. 18. The learned D.R. Shri Arvind Kumar further submitted that the alleged interest, penalty and refund claimed to have been payable by the assessee on the whole contract price is without any basis as the levy of interest, penalty or refund is to be made with the specific vessel for which default is committed by the assessee. Reference was made to clauses 49 and 51 and submitted that the specific liabilities are to the particular vessel for which the default was committed and not for the entire contract. Referring again to clause 5 of the agreement it was submitted that the price of each vessel was specified and the supply has to be made accordingly. All the considerations including the specification for the items supplied have to be assessed individually and the assessee will be liable only for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces and in what context the learned Dy. Commissioner considered it necessary to interfere with the method of accounting followed by the assessee from the inception of the contract agreement. It is, however, apparent that the revenue authorities are mainly influenced by the decision of the Hon'ble Supreme Court in the case of British Paints India Ltd. It is further seen that by interfering with the system of accounting followed by the assessee, the Assessing Officer has to estimate the expenditure for manufacture of two barges on the aggregate expenditure capitalised by the assessee to be adjusted in the year of completion. From the balance sheet as also from the order of the learned CIT (Appeals), it is seen that the amount spent on the entire contract up to31-12-1987was Rs. 1,95,44,241.31 which was capitalised and shown under the head "Ship Export Project". The amount advanced to FELS,Singapore, the sub-contractor amounted to Rs. 15,44,71,825.32. As per the provisions of the contract agreement the assessee- was to receive 10 per cent of the contract price of Rs. 401,40,000 within 30 days upon receipt by the buyer inMoscowof the contractor's invoice etc. The assessee accordingly re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear of delivery of the sixth and last Barge." 21. The assessee disclosed entire receipt in the next assessment year 1989-90 for which the previous year is the year ending31-3-1989. The Auditors vide Note 12 of Schedule 16 made the following remarks: "12. The company was awarded an export contract for supply of 6 (six) Sea-Going Hopper Barges @ Rs. 669,00,000 per Barge (ship) by V/o Sudo Import, Moscow, USSR on June 20,1984. Last shipment was made under the contract onMay 10, 1988. Being a single contract the company was issued by the Government of India one Advance Import Licence carrying an export obligation for the whole contract. Therefore, the expenses, sales/purchase and profit relating to the contract of all six barges (including 2 barges which have been delivered in the previous period) are being accounted for completely in the current period i.e. the period in which the contract has been completed and the company has fulfilled its export obligation under the Advance Import Licence." It is a fact that the assessee has fully disclosed the entire receipts and also accounted for all the expenses during the assessment year 1989-90. It is also a fact that the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome out of the supply of two barges during the year. 23. With regard to the terms of the agreement, it is seen that the Assessing Officer raised various objections on the various provisions of the agreement without considering the agreement as a whole. The learned Accountant member also appears to have committed the same mistake. If the agreement is read as a whole, the terms of agreement contemplate supply of six Sea Going Hopper Barges by the assessee to Sudo Import,Moscow,USSR. The agreement provides for terms of delivery, as also for terms of payment. From the above details, it is seen that it is an on going project for which final determination and payment has to be made at the completion of the project. The assessee has to receive 25 per cent in the form of advance and final payment of 75 per cent is to be made on the completion of the project. There is no specification for determination of profit or loss at any point of time till the whole project is completed. All payments are in the nature of running payment which is not stipulated for any specific item. The assessee, therefore, did not attempt nor maintain separate account for each vessel to be supplied. 24. On the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears 1991-92 and 1992-93 and the revenue department did not interfere with the system of accounting adopted by the assessee. There is, therefore, no reason to interfere with the system of accounting adopted by the assessee in respect of the agreement dated20-6-1984entered into by the assessee. I hold accordingly and concur with the learned Judicial Member. 28. The matter will now go before the regular Bench for decision according to majority opinion. ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT Per Jordan Kachchap, J.M.--Their being difference of opinion among the members. The following respective questions were referred to Third Member for a decision. 2. The question referred by the Judicial Member: "Whether on the facts and in the circumstances of the present case "the Contract Completion Method" will be applicable or not?" 3. The question referred by the Accountant Member:-- "Whether on the facts and in the circumstances of the present case, the contract entered into by the assessee with Russian party is a divisible one or not and accordingly, whether the income from two barges supplied and billed during the year will be taxed in the relevant assessment year?" 4. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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