TMI Blog1993 (4) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... essment on 24-2-1984 but it was reopened by issue of notice under section 148 on 12-3-1986. Despite the service of notice on the assessee on 14-3-1986, no return was filed by the assessee and, therefore, the Assessing Officer, after issue of notice under section 142(1), had completed the assessment under section 144 of the IT Act. For assessment years 1982-83 and 1983-84, the assessee had filed the return of income but, however, the income for both the years was declared at nil. The contention of the assessee before the Assessing Officer was that the assessee was engaged in construction of flats and no profit accrued during these three years as the project was not complete. The assessee had taken a stand before the Assessing Officer that in the case of a building contractor, the profits should not be assessed on year-to-year basis and the ascertainment of the profit should be done at the end of the contract work. Thus, the assessee was of the view that the profit in its case should be assessed only after the contract work was completed. It was, therefore, accordingly, pleaded before the Assessing Officer that no profit for the years under consideration should be computed. Hence the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest of Rs. 44,473 for assessment year 1981-82, Rs. 86,798 for assessment year 1982-83 and Rs. 65,834 for assessment year 1983-84. Thus, the total income of the assessee was computed at Rs. 91,630 for assessment year 1981-82, Rs. 1,25,370 for assessment year 1982-83 and Rs. 1,71,140 for assessment year 1983-84. 5. Being aggrieved, the assessee-company went in appeal before the first appellate authority. The assessee had objected to the estimate of profit at 8 per cent of the receipts for all the three years under consideration and also the disallowance of interest under section 40A(8) of the IT Act. The Commissioner of Income-tax (Appeals) examined the issue on both the counts and was of the view that the estimate of business at 8 per cent of the receipts was justified. She, therefore, upheld the computation of business income. She also observed that the determination of business income at 8 per cent of the receipts was reasonable and therefore, she did not interfere with the assessment orders of the Assessing Officer. Against this, the assessee has come up in appeals before us. 6. However, the assessee succeeded in respect of the addition of interest under section 40A(8) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the learned counsel, therefore, the issue is fully covered in his favour by the aforesaid two decisions. He, therefore, prays that the orders of the CIT (Appeals) on this count should be vacated. 9. Alternatively, the learned counsel contends that, without prejudice to the contention that no part of the income on sale of flats registered in the accounting years is includible in the income of the assessee, the rate of 8 per cent adopted by the Assessing Officer and confirmed by the CIT (Appeals) is excessive. He, therefore, urges that the rate adopted by the Assessing Officer should be suitably reduced. 10. On the other hand, the learned departmental representative, Sri K. Vasanth Kumar, argued that the method of accounting followed by the assessee was incomplete and does not lead to the computation of true income. The assessee's Auditors themselves had mentioned that the closing work-in-progress has not been scientifically valued by the assessee. The books of account maintained by the assessee are not closed and adjusted and part of the expenses also cannot be verified. The books also cannot lead to the deduction of the true profit and, therefore, as per the decision of the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contract was completed in order to ascertain the income and it was open to the Revenue to estimate the profit on the basis of the receipts in each year of the construction although the contract was not complete ........" Our view is also strengthened by the finding of the Patna High Court in the case of Sukhdeodas Jalan v. CIT [1954] 26 ITR 617. The brief facts of the case before their Lordships of the Patna High Court were that the assessee was a contractor and he took a contract from the Defence Department on 14-4-1943. The assessee's accounting year was from 1-4-1943 to 31-3-1944. The assessee did not show in his return any income from the contract business in the accounting period 1943-44 on the ground that the accounts in respect of this contract were closed only on 3-12-1944 and, therefore, the profit from that contract could be ascertained only on that date. This issue was examined by the Honourable High Court under section 3 and proviso to section 13 of the 1922 Act. On facts, it was laid down that the scheme and the structure of the Income-tax Act is to make the tax and annual tax for the purpose of assessment. Section 3 makes each previous year a distinct unit of time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... complete and only a small portion of the work remains to be done, an 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 win 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 work. " 13. With a view to arrive at the reasonable profit on an incomplete work, we also can gainfully refer to the observations in Spicer and Pegler's Bookkeeping and Accounts, 16th edition, page 301. In the said book, the method of valuation of a long-term contract has been discussed. As per the learned author: " Any business which involves the expedience and completion of long term contracts, it is often appropriate to spread over the period of contract on a properly determined basis, the profits which are expected to be earned when the contracts are completed. This procedure takes up in each period during the performance of the contract a reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ress and, therefore, it is the duty of the Assessing Officer to correctly value the closing work-in-progress and arrive at the true picture of the profit for the years under consideration. 15. Though the decision of the Supreme Court in the case of British Paints India Ltd. is not directly applicable to the facts of the case, we take assistance from the decision for a limited purpose of valuation of the closing work-in-progress. In the case before us, the Assessing Officer has applied the provisions of section 145 to compute the profit in the case of the assessee. In the said decision, while examining the provisions of section 145, the Honourable apex court observes: " Section 145 confers sufficient power upon the Assessing Officer----say, it imposes a duty upon him to make such computation in such manner as he determines for deducing the correct profits and gains. This means that where accounts are prepared without disclosing the real cost of the stock-in-trade, albeit on sound expert advice in the interest of efficient administration of the business, it is the duty of the Assessing Officer to determine the taxable income by making such computation as he thinks fit. " On thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal before the Tribunal and agitated that the CIT (Appeals) was not justified in setting aside the assessment. For assessment year 1984-85, the Tribunal had followed its own order for assessment year 1982-83 and had upheld the action of the CIT (Appeals). 18. It is however, important to mention that in the case of Decent Builders the merits of the case were neither advocated nor discussed by the Tribunal. The issue before the Tribunal was only whether the CIT (Appeals) had rightly restored the matter back to the file of the Assessing Officer. The issue whether the profit in the case of a building contractor arises or accrues from year to year or on the completion of the contract, was never examined by the Tribunal in the aforesaid orders. The decision in these two orders, therefore, does not support the contention of the assessee in the case before us. 19. It is also important to mention that normally the profit or loss of a trader should be computed with reference to the books of account maintained and the method of accounting followed by him. In the case of Decent builders the assessee itself had filed return of income disclosing income of Rs. 40,000 for assessment year 1982- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of CIT v. Padma Timber Depot [1988] 169 ITR 646 (AP). The Revenue is, therefore, directed to exclude the interest under sections 139(8) and 217 of the IT Act for assessment year 1981-82. 22. Coming to the appeals from the Revenue, the only issue is against the deletion of interest under section 40A(8) of the IT Act. The facts of the case we have already mentioned above. The provisions of section 40A(8) were brought on the statute book for a definite purpose. The objective behind the enactment of the said provisions was explained in the Notes in Clauses when the provisions of section 40A(8) were introduced. As a result of general policy of credit restraint and enforcement of selective control measures by Reserve Bank of India, it was felt that non-banking, non-financial companies had been increasingly resorting to acceptance of deposits from the public to meet their financial requirements. With a view to curb this, it was provided that 15 per cent interest was to be disallowed under the provisions of section 40A(8) of the IT Act even if nothing was found excessive or unreasonable as under section 40A(2) of the Act. Thus, the disallowance under section 40A(8) was ..... 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