TMI Blog2008 (2) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... ising in the present appeals is whether the Completed Contract Method followed by the assessees and accepted by the Revenue in the past needed to be substituted by percentage of Completion Method as contended by the AO. 3. We are concerned with assessment years 1991-1992 to 1997-1998. 4. Assessees are private limited companies subscribing to chits as their business activities. They were maintaining their accounts on mercantile basis and they were computing profit/loss, as the case may be, at the end of the chit period following completed contract method, which was earlier accepted by the Department over several years. 5. Chit funds are basically saving schemes in which certain number of subscribers join together and each contributes a certain fixed sum each month, the total number of months being equal to the total number of subscribers. The subscriptions are paid to the Manager of the fund by a certain prescribed date each month and the total subscriptions to the fund are auctioned each month amongst the subscribers. At each auction, the lowest bidder is paid the amount of his bid and the balance received from out of the total subscriptions received is distributed equally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not correct. Therefore, to that extent, the controversy is settled. 11. The limited controversy is whether the completed contract method of accounting adopted by the assessees as method of accounting for chit discount is required to be substituted by percentage of completion method. 12. In this connection, it is the case of the assessees that, profits (loss) accrued to the assessees only when the dividends exceeded the discount paid and that difference could be known only on the termination of the chit when the total figure of dividend received and discount paid would be available. That, it would be possible for the assessees to make profits only when the sum total of the dividend received exceeded the sum total of discounts suffered which is debited to P L account. According to the assessees, the Department has all along been accepting the completed contract method and, therefore, there was no justification in law or in facts for deviating from the accepted practice. According to the assessees, a chit transaction has been treated by the various courts as one single scheme running for the full period and, therefore, according to the assessees, the completed contract metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands, but, in accordance with the mercantile system of accounting followed by the assessee, it credited in its accounts Rs. 43,692 representing the full sale price of the lands. At the same time, it also debited Rs. 24,809 as expenditure for the development it had undertaken even though, no part of that amount was actually spent. The Department, therefore, disallowed the expenditure of Rs. 24,809 on the ground that the amount was not actually spent. The assessee ultimately succeeded in the Supreme Court. It was held by the Supreme Court that the expression "Profits or Gains" in Section 10(1) of the Income-tax Act, 1922 should be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure, which is necessary for the purposes of earning the receipts is deducted therefrom. Accordingly, the Supreme Court took the view, that since the assessee was following Mercantile System of Accounting and since the assessee had credited the full sale price of lands in its accounts amounting to Rs. 43,692, the assessee was entitled to estimate the expenditure because, without such estimation of expenditure, it was not possible to compute pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnizing costs (expenses) against revenues or against the relevant time period in order to determine the periodic income. This principle is an important component of accrual basis of accounting. As stated above, the object of AS 22 is to reconcile the matching principle with the Fair Valuation Principles. It may be noted that recognition, measurement and disclosure of various items of income, expenses, assets and liabilities is done only by Accounting Standards and not by provisions of the Companies Act." 15. Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. Completed contract method is one such method. Similarly, percentage of completion method is another such method. 16. Under completed contract method, the revenue is not recognised until the contract is complete. Under the said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to P L account. The said method determines results only when contract is completed. This method leads to o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tral. Therefore, we do not wish to interfere with the impugned judgment of the High Court. 21. Before concluding, we may point out that under section 211(2) of the Companies Act, Accounting Standards ("AS") enacted by the Institute of Chartered Accountants have now been adopted [see: judgment of this Court in J.K. Industries case (supra)]. Shri Tripathi, learned counsel for the Department, has placed reliance on AS 22 as the basis of his argument that the completed contract method should be substituted by deferred revenue expenditure (spreading the said expenditure on proportionate basis over a period of time). He also relied upon the concept of timing difference introduced by AS 22. It may be stated that all these developments are of recent origin. It is open to the Department to consider these new accounting standards and concepts in future cases of chit transactions. We express no opinion in that regard. Suffice it to state that, these new concepts and accounting standards have not been invoked by the Department in the present batch of civil appeals. 22. Subject to above, we see no reason to interfere with the impugned judgment of the High Court and accordingly the civil ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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