TMI Blog2001 (1) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and in the circumstances of the case, the learned CIT failed to appreciate that the income is assessable to tax only after completion of a project in all respects. 2. At the time of hearing Smt. Vidya Sharma, Advocate, appeared on behalf of the assessee and Shri P.C. Chadaga, DR, appeared on behalf of the Revenue. Their detailed submissions were heard. 3. Briefly the facts are that the assessee has been carrying on work of development of properties and also construction of apartments. The business activity carried out by the assessee involves various steps being identification of a plot, securing approval of the plans and construction and delivery thereof and simultaneously identifying buyers for the apartments. The undivided right and interest in land is sold by the owner of the land to the prospective buyers directly and after completion of the building hands over the possession of the respective units to the buyers. The assessee has been following the mercantile method of accounting in respect of the projects developed by it as part of its income. The profit on each project was taken by the assessee on the basis of completion of the projects undertaken by the assessee o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,00,000 --------------- Net profit according to books Rs. 7 00,000 Difference : Rs. 7,00,000 and Rs. 8,00,000 = (Rs. 1,00,000) The loss of Rs. 1,00,000 to be allowed in the second year. That is, second year income is Rs. 3,20,000 - Rs. 1,00,000 = Rs. 2,20,000. The assessing being aggrieved by this direction of the CIT under section 263 is in appeal before us. 4. At the time of hearing, Smt. Vidya Sharma, Advocate, appearing on behalf of the assessee, at the out set contended that assuming of jurisdiction by the CIT was based on wrong appreciation of facts and was also contrary to the provisions of section 145 of the Income-tax Act and that the orders of the Assessing Officer do not suffer from any error so as to make it prejudicial to the interests of the Revenue. According to her, as per the operating mechanics of the assessee's business, the obligation of the assessee commences with the signing of the Development agreement with the owner of the land and progresses with subsequent agreement with the prospective buyers and completion of contract in all respects in accordance with the said contract entered into with the custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel that according to this method of accounting, the expenditure if it is being incurred on the project is also claimed in the year of appropriation of the income or in other words in accordance with the mercantile system of accounting. According to her, the method of accounting following by the assessee is in tune with the generally accepted accounting policy of matching costs with revenue, i.e., when the revenue is taken into account, the commensurate expenditure is also taken and vice versa She submitted that there are two recognised methods of accounting for recognising the incomes from contracts normally in use. She referred to the Accounting Standard (AS 7) issued by the Institute of Chartered Accountants of India (ICAI) wherein the two methods have been prescribed, namely, completed contract method and the percentage of completion method. According to the learned counsel, the method adopted by the assessee in its return of income being the completed contract method, conforms to the accounting standards issued by the premier accounting body of the country, i.e., ICAI. According to her, the method of accounting adopted by the assessee depicts a true and fair view about t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the receipts are received on the completion of the structure. As against this, according to her, for completion of the structure, the cost incurred would be only about 40 per cent of the project cost whereas the major cost is incurred subsequent to completion of the civil structure. Against the aforesaid facts, it was argued by the learned counsel that if the stand of the Revenue is accepted to tax the income as and when the customer pays, the money, it would lead to absurd results. According to her, in such a scenario, 90 per cent of the receipts would be accounted as income in the year of completion of the structure (which would represent only 40 per cent of the work), whereas the expenditure would have been only 40 per cent and there will be huge profit in the first year and in the subsequent year wherein 10 per cent of the receipts would be accounted for as against the expenditure which will be to the tune of 60 per cent and would ultimately result in a huge loss. The assessee's counsel attempted to demonstrate that such a method of accounting is impracticable and unrealistic and does not satisfy the requirement of section 145 vis-a-vis the method of accounting should ena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording to the learned DR, more often than not the project of the assessee takes more than 12 months for completion and due to the method of accounting employed, the income is offered for tax at a later stage. The DR relied upon the decisions which have been referred to in the order of the CIT. With regard to the assessee's plea that the method of accounting of the assessee is in consonance with the accounting principles framed by the ICAI, the learned DR drew the attention of the Bench to the observations of the Apex Court in Tuticorin Alkali Chemicals Fertilizers Ltd v. CIT [1997] 227 ITR 172. According to him, the issue is to be decided in accordance with, the principle of law and not in accordance with the accountancy practice. The DR also referred to the decision of the Bangalore Bench in United Property Developers (P.) Ltd. [IT Appeal No. 546 (Bang.) of 1997 dated 10-9-1999]. He pointed out that the Tribunal in the aforesaid case has held that if part construction is made in a year and payments are received during the previous year, it necessarily follows that the assessee has earned some income as there is an element of earning comprised therein. It was accordingly pleaded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ajor considerations governing the selection of accounting policies are prudence, substance over form and materiality. In any given case, the method of accounting followed should stand the tests of the aforesaid three principles of accounting assumptions. Tested against the aforesaid, it can be stated that the assessee's method of accounting followed is prudent in so much as income is accounted for only on the completion of its obligation. The assessee's method of accounting recognises the substance of the business mechanics by recognising profits only on the completion of the project or near completion where the revenue can be measured with certainty after providing for possible liability or losses. 12. We find that although the CIT in his impugned order concludes that the method of accounting followed by the assessee, i.e., project completion method, does not lead to ascertainment of correct profits in relation to the activity while on the other hand what he has proposed as a substitute is not an alternative method suggested by the ICAI, namely, percentage of completion method. In fact, the CIT has directed the Assessing Officer to adopt the income at 8 per cent of contract rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer is not prevented from rejecting a particular method of valuation of stock merely because it was accepted by the Department in earlier years. The Assessing Officer is fully entitled to and in fact duty bound to reject the method if, in his opinion, the method employed is such that income cannot properly be deduced therefrom. However, what is significant to note is that the Supreme Court has nowhere said that it would be open to the Assessing Officer to reject even a recognised method of valuation. Indeed, the Supreme Court could not have said so for the simple reason that it cannot at all be open to the Assessing Officer to say, in the context of a recognised method of valuation, that it is such that income cannot be properly deduced from its employment. In the case of British Paints India Ltd. it was not argued by the assessee that the method of valuation of stock adopted by it was a recognised method. In fact, the Assessing Officer in that case held that the method adopted by the assessee (British Paints India Ltd.) though regularly employed was not a recognised method." 14. As has been mentioned by us in the earlier paragraphs, the CIT as also the learned DR have placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d neither the accounts of the assessee have been rejected by the lower authority, thus this decision does not help the case of the Revenue. 16. In fact, having regard to the ratio of the decision of the jurisdictional High Court in the case of Khoday Distillers Ltd., we find ample force in the submissions of the assessee's counsel. The Hon'ble High Court categorically approved and stated that the method of recognising the incomes on completed contract method is one of the recognised methods of computing income. The Hon'ble High Court in this case was answering the following question referred to it: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the assessee is following the complete contract method of accounting and in deciding that no part of the profit of Rs. 17,58,737 is assessable in the assessment years 1980-81 and 1981-82 and the whole of such amount is assessable only in the assessment year 1982-83?" The Hon'ble High Court while affirming the order of the Tribunal in favour of the assessee, held as under: "When one of the accounting procedures is to compute the profits only on the completion of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. relied upon the decision of the High Court of Karnataka in Khoday Distillers Ltd to conclude the issue. In fact, after perusing the order of the Tribunal in United Property Developers (P.) Ltd's case, we find the reference to the decision of the Jurisdictional High Court in Khoday Distillers Ltd's case) missing. Ostensibly, the Bench therein did not have the benefit of having the well considered views of the jurisdictional High Court. 18. Therefore, we find that the method of accounting employed by the assessee in its returns and initially accepted by the Assessing Officer in the course of original assessments was not erroneous so as to be prejudicial to the interests of Revenue. In fact, the decision of the Rajasthan High Court in the case of Rajasthan Financial Corpn. is an identical facts. The assessee before the Rajasthan High Court was a financial corporation deriving income mainly from interest on monies advanced. It was crediting interest to the profit and loss account except in cases where litigation was initiated, the interest was not credited on the ground that such loans were sticky or doubtful of realisation. It was only on finalisation of the litigation that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
