TMI Blog1996 (9) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,267, ie., Rs. 91,99,633 allowed as deduction under section 80-O." 2. On appeal, the CIT(A) following the order of the Tribunal in the assessee's case for the assessment year 1985-86 and the orders of the CIT(A) for the assessment years 1989-90 and 1990-91, accepted the assessee's contention and held that the deduction has to be allowed on the gross amount of income brought into India in convertible foreign exchange without deducting any expenses in India. 3. We find that the issue is covered in favour of the assessee by the order of the Tribunal dated 13-9-1991 in ITA No. 1827 (Cal.) of 1990 and ITA No. 2284 (Cal.) of 1990 for the assessment year 1985-86. In this order the issue has been deal with at length and the provisions of section 80-O have been considered along with section 80AB. The Tribunal ultimately upheld the assessee's contention. 4. Respectfully following the Tribunal's order, we uphold the decision of the CIT(A) and dismiss the appeal by the department. 5. There is also one more aspect of the matter which we thought we should record in the order. While considering a similar provision in section 80M of the Act, the Calcutta High Court held in the case of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed certain jobs from which the aggregate amount payable came to Rs. 31.20 cr. and directed the company to explain why only a lesser amount has been taken to the profit and loss account. According to him, the assessee was following the mercantile system of accounting which enjoined that it should take credit for amounts receivable, that as per the terms of the agreement with its clients the assessee was to receive certain payments during the accounting year and such terms did not offer any scope for re-working the amounts to be taken credit for and therefore the company had not properly disclosed the amount of engineering fees. His views were communicated to the assessee by letter dated 1-12-1993 and in this letter he specifically referred to the agreement with TISCO (Tata Iron Steel Co. Ltd.) in connection with the Phase-III expansion programme undertaken by the assessee, under which the assessee was to receive a sum of Rs. 12 cr. during the year, but had taken only Rs. 2.5 cr. as income for the year. 8. The assessee's response by letter dated 1-2-1994 was elaborate and covered all the factual and legal aspects of the quary raised by the ITO. Particular emphasis was laid on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f engineering fees to be credited to the Profit Loss Account, on the basis of the information supplied by the assessee in its letter dated 1-2-1994, at Rs. 41,48,26,015. As the assessee had disclosed only Rs. 27,20,884 in its Profit Loss Account, the balance of Rs. 14,28,09,131 was added to the business income. 10. On appeal, the CIT(A) whole-heartedly agreed with and approved the decision taken by the ITO and confirmed the addition. Thereafter the assessee filed an application under section 154 of the Act pointing out to the CIT(A) that if the income is to be so assessed on the basis of the agreements, then the assessee should be held entitled to deduction of estimated expenses for completion of the projects, on the basis of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC). By order dated 25-7-1995, the CIT(A) agreed with the assessee's contention and directed the ITO to work out and allow the deduction for costs committed by the assessee as per the contracts. 11. The assessee-company is in further appeal before us reiterating its stand amply elaborated before the departmental authorities. By way of assistance, detailed paper-books, running to 218 pages, were filed. The order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been following the method of accounting for profits from the engineering consultancy work on the basis of 'percentage of progress' method, one which has been approved by the ICAI in its Accounting Standards and further that the system has been followed for the last thirty years and has also been accepted by the income-tax authorities. This factual position has not been controverted on behalf of the income-tax authorities. In fact, once they had attempted to tinker with the same in the assessment year 1963-64 but that attempt was thwarted by the Tribunal. The assessee had undertaken some work for the Bokaro Steel Plant. The work covered a period of 14 months for which the assessee, under the agreement, was to receive a sum of Rs. 60 lakhs. The work started in the accounting year in May. The accounting year came to an end on June. According to the ITO, the have taken in to account 1/7th of the above sum, for the purpose of assessment. The assessee had accounted for earnings from this contract only to the extent of Rs. 5 lakhs. The contention on behalf of the assessee was that receipts of a particular period had no relation to the work completed during that period. In other wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them". Para 4.2 defines 'completed services contract method' as one "which recognises revenue in the statement of profit and loss only when the rendering of services under a contract is completed or substantially completed". Para 4.3 defines 'proportionate completion method' as a "method of accounting which recognises revenue in the statement of profit and loss proportionately with the degree of completion of services under a contract". The Explanation at para 5 explains that revenue recognition is mainly concerned with the timing of recognition of revenue in the profit and loss account and the amount of revenue is usually determined by the agreement with the parties. Paragraph 7 is as follows : "7. Rendering of Services 7.1 Revenue from service transactions is usually recognised as the service is performed, either by the proportionate completion method or by the completed service contract method. (i) Proportionate completion method -- Performance consists of the execution of more than one Act. Revenue is recognised proportionately by reference to the perf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prudence') revenue is recognised as the activity progresses even though in certain circumstances it may not be realised." The basis for recognising revenue on construction contracts is given at para 9 (relevant portion only) : "Basis for Recognising Revenue on Construction Contracts 9. Percentage of completion method 9.1. Under the percentage of completion method, the amount of revenue recognised is determined by reference to the stage of completion of the contract activity at the end of each accounting period. The advantage of the method of accounting for contract revenue is that it reflects revenue in the accounting period during which activity is undertaken to earn such revenue. 9.2. The stage of completion used to determine revenue to be recognised the financial statements is measured in an appropriate manner. For this purpose, no special weightage should be given to a single factor ; instead, all relevant factors should be taken into consideration ; for example, the proportion that costs incurred to date bear to the estimated total costs of the contract, by surveys which measure work performed and completion of a physical proportion of the contract work. 9.3. Progr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... standards laid down as above, reflect the views of a professional body, viz., the ICAI and are therefore entitled to the highest respect. Their view with regard to capitalisation of interest during preproduction period was accepted as reflecting the proper commercial principles of accounting by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. The Madras High Court accepted the view of the ICAI as reflecting the correct accounting practice in Sivakami Mills Ltd. v. CIT [1979] 120 ITR 211. Even the views expressed by author, whose books on accountancy are recognised throughout the world, have been applied by the Calcutta High Court in the case of Garden Reach Workshop Ltd. v. CIT [1981] 132 ITR 814. 20. A method of accounting or accounting practice or policy prescribed or approved by the ICAI is normally to be given effect to. Similarly, the views of authors of recognised books on accountancy are entitled to highest respect. 21. We will now examine whether the assessee has in fact followed the accounting standards. The authorities appear never to have questioned that it has. As mentioned earlier, in the letter to the ITO, dated 1-2-1994, the assessee has ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TO in the assessment order has stated that the assessee did not furnish any evidence to support its claim that the performance is evaluated by the project managers. Along with the letter dated 1-2-1994 the assessee had furnished copies of the "Job progress report for the year ended 31-3-1991" in respect of ASP-Stage II Expansion project and RSP-Coke Oven Battery project, in Annexure B to the said letter. After this letter, which also contained a reference to the project evaluation, there is nothing to show that any evidence in this behalf was directed to be produced. Even in its earlier letter dated 20-10-1993, the assessee had made a similar claim which is noticed by the ITO himself in his letter of 1-12-1993 ; nevertheless, the ITO has not called upon the assessee to lead any evidence in this behalf in his letter. Thus the assessee's claim has never been doubted on facts. The ITO did not also dispute the figures given in the progress report furnished as Annexure B to the assessee's letter dated 1-2-1994, which obviously were based on the project evaluation made by the project engineers. Therefore, there is nothing to doubt or suspect the assessee's claim that it had actually foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e method of accounting any income that has accrued to the assessee has to be brought into account and on the basis of the agreements, the assessee obtained the right to receive the income at stated intervals of time and the moment that point of time was reached the right fructified into a debt due and that such moment cannot be postponed to suit what is called the revenue recognition theory. But as already stated, it is only a question of giving primacy or preference to the accounting standards over the rights of the assessee under the agreements. The projects undertaken by the assessee, a glimpse of which is given at pages 11 to 30 of the paper book, are quite complicated matters. They involve highly specialised engineering consultancy services. There is a time-schedule by which the project is to be completed and often the assessee, for reasons beyond its control, is unable to meet the schedule. Projects are delayed. In some cases additional payment is provided for. In some cases, even before a proper agreement for the engineering services is entered into, a memorandum of understanding is entered into, on the basis of which the work is started. The agreement proper follows. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,34,317 2. RSP-DPR Modernisation 10,00,000 10,00,000 54,00,000 3. ICCL Ltd. 11,00,000 12,00,000 16,50,000 4. TISCO (Bar Rod Mill) 11,00,000 11,00,000 23,30,000 5. Orissa Mining 8,50,004 9,63,337 13,27,334 Corpn. Ltd., Bhubaneswar. 6. Hindustan Development Corpn., Calcutta. 13,50,000 18,00,000 20,00,000 7. Prakash Pipes Industries Ltd., Delhi. 3,50,000 2,00,000 4,95,000 -------------------------------------------------------------------------------------------------------------------------------------------------- It is, therefore, clear that a genuine effort has been made by the assessee to estimate its income on the basis of the actual performance and that there is no intention to postpone or defer the income with a view to reducing the income for income-tax purposes. 25. At pages 217-218 of the paper-book, the assessee has furnished details in respect of TISCO Phase-III project for the assessment years 1990-91 to 1996-97 to show the fallacy in the view taken by the income-tax authorities. During this period, the assessee has received a total sum of Rs. 46.5 cr. The assessee has appropriated to the Profit Loss A/cs. of these years an aggregate income of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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