Income Tax Appellate Tribunal - Chennai
Assistant Commissioner Of Income Tax vs Heeral Constructions (P) Ltd. on 27 November, 2003
Equivalent citations: (2004)85TTJ(CHENNAI)49
ORDER
Mahavir Singh, J.M.
1. These appeals by the Revenue arise from the orders of the learned CIT(A), Madras-34, dt. 26th Nov., 1991 and 28th Nov., 1991. Since the issue involved in all the appeals is common, they were clubbed together, heard together and are being disposed of by this common order for the sake of brevity and convenience.
2. The common issue raised in these appeals pertain to rejection of the method of accounting adopted by the assessee in its construction business, i.e., following of the completed-project method for the purpose of accounting of construction contracts.
3. The respondent-assessee is a private limited company doing business of construction, sale, lease and letting out of residential and commercial buildings. The respondent-assessee had been maintaining mercantile system of accounting from the very beginning and following completed-project method for the purpose of contracts. The AO, while framing assessment, computed the income by making individual sale and added the amount as and when each flat was ready and possession handed over with sale deed for the sale even though the project had not been completed. In other words, the AO assessed the income on sale of flats during the relevant assessment year; the assessee, on the other hand, had done his accounting on completed-project method. In the result, the AO was of the opinion that the method of accounting followed by the assessee, i.e., completed-project method did not reflect the true profit derived by the assessee. As per the AO, since the assessee was completing the contract as entered into in the different agreements for sale of flats, with different buyers, the profit and loss should be accounted for, as and when the flat was sold.
4. Before the learned CIT(A), it was argued that right from the beginning, i.e., from the asst. yr. 1979-80, the assessee had been consistently maintaining its accounts on the basis of completed-project method and the Department had also accepted this method upto the asst. yr. 1985-86. However, for the asst. yrs. 1984-85 and 1985-86, the completed assessments were tried to be unsettled, by taking recourse to Section 263 of the IT Act. It was further submitted that the business of the assessee involved construction work of considerable magnitude, the projects took atleast 3 to 5 years for completion and that the completion of the project depended on various factors such as statutory permission from various Government authorities, continuous availability of construction materials, availability of funds, and demand and supply of accommodation, supply of labour and weather conditions, and that the capital employed by the assessee was only Rs. 2 lakhs and he had to borrow lakhs of rupees for completion of the projects. It was accordingly submitted that all the above factors reveal that completed-project system of accounting was adopted by the assessee to arrive at the profit and loss on the completion of the project. The learned CIT(A) also had gone into the accounting standards prescribed by the Institute of Chartered Accountants of India. The relevant para from the CIT's order is reproduced below :
"The accounting standard issued by the Institute of Chartered Accountants of India points out that the principal advantage of the completed contract method is that it is based on results as determined when the contract is completed rather than on estimates which may require subsequent adjustment as a result of unforeseen costs and possible losses. This method minimises the risk of recognising profits that may not have been earned. Further, in para 7.5 of the pamphlet prescribing the accounting standard for construction contracts, it is stated that it may be necessary for accounting purposes to combine contracts made with a single customer or to combine contracts made with several customers if the contracts are negotiated as a package or if the contracts are for a single project. Thus, the method followed by the appellant accords with the procedure indicated by the ICAI in this regard."
Before the learned CIT(A), it was also contended that the method adopted by the appellant was one of the recognised methods and that the AO had neither pointed out any defect in the method nor had he found that the true profit could not be arrived at on the basis of the method followed by the assessee. In view of all these, the learned CIT(A) held that the AO was not justified in rejecting the method of accounting consistently followed by the assessee and imposing another method on the assessee.
5. Before us, the learned Departmental Representative relied on the orders of the AO and the grounds of appeals. He argued that the system adopted by the assessee did not reflect the true and correct profit and, therefore, the real profit arising each year from the sale of flats was not properly arrived at and brought to tax. On the other hand, the learned counsel for the assessee argued that the respondent-assessee had adopted a method which was one of the recognised methods and it was based on the accounting standards prescribed by the ICAI and also the accounting body set up by the International Accounting Standards, and that the assessee had been following this method consistently from asst. yr. 1979-80 and the AO had not pointed out any defects either in the books of account or in the method of accounting. He also relied on the orders of the learned CIT(A) and argued that it was a well reasoned order where every aspect had been considered. He also argued that for the asst, yrs. 1984-85 and 1985-86, the Department tried to unsettle the method of accounting followed by the assessee by taking recourse to Section 263 of the IT Act and the 'B' Bench of the Hon'ble Madras Tribunal, in ITA Nos. 1261 and 1262, in the assessee's own case, had finally settled the issue and held that the method adopted by the assessee, i.e., project-completion method of accounting in respect of several civil construction projects adopted by the assessee was the correct and recognised method of accounting.
6. We have heard rival submissions and perused the materials placed before us, and the precedents cited by both the parties. The issue involved in these Departmental appeals is regarding the rejection of the method of accounting followed by the respondent-assessee for its construction business, which the assessee had been following right from the beginning of his business, i.e., asst. yr. 1979-80. For the asst. yrs. 1984-85 and 1985-86; the Department tried to revise the completed assessment by taking recourse to Section 263 of the IT Act, but finally, the 'B' Bench of Tribunal, Madras, settled the issue and held that "project-completion method of accounting in respect of several construction projects adopted by the assessee was the correct and recognised method of accounting". Accordingly, it was held that the assumption of jurisdiction under Section 263 was not in accordance with law and, therefore, revisional orders were cancelled. While framing the assessment, the AO did not point out any defect either in the books of account or in the method followed by the assessee and he assessed the assessee as a building contractor as entered into separate agreements for the sale of flats with different buyers and treated sale as profit or loss arising therefrom as accounted, rather than in the order in which the entire project was completed. It is also true that in each project construction takes normally 3 to 5 years and completion depends upon the progress of work and the factors like sanction from various Government agencies, availability of materials, funds and demand and supply of accommodation. Any delay in completion of the project will lead to escalation of cost if the factors such as cost of construction material, huge payments of interest on borrowals, increase in labour cost, etc. are taken into consideration. In view of all these, the rejection of accounts by the AO, done light heartedly, was not valid. Once accounts are regularly maintained in the normal course of business, they have to be taken as correct unless there are strong and sufficient reasons to indicate that they were unreliable. The Department had to prove satisfactorily that the method or the accounts were unreliable, incorrect or incomplete before the accounts were rejected. We find that the Hon'ble Supreme Court in the case of CIT v. Indo Nippon Chemicals Co. Ltd. (2003) 261 ITR 275 (SC) has affirmed the decision of the Hon'ble Bombay High Court in the case of very assessee [CIT v. Indo Nippon Chemical Co. Ltd. (2000) 245 ITR 384 (Bom)] as under :
"The High Court took the view that unless the AO acted under circumstances indicated in Section 145 of the Act, the AO is bound to adopt the method of computation of income regularly employed by the assessee. However, if he comes to the conclusion that the method of accounting 'employed by the assessee makes it impossible to correctly compute the income, then the AO is entitled to adopt any other suitable accounting method. We may add that whatever method the AO adopts, the method has to be consistent with the accepted principles of accountancy. It is not open to the AO to treat outgoings as income under Section 145 of the Act."
and held that :
"We are of the view that the High Court has correctly appreciated the arguments and rendered a judgment which is unexceptionable. There is no substance in the appeals of the Department. Hence, we dismiss these appeals."
We further find that the 'B' Bench of this Tribunal, in the case of this very assessee, for the asst. yrs. 1984-85 and 1985-86 in ITA Nos. 1261 and 1262/Mad/1987 had held as under vide its order dt. 14th June, 1995 :
"The very point came up for consideration before the Tribunal in several cases. In the case of Shapoorje Pallonji & Co. (Rajkot) (P) Ltd. v. ITO (1994) 49 ITD 479 (Bom), the Tribunal, Bombay 'A' Bench by its order dt. 17th Nov., 1993, for the asst. yrs. 1983-84 and 1984-85 held that project-completion method of accounting in respect of civil construction projects adopted by the assessee was correct and recognised method of accounting. The revision under Section 263 was held to be not valid. The Tribunal pointed out that in a case where the completion of project takes several years, postponement of profit of the project from the commencement of the project to the year of completion of the project would not be the basis for coming to the conclusion that the assessment made on completion of project basis was erroneous. The assessee had the choice to adopt the method of accounting but it should be adopted consistently according to the mandate of Section 145 and the Department was bound by the assessee's choice of method and it could not be rejected as improper merely because it gives the assessee benefit in certain years or merely because, according to the CIT, another method is preferable. When the assessments were made on certain principles, there was no reason why assessments should be revised. Accordingly, it was held that the assumption of jurisdiction under Section 263 was not in accordance with law and therefore, the revisional orders were cancelled. In that order, the Tribunal again pointed out the requirement of 'Accounting Standard-7' that while recognising the profit under percentage of completion method an appropriate allowance for future unforeseeable factors should be made on either a specific or percentage basis. A foreseeable loss on the entire contract should be provided for the financial statements irrespective of the amount of work done and the method of accounting followed. In the case of Malad Shopping Centre (P) Ltd. v. ITO (1983) 17 TTJ (Bom) 125, the assessee was engaged in the business of constructing shops and flats and the method of accounting adopted was to bring the profits into account when the entire project was completed. It was accepted by the AO for the first two assessment years. However, for the third year, profits were ascertained by the AO in respect of three wings of the project which had been completed and sold out by the assessee. The Tribunal held that it was not justified. The Tribunal pointed out that in order to invoke the proviso to Section 145(1), the Department must show that although the method of accounting followed is incorrect, there is income accrued during the year and that income cannot be ascertained from the method, i.e., the Department must show that some income had accrued which cannot be ascertained. The Tribunal considered the decision of the Supreme Court in the case of P.M. Mohammed Meerakhan v. CIT (1969) 73 ITR 735 (SC) but held that the decision has no application. It relied on the decision of the Gujarat High Court in the case of Balapur Vibhag Jungle Kamdar Mandali Ltd. v. CIT (1982) 135 ITR 91 (Guj), wherein the method of accounting followed by the assessee was accepted by the Department for a number of years but rejected in a later year on the ground that the method of accounting accepted earlier did not disclose the profits earned by the assessee properly. But the Gujarat High Court disapproved the refusal of the Department to follow the method which had been accepted for earlier years without any valid reason."
We also find that the Hon'ble Gujarat High Court in the case of Balapur Vibhag Jungle Kamdar Mandali Ltd. v. CIT (1982) 135 ITR 91 (Guj), has held that :
"If an assessee's method of accounts has been accepted regularly for a number of years as basis for his assessment, the AO shall not be justified if he, for any particular year, refuses to accept such method as the basis of assessment for that year";
The Hon'ble Bombay High Court, in the case of CIT v. Tata Iron & Steel Co. Ltd. (1977) 106 ITR 363 (Bom) has held that :
"Rejection of a particular method of accounts, if it is not unreasonable, cannot be justified on the ground that a better method could be visualised"; and the Hon'ble Calcutta High Court, in the case of CIT v. Dunlop Rubber Co. (I) Ltd. (1977) 107 ITR 182 (Cal) has held that : "Similarly, the difficulty of proper apportionment cannot justify such rejection". 7. The AO, while applying provisions of Section 145 of the IT Act, has to consider the following aspects :
(i) That the assessee has been regularly employing the method of accounting,
(ii) From the regularly adopted method of accounting, true and correct profit could be deduced,
(iii) The accounts are maintained correctly and no defect whatsoever has been noticed, and
(iv) That the accounts maintained are complete and there is no significant omission.
If the AO's findings on all these four aspects are in the affirmative, the assessee's profits are to be computed only on the basis of his accounts and no other method could be adopted.
8. Considering the facts and circumstances of the case and the judicial decisions of the apex Court and various High Courts, we are of the opinion that the project-completion method of accounting in respect of civil construction projects adopted by the assessee is the correct and recognised method of accounting, since the AO had neither pointed any defects either in the books of accounts or in the method of accounting, nor that from this adopted method, the true profit or income derived by the respondent-assessee could not be deduced. In view of all the findings and precedents relied upon, we uphold the order of the learned CIT(A) and dismiss the appeals of the Revenue.
9. In the result, all the three appeals filed by the Revenue stand dismissed.