Income Tax Appellate Tribunal - Ahmedabad
Shree Parshwanath Corporation,, ... vs Department Of Income Tax on 8 July, 2005
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "B"
(BEFORE S/SHRI D T G AR ASI A,JM AND A N P AHUJ A,AM)
ITA No.2213/Ahd/2005
(Assessment Year:-2001-02)
The Assistant V/s M/s Shree Parshwanath
Commissioner of Income- Corporation, 50, Harisidha
tax, Circle-9, Ahmedabad Chamber, Ashram Road,
Ahmedabad
[PAN:AADFS3093C]
[Appellant] [Respondent]
Revenue by :- Ms. Smriti Samant,DR
Assessee by:- Shri M G Patel,AR
O R D E R
A N Pahuja: This appeal by the Revenue against an order dated 08-07-2005 of the ld. CIT(Appeals)-XV, Ahmedabad, raises the following grounds:
1 "The ld. CIT(A) has erred in law and on facts in deleting addition of Rs.30,66,750/- which was made on the basis of percentage completion method.
2 The ld. CIT(A) has erred in law and on facts in deleting disallowance of interest of Rs.71,50,643/- when it was not the business of assessee to arrange for funds by raising loans from bank.
3 On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer.
4 It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the order of the Assessing Officer be restored to the above extent."
2. Adverting first to ground no.1 in the appeal, facts, in brief, as per relevant orders are that return declaring loss of Rs.9,74,661/- filed on 29.10.2001 by the assessee, carrying on the business of civil construction, was taken up for scrutiny with the issue of notice u/s 143(2) of the Income-tax Act,1961[hereinafter referred to as the 'Act'] on 29.10.2002. During the period under consideration, the ITA No.2213/Ahd/2005 assessee undertook civil construction work on behalf of Kalpataru Park Coop Housing Society Ltd. Zundal (proposed), Kalpavruksha Coop. Hsg Soc Ltd. Koba (proposed) and Kshipdev Coop Hsg. Soc. Ltd. Vadaj. The Assessing Officer [AO in short] found that the assessee opted "completed contract method" of accounting i.e one of the method of accounting prescribed under AS-7 by the ICAI, for maintenance of their accounts. According to the AO, since the choice of accounting policy is left to construction contractor without any rider by "ICAI", it was obligatory on the part of a construction contractor to select such accounting policy which is in conformity with the provisions of the Act and principles laid down by the Apex Court. The AO was of the opinion that assessment has to be framed adopting "percentage of completion method as against completed contract method" adopted by the assessee, for the following reasons:
a) the 'Completed Contract Method' was not representing a true and fair view of the state of affairs of the business as prescribed vide notification No. S.O. 69(E) dated 25-01-1996 issued by Government of India.
b) There was a change in law to be precise section 80IB(10) hence as provided by above referred notification and clarified by "ICAI" , the change in Accounting Policy was necessary.
c) It was not in conformity with the decrees of Supreme Court 2.1 In the light of aforesaid facts , in response to a notice dated 9.2.2004 issued by the AO , the assessee replied vide their letter dated 11.2.2004 that the assessee was a partnership firm in terms of partnership deed executed on 25th April 1996 and its first assessment year was 1997-98. Since then the method of accounting regularly employed was "completed contract method".
'Habitat' was their first construction project started in A.Y. 1997-98 and completed in A.Y. 2000-01. Assessment for the said AY 1997-98 u/s 143(3) of the Act was finalized on 26.3.2003 determining loss at Rs.3,93,51,660/-.During the course of development of the "Habitat," the assessee started civil construction on behalf of above referred three cooperative housing societies, by entering into development 2 ITA No.2213/Ahd/2005 agreements with them. As per the terms of the agreement , the assessee firm was entitled to 'remuneration' being the difference between amount collected from the members of the scheme and total cost incurred in connection with the scheme and this remuneration would accrue on completion of respective scheme. Relying upon the decisions in the case of T.S. Chandrashekhar v. ACIT,ITAT Banglore, 66 TTJ 360, Madhavan House Building Coop Soc. v. ACIT,ITAT Banglore, 76 TTJ 948, ACIT v. Magnum International Trading Co.,ITAT Delhi "D" 3rd Member, 79 TTJ 552),Shapoorji Pallongs & Co. (Rajkot) P. Ltd. V. ITO,ITAT Bombay, 49 ITD 479) ,M. Constructions v. JCIT,ITAT Banglore, 84 ITD 429, Happy Home Developers v. ACIT,ITAT Mumbai, 115 Taxman 300 (Mag.), Malad Shopping Centre P. Ltd. V. ITO,17 TTJ 125 (Mum.), Bharat Bijli Ltd. V. DCIT,71 ITD 412 (Mum.), Sandvik Asia Ltd. V. DCIT,69 ITD 59( Pune) and Balapur Vibhag Jungle Kamdar Mandli Ltd. V. CIT,135 ITR 91 (Guj), the assessee contended that since the assessee was regularly following 'completed contract' method, their accounting policy may not be disturbed. The ongoing three projects had been completed in 2003-04 and the income earned on the said scheme has been duly offered in A.Y. 2003-04., the assessee pleaded.
2.2 However, the AO rejected the contentions of the assessee on the ground that maintenance of accounts projects wise and completion of one project or commencement of another project either during the pendency of earlier project or on completion of old project, has no relevance. Moreover, under AS-7 ,it was prescribed that a foreseeable loss on the entire contract should be provided for in the financial statement irrespective of the amount of work done and the method of accounting followed. The AO further observed that the assessee entered into a development agreement with three cooperative housing societies in A.Y. 1999-00 and completed work in A.Y. 2003-04,disclosing net profit of Rs.4,31,38,554/- . However , in the return, the income was computed as under:
Profit & Gain of Business or Profession Rs. 4,32,32,215 Less set off of B/F Business loss Rs. 2,24.58.977
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Rs. 2,07,73,238
Add Income from other sources Rs. 3,750
3
ITA No.2213/Ahd/2005
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Rs. 2,07,76,988
Less B/F Depreciation Rs. 8.63.860
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Gross total Income Rs. 1,99,13,128
Less Deduction u/s 80-IB Rs. 2,00,64,507
In the light of aforesaid claim u/s 80IB(10) of the Act, the AO was of the opinion that if the Accounting Policy was not changed, it will create absurd results as the assessee would avail deduction u/s 80IB(10), for which it was not entitled. As regards plea of the assessee regarding accrual of remuneration or income on the completion of contract, the AO observed that the agreement clearly mentioned that construction will be carried out only after getting money from members. There is no provision for straight way refund of money to anybody, be it cooperative housing society or member. Hence the difference between collection from members and work in progress is the income of the assessee. Mere formality of passing entries does not change the nature of revenue , the AO concluded. While referring to notification no. S.O.69(E) dated 25.1.1996 and the definition of the word 'income' as also the decisions in the case of Dooars Tea Co. Ltd. V. Comm. of Agrl. IT. [1962] 44 ITR 6,Tuticorin Alkali Chemicals & Fertilizers Ltd. V. CIT 1997] 227 ITR 172(SC),Modi Ind. Ltd. v. CIT [1995] 216ITR759(SC) and Tirath Ram Ahuja Pvt. Ltd. Vs. CIT, 103 ITR 15 (1975) Delhi, B.S.C. Footwear(1972) 83 ITR 269(HL) and CIT Vs. British Paints India Limited, 188 ITR 44(SC), the AO brought to tax the income of Rs.30,66,750/-
3 On appeal, the assessee while reiterating their contentions before the AO submitted since the assessee is following regularly and consistently completed contract method of recognising the income, duly accepted by the Department in past, the same has to be followed in subsequent years. While relying upon the decisions in the case of Malad Shoping Centre P. Ltd. v. ITO ,ITAT Bombay 17 TTJ 125, Bharat Bijlee Ltd. v. DCIT,ITAT - Mumbai, 71 ITD 412, Sandvik Asia Ltd. v. DCIT,ITAT - Pune Bench, 69 ITD 59 and Balarpur Vibhag Jungle Kamadar Mandli Ltd. v. CIT,135 ITR 81 (Guj), the assessee argued that the method of accounting followed by the assessee may be accepted.In the light of these submissions, the ld. CIT(A) concluded as under:
4 ITA No.2213/Ahd/20052.2 I have considered the submissions of the Authorised Representative carefully and have also gone through the details filed by the Authorised Representative. It is the claim of the Authorised Representative that at the end of the completion of each project the net profit of each project has to be considered whereas the Assessing Officer has assessed the net profit on the basis of percentage of completion of each project. It is also found that the Assessing Officer has not disturbed the method of accounting for computing the income of the appellant shown by the appellant in the other years. The appellant has given project wise summary as per page 83 of the paper book. It is the contention of the Authorised Representative that on completion of the projects the appellant has offered the income. The appellant has followed 'completed contract method.' The first construction project i.e. "HABITAT" at Gulbai Tekra, was completed in A.Y. 2000-01 and in that year final loss has been offered by the appellant in the return of income for that year and during the year in the projects for construction of residential flats for the three societies i.e. Park Co. Operative Housing Society Ltd. Zundal, Kalpavruksha Co.
Operative. Housing Society Ltd., Koba and Kshipdev Co. Operative Housing Society Ltd. Vadaj were not completed and therefore, the appellant has shown the construction expenses incurred on the said projects on the Asset side and the amount collected from the members on Liability side. The appellant has cited various decisions wherein the completed contract method has been recognized. The tenaments of Zundal project have been completed in F.Y.2001-02 and the other projects have been completed during F.Y. 2002-03 and income earned on the said schemes have been duly offered for taxation in A.Y. 2002-03 and 2003-04. In view of the above facts as the method of accounting of profit in other years on the basis of completed contract method has not been disturbed and the completed contract method is an accepted method of accounting, in my opinion, it is not justified to change the method of accounting, thereby to make addition of Rs.30,66,750/- during the year in appeal. Accordingly, the addition made by the Assessing Officer is deleted."
4 The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. DR supported the order of the AO while the ld. AR on behalf of the assessee supported the order of the ld. CIT(A).
5 We have heard both the parties and gone through the facts of the case. Undisputedly, the assessee is following the completed contract method of accounting right since inception in terms of partnership deed executed on 25th April 1996 and the AO has accepted the said method of accounting since then as also in the subsequent assessment years. Sec. 145 of the Act prescribes that business income shall be computed in accordance with system of accounting 5 ITA No.2213/Ahd/2005 regularly employed by the assessee. The choice of method of accounting lies with the assessee and unless conditions prescribed in sec. 145(3) are fulfilled, profits have to be determined in accordance with the method of accounting followed by the assessee [CIT v. McMillan & Co., (1958) 33 ITR 182 (SC), CIT v. A. Krishnaswami Mudaliar and Others, (1964) 53 ITR 122 (SC)]. The assessee is entitled to change the method of accounting followed, provided such change is bona fide and is regularly followed thereafter. Sec. 145 had been amended by Finance Act, 1995 w.e.f. 1-4-1997 and the amended sec. provides that income shall be computed in accordance with either cash or mercantile method of accounting regularly followed by the assessee. Sub-sec.(2) empowers the Central Government to notify accounting standards. No standard has been brought to our notice by the Revenue which specifically deals with the method of accounting to be followed by builders or developers . Subsec.(3) thereof provides that where the assessing officer is not satisfied about the correctness or completeness of accounts or where the method of accounting has not been regularly followed, the AO may make the assessment in the manner provided in S. 144. Though in accordance with sec. 145, business income has to be computed in accordance with the method of accounting regularly followed by the assessee, it does not determine chargeability of income. [CIT v. A. Krishnaswami Mudaliar and Others, (1964) 53 ITR 122 (SC), CIT v. Motor Credit Co. P. Ltd., (1981) 127 ITR 572 (Mad.), Kewal Chand Bagri v. CIT, (1990) 183 ITR 207 (Cal.)]. If income has not accrued at all, S. 145 cannot determine chargeability of such income. Sec. 5 provides for scope of income chargeable to tax and to the extent relevant to the issue it reads : "accrues or arises or is deemed to accrue or arise to him . . . .". What is chargeable to tax is income, which has accrued or arisen to a person. The concept of accrual was considered in E. D. Sassoon & Co. v. CIT, (1954) 26 ITR 27 (SC) and it was held : "What is sought to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called income". Profits for the purpose of tax have to be determined as per commercial principles, subject to specific provisions of the Act. Though accounting standards and practices are relevant, these cannot override specific provisions of the Act. The Supreme Court in Challapali Sugars Ltd. v.
6 ITA No.2213/Ahd/2005CIT, 98 ITR 167 (SC) had laid down that pronouncements of accounting bodies are relevant in determining commercial profits. In Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, (1997) 227 ITR 172 (SC), it was held that : "The argument based on accountancy practice has little merit if such practice cannot be justified by any provision of the statute or is contrary to it." The subsequent decision in case of CIT v. Bokaro Steel Ltd., (1999) 236 ITR 315 (SC) reiterated the same principle. In the instant case, the assessee was following completed contract method of accounting right since AY 1997-98 as also in the subsequent assessment years. Simply because the assesee was entitled to deduction u/s 80IB(10) in the AY 2003-04 , does not imply that method of accounting hitherto accepted by the AO was not bonafide. In the facts and circumstances of the case, especially when the method of accounting is regularly followed by the assessee and the Revenue have not placed any material before us, suggesting that the said method was in any manner contrary to the provisions of the Act, we are of the opinion that the income has to be computed in accordance with the method of accounting regularly followed. Similar view was taken in the case of MKB(Asia) P Ltd. vs.CIT,294 ITR(Gauhati) and in a number of decisions of the ITAT relied upon on behalf of the assessee.Method of accounting is relevant only for computation of income and it cannot determine accrual of income. The ld. DR appearing before us has not referred us to any material suggesting that income has accrued to the assessee in the year under consideration. In these facts and circumstances, we are not inclined to interfere with the findings of the ld. CIT(A). Therefore, ground no.1 in the appeal is dismissed.
6 Next ground no.2 relates to disallowance of interest. The AO noticed that the assessee had borrowed money and paid interest of Rs.71,50,643/- even when the assessee having surplus funds of Rs.1,53,78,828/-. The assessee''s business was to enter into development agreement with NTC or Cooperative Housing Societies and to collect funds from the members and to start construction and hand over possession of residential /commercial units after collecting entire amount in advance. As the assessee had surplus funds of Rs.1,23,12,078/- at its disposal at the beginning of the year and it had collected 7 ITA No.2213/Ahd/2005 additional surplus fund of Rs.30,66,750/- during the year under consideration, the AO concluded that the interest expenses were not incurred for the assessee's business. The AO further noticed that the assessee had taken advances from Charotar Nagarik Co-op. Bank Ltd. for the lands situated at village Zundal and Chandkheda . Therefore, the AO was of the opinion that since the assessee had arranged funds by raising loans and paid interest thereon for developing the aforesaid lands, it cannot be said for the construction activity on contract basis and it would be for the development of scheme on its own. In these circumstances, the AO disallowed interest of Rs.71,50,643/-.
7 On appeal, the assessee reiterated their contentions before the AO. Accordingly, the ld. CIT(A) dealt with the issue in the following terms:
"3.2 I have considered the submissions of the Authorized Representative carefully . It is the contention of the Assessing Officer that the appellant should not have borrowed funds on interest and should not have paid interest but as per the agreement, the appellant as a developer had to take funds for the completion of the projects and for these projects loans have been taken from Charotar Nagrik Co.Op. Bank Ltd. and interest has been capitalized among various projects. In view of the above facts, as the appellant has incurred expenditure of interest and the borrowals have been made for the purpose of business and as per the clauses of the development agreement, the disallowance of interest made by the Assessing Officer is held to be not justified. Accordingly, the disallowance made by the Assessing Officer is deleted."
8. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. DR supported the order of the AO while the ld. AR explained that the assessee has not claimed deduction for interest disallowed by the AO. Since interest was capitalized and claimed in the period relevant to the AYs 2002-03 and 2003-04, no disallowance could be made in the year under consideration.
9. W e have heard both the parties and gone through the facts of the case. Undisputedly, in accordance with method of accounting followed regularly by the assessee, interest on funds borrowed had 8 ITA No.2213/Ahd/2005 been capitalised with the related project cost and had not been claimed as deduction in the year under consideration. Even otherwise, the Revenue have not placed before any material in order to controvert the findings of the ld. CIT(A) that the assessee had incurred expenditure of interest and the borrowings had been made for the purpose of business and as per the clauses of the development agreement. In these circumstances, especially when Revenue have not placed before any material so as to enable us to take a different view in the matter, we are not inclined to interfere with the findings of the ld. CIT(A). Therefore, ground no.2 in the appeal is also dismissed.
10. Ground nos. 3 &4 ,being general in nature ,do not require any separate adjudication and are, therefore, dismissed.
11. In the result, appeal is dismissed.
Order pronounced in the open court today on21-05-2010 Sd/- Sd/-
(D T G AR ASI A) (A N P AHUJ A)
JUDICI AL MEMBER ACCOUNTANT MEMBER
Date : 21-05-2010
Copy of the order forwarded to :
1. M/s Shree Parshwanath Corporation, 50, Harisidha
Chamber, Ashram Road, Ahmedabad
2. The ACIT, Circle-9, Ahmedabad
3. CIT concerned
4. CIT(A)-XV, Ahmedabad
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Deputy Registrar
Assistant Registrar
ITAT, AHMEDABAD
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