Income Tax Appellate Tribunal - Mumbai
Abode Construction Ltd. vs Income Tax Officer on 30 September, 2004
Equivalent citations: (2005)95TTJ(MUM)35
ORDER
T.K. Sharma, J.M.
1. This appeal filed by the assessee is directed against the order dt. 16th March, 1998, of the CIT(A)-XI, Mumbai, pertaining to the asst. yr. 1994-95.
2. The various grounds raised in this appeal are as under:
"1. The learned CIT(A) erred in holding in conformity with the ITO that profit in respect of construction business is assessable from year to year based on percentage of receipts rejecting the method followed by the appellants on completion of project method.
2. In doing so, the learned CIT(A) failed to appreciate that the method followed by the appellants was one of the recognised methods and did not consider the decision relied upon by the appellants direct on the point.
3. The learned CIT(A) in upholding the action of the AO failed to appreciate that the method followed was one of the recognised methods irrespective of the fact whether the assessee is a builder/developer or contractor.
4. The learned CIT(A) further erred in holding that the appellants were merely contractors and not builders/developers as claimed by them in respect of award of Mass Housing Project by MAHADA.
5. The learned CIT(A) in any event erred in upholding the action of the AO in estimating the profits at 4 per cent of the construction receipts. In so doing, he has totally ignored the facts and material on record.
6. The learned CIT(A) further in any event ought to have held that there was no warrant for estimating the profits for the assessment year under appeal on the facts and circumstances of the case.
7. The learned CIT(A) erred in holding that the appellants were not entitled to the deduction of depreciation as per rules of Rs. 4,02,446 (including Rs. 18,189 for asst. yr. 1991-92) from the profits as estimated by the ITO.
8. The learned CIT(A) in event ought to have allowed unabsorbed depreciation of asst. yr. 1991-92 of Rs. 18,189 against the income as confirmed by him.
9. The learned CIT(A) erred in not adjudicating upon the ground with regard to levy of interest under Section 234B as raised vide ground No. 6 of grounds of appeal and specifically argued before him as well as in the written submission dt. 10th Nov., 1997, filed on 12th Nov., 1997.
3. The main dispute raised by the assessee in ground Nos. 1 to 6 is that whether income of the assessee has to be computed in accordance with the completed contract method or the same has to be assessed on the basis of percentage of receipt received by the assessee every year.
4. The brief facts of the case are that the assessee-firm is engaged in the business of construction activities since inception from the asst. yr. 1987-88 and during the asst. yr. 1991-92, construction of mass housing project of MAHADA comprising of Phase-I and Phase-H arising out of tender submitted and accepted. The said project was on turnkey basis, i.e., of developing the land (same plot for both phases), preparing design and construction of tenements and shops, providing all infrastructural facilities and maintaining same after delivery of the same for the period of 3 years as stipulated. The entire project was titled by the MAHADA as Phase-I and Phase-II The assessee was following project completion method of accounting which is one of the recognised methods of accounting, both under the Companies Act, 1956, read with accounting standards and also by the IT Department. In the assessment year between 1991-92 and asst. yr. 1994-95, the assessee had no other project than the project of MAHADA. It appears that the aforesaid project not having been completed during the previous year relevant to the asst. yr. 1994-95, no profit or loss was declared in the return of income and for the assessment year under appeal, the assessee filed return of income and declared Nil income accompanied by statutory tax audit report along with its annexure. The note accompanied by the return reads as under :
"During the year the construction project at Chandiveli was not complete and all the direct and indirect expenses have been treated as work-in-progress and carried forward to next year account of Rs. 26,36,65,811. Similarly, the progressive payments received on the said project of Rs. 26,33,96,418 are shown as current liabilities and carried forward to next year, As the progressive contract receipt exceeds Rs. 40,00,000 the company has obtained tax audit under Section 44A by way of abundant caution. The various admissible and inadmissible expenses during the year will be taken into consideration while computing taxable income on completion of the project,"
5. The AO framed the assessment under Section 143(3) on 27th March, 1997, applying net profit @ 4 per cent on receipt as under:
1. Total receipts Rs. 11,38,95,644
2. Net profit at 4% Rs. 45,55,812 The reasoning given by the AO for applying net profit rate of 4 per cent is that the project completion method cannot be followed by the assessee as the assessee is only a contractor and not builder/developer. The AO also observed that the assessee is merely a contractor and he is not owner of the land and the assessee-company cannot sale the constructed tenements according to their wishes. The AO accordingly held that the assessee-company cannot follow the project completion method and the assessee is bound to estimate its profit year to year as held by the Hon'ble Patna High Court in the case of Shri Sukhdev Jalan v. CIT (1954) 26 ITR 17 (Pat). The AO also placed reliance on the decision of P.M. Md. Meerkhan v. CIT (1969) 73 ITR 735 (SC) for the proposition that each year is an independent unit and that the profit for each year should be computed yearwise and taxed.
6. The AO in the assessment order by referring letters dt. 22nd Nov.., 1990, and 30th Oct., 1992, from MAHADA concluded that Phase-I and Phase-II are not independent project. Thus, the contention of the assessee-company that both the projects constitute a single project was not accepted. The AO also held that the assessee-company follows mercantile system of accounting; therefore, it is not necessary for him to wait till the completion of the project and tax the business profit in the case of the assessee. The AO in the assessment order, referred the figures of receipt and expenditure of entire project as per books upto 31st March, 1996, estimated the income of Rs. 45,55,810 at the hand of the assessee. The AO has not taken the figures of difference of receipts and expenditure as per the financial statement for 31st March, 1996, as according to him there is every possibility of disallowing certain portion of expenses.
7. The assessee carried the matter in appeal. Before the CIT(A), gave elaborate submissions which have been reproduced by the CIT(A) in the impugned order. The learned CIT(A) also reproduced the observation of the Hon'ble Patna High Court in the case of Sukhdev Jalan (supra) and concluded that the determination of the income by the AO is reasonable and as such, it does not call for any interference.
8. At the time of hearing, on behalf of the assessee, Mr. B.K. Nema, the learned counsel, appeared and submitted that the completed assessments of earlier years as well as subsequent years have also been reopened by the AO on the basis of this order. However, he submitted that this appeal can be decided independently.
9. On behalf of the Revenue, Sh. Sunil Aggarwal, the learned Departmental Representative, appeared and conceded the same. We proceeded to decide the appeal after hearing both the sides.
10. The learned counsel for the assessee produced a paper book containing 176 pages, with, inter aha, letter dt. 23rd Nov., 1990 and 30th Oct., 1992. The counsel for the assessee submitted that in the assessment order, the AO has stated that the work has been done phase-wise without appreciating that for both the works, final negotiation offer was vide letter No. Nil dt. 31st Oct., 1990. The counsel for the assessee drew our attention to both these letters, which are placed at pp. 67 to 85 of the paper book. The learned counsel for the assessee submitted that though the contract was awarded by Bombay Housing and Area Development Board by two separate letters but the assessee got the negotiated offer vide letter dt. 31st Oct., 1990, in respect of both the phases. For the asst. yrs. 1992-93 to 1993-94, the assessee followed the project completion method which was accepted by the AO. These two years were reopened subsequently. The assessee-company has maintained regular books of account and has been consistently following the method of accounting of recording income on the basis of completed project method in the past as well as subsequent years. The AO, after examining the books of account of the assessee-company has not found any defect, omission nor mistake in the course of assessment proceedings. The books of account of the assessee-company are audited by the chartered accountants and tax audit report was also submitted along with the statutory details, No adverse comments have been given by the auditors as regards to the maintenance of books of account as well as method of accounting followed by the assessee. The method of accounting of completed project method is a recognised method of accounting accepted by the accounting standards issued by the Institute of Chartered Accountants of India. The counsel for the assessee submitted that the project completion method is also a recognised method of accounting as approved by the various judicial decisions.
11. The learned counsel for the assessee further invited our attention to the decision of Tribunal, Pune Bench, in the case of ITO v. V.S. Dempo & Co. (P) Ltd., the copy of the order of the Tribunal has been placed in the paper book at pp. 36 to 51. It was a case of building contractor. In that case, the assessee was following method of accounting of completed contract basis, i.e., income was shown to have been accrued in the year of completion of project. The Tribunal has laid down that the project completion method in the case of contractor is a recognised method of determining the income. It has been further held that in the absence of any defect in the books of account maintained by the assessee, the proviso to Section 145(1) of IT Act, 1961, was not applicable in the said case. The aforesaid decision of the Tribunal, Pune Bench, had come up for consideration before the Hon'ble Bombay High Court and the decision of Tribunal has been upheld. The decision of Hon'ble Bombay High Court in the case of CIT v. V.S. Dempo & Co. (P) Ltd. Accordingly, the learned counsel for the assessee submitted that the decisions relied upon by the assessee being of jurisdictional High Court is a binding precedent in the case of the assessee.
12. The learned counsel for the assessee invited our attention to the assessment framed in the case of the assessee .for the asst. yr. 1997-98 by ITO, Ward 6 (4), Mumbai, vide order dt. 15th Feb., 2000. The assessment order is placed in the paper book at pp. 140 to 143, in which the AO has recorded a finding that the assessee is following the method of ascertaining the profit or loss on completion of each project. It has also been recorded that the project in respect of MAHADA is not yet completed. The AO thereafter accepting the method of accounting in respect of other projects proceeded to estimate income in respect of MAHADA project as per the stand of the Revenue taken for MAHADA project in the past assessment years. In view of above, there remains no dispute that the assessee is consistently following method of accounting of completed project method and Revenue has also accepted such method of accounting in respect of all other projects except that of MAHADA project.
13. The learned counsel for the assessee further invited our attention to the total receipt and expenditure in respect of MAHADA project since inception to asst. yr. 2002-03. The aforesaid statement is placed in the paper book at pp. 130 and 131; the. total receipts upto the year ending 31st March, 1994, is Rs. 2.6,33,96,449 against which the expenditure incurred is Rs. 26,36,65,811. It was also submitted that on account of litigation between the appellant and MAHADA claims of over Rs. 15 crores are made against the appellant-company. Such disputes are pending in Court litigation and, therefore, the matter is sub-judice. On above stated facts the completed project method is the only appropriate method of accounting by which income/loss can be determined at the hands of the assessee.
14. It was submitted by the learned counsel for the assessee that the decision of the Hon'ble Patna High Court relied upon by the AO is not applicable in the facts of the present case because in the aforesaid case the assessee was not maintaining any books of account prior to the assessment year which was under dispute. In the said case there was no method of accounting regularly followed by the assessee in the past or subsequent years. The AO in the said case found, there was no method of accounting regularly followed by the assessee in the past or subsequent years. The AO in the said case had pointed out various defects and found the books of account not reliable. The 9/10th of the total work was completed within the previous year. In the aforesaid case books of account were not even closed as at the end of the financial year. It is under such circumstances that the Hon'ble Tribunal had concluded that the proviso to Section 13 of IT Act, 1922, was applicable in the said case. The aforesaid decision of Tribunal was approved by the Hon'ble Patna High Court. The facts in the said case being clearly distinguishable and the ratio as laid down in the said case are not applicable in the case of the assessee. It was further submitted that the decision of Hon'ble Patna High Court was duly considered and distinguished by the Tribunal, Pune Bench, which decision has been upheld by the Hon'ble Bombay High Court in the case of V.S. Dempo & Co. (P) Ltd. (supra); the case of the assessee is in fact squarely covered by the decision of the Hon'ble jurisdictional High Court and, therefore, reliance placed by the AO on the decision of the Patna High Court is misplaced.
15. The learned counsel for the assessee further submitted that the observation of the AO by referring to two letter dt. 22nd Nov., 1990 and 30th Nov., 1992, that the assessee has undertaken two independent projects is factually not correct. The counsel for the assessee has invited attention to the aforesaid letters which are placed in the paper book from pp. 67 to 85. The assessee was awarded turnkey project vide letter dt. 23rd Nov., 1990, and it is the title given by MAHADA as Phase-I and Phase-II of the project was in continuation with the acceptance letter of Phase-I. However, vis-a-vis the assessee is concerned, the project is only one. The counsel invited attention to the letter dt. 23rd Nov., 1990, to show that at various places in the said letter work is to be conducted by the assessee in Phase-II of MAHADA. The counsel had submitted that the entire project of MAHADA has been classified by the MAHADA as Phase-I and Phase-II for their convenience and so far as turnkey project granted to the appellant-company is concerned it is only one project. The counsel has further submitted that the entire project is at one place. The boundary wall of the same is common, main sub-station and electrical cable station is common, water supply, sewerage pipelines all are common. According to him, thus finding of the AO is factually incorrect.
16. The learned counsel for the assessee further submitted that the observation of the AO that the work is completed upto 75 per cent at p. 4 of the assessment order is factually incorrect. It was submitted that the AO has not given any date as to on which date the work completed is taken by him at 75 per cent. The assessee by referring to total area of work completed and allowed submitted that buildings handed over upto 1st March, 1994, were 14.29 per cent of total work allotted. On account of escalation in prices the money value received if compared to estimate contract value the percentage was higher. It was however, submitted that the work completed physically would only be relevant to be considered for consideration of completion of project and not the receipts as compared to total contract value. It was, therefore, submitted that work completed is 14.29 per cent only and not 75 per cent as observed by the AO.
17. The counsel for the assessee has invited our attention to the orders of the CIT(A) for past as well as subsequent years to show that the completed project method of accounting has been accepted in the case of assessee in past and subsequent assessment years by following the decision of jurisdictional High Court in the case of V.S. Dempo & Co. (P) Ltd. (supra).
18. It was submitted by the learned counsel for the assessee that the project completion method adopted by the assessee is correct and reasonable as it also takes into account uncertainty of completion, claims, arbitration and also losses.
19. The learned counsel for the assessee further submitted that there should be finality and certainty in all litigation and earlier decision cannot be questioned, if the decision is not arbitrary or perverse: In support of this contention, the learned counsel relied upon the following decisions :
1. HA. Shah & Co. v. CIT (1956) 30 ITR 618 (Bom)
2. Parsuram Pottery Works Co. Ltd. v. CIT (1977) 106 ITR 1 (SC).
20. The learned counsel submitted that even though the rule of res judicata is not applicable to income-tax proceedings, the rule of consistency does apply and a method which is consistently followed by the assessee and accepted by the Department cannot be allowed to be changed unless there are compelling reasons for such change. In support of this contention, reliance was placed on the following decisions :
1. CJT v. Godavari Corporation Ltd. (1986) 156 ITR 835 (MP)
2. Indra Sawhaney v. Union of India AIR 1933 SC 477
3. Tribunal, Mumbai Bench 'C, decision in the case of Dy. CIT v. Shapoorji & Co. Ltd. (2001) 29 TTC 443 (Mum)
4. Govt. of A.P. v. A.P. Jaiswai and Ors. (2001) 1 SCC 748.
21. It was submitted by the learned counsel for the assessee that the "project completion method" for construction as. adopted by the assessee is a recognised method of accounting as approved in following decisions :
1. CIT v. V.S. Dempo & Co. (P) Ltd. (supra)
2. Nirmal Commercial Co. v. CIT (1992) 193 ITR 694 (Bom)
3. Shapoorji Pallonji (Rajkot) (P) Ltd. v. CIT (1994) 49 ITD 479 (Bom).
22. The learned counsel for the assessee submitted that strong burden lies upon the Revenue to establish that the method followed by the assessee is contrary to law or it does not enable to deduce true profit assessable to tax in the case of the assessee. Following the decision of the Mumbai Tribunal in the case of Bharat Bijlee Ltd. v. Dy. CIT (2001) 71 TTJ (Mumbai) 909 : (2000) 13 DTC 631 (Mumbai), the counsel submitted that the AO has failed to bring any material on record to show that the method of accounting is not correct.
23. The learned Departmental Representative has relied upon the orders of the authorities below. The learned Departmental Representative submitted that each year is an independent year and the profit from the business has to be determined on year to year basis. According to the learned Departmental Representative the net profit estimated by the AO is fair and reasonable. The learned Departmental Representative relied upon the decision of the Hon'ble Patna High Court in the case of Shi Sukhdev Jalan (supra) and submitted that it recognises the view adopted by the AO for determining the income. The learned Departmental Representative also placed reliance on the passage from the Advance Accounting by J.R. Batilboi which also recognises that profit can be computed on incomplete contracts. The learned Departmental Representative relied on the decision of the Mumbai Tribunal in the case of Champion Construction Co. v. TTO (1983) 5 ITD 495 (Bom). He further submitted that in the aforesaid decision the project completion method in the case of contractor was not approved. It was, therefore, submitted that considering the aforesaid decision the action of the AO was justified and deserves to be approved. It was, therefore, contended that the order passed by the AO is fair and reasonable and has rightly been upheld by the CIT(A). Therefore, the appeal filed by the assessee deserves to be dismissed.
24. Having heard both the sides, we have carefully gone through the orders of the authorities below. Rival submissions were also considered. It is an undisputed fact that the assessee was consistently following project completion method of accounting since its very inception, i.e., from the asst, yr. 1987-88, onwards. The assessment order for the asst. yr, 1997-98 passed by the AO on 15th Feb., 2000, indicates that the Revenue has accepted that assessee is consistently following the project completion method and income of the assessee can be determined on the basis of said method of accounting. In the case of Shri Sukhdev Jalan v. CIT (supra), which has been relied by the AO, the Tribunal found that 9/10th of the contract work had been done in the accounting year and no regular books of account were maintained till earlier assessment years. In that case we found that the accounts maintained by the assessee did not reflect the true profits of that period. On this fact, the estimation of profit by the AO was upheld. In the case before us, the regular books of account are maintained and no serious defect or omission is noticed by the AO. The method of accounting is consistently followed and accepted in past and subsequent years. We, therefore, are of the view that the decision of Shri Sukhdev Jalan v. CIT (supra), relied by the AO in the assessment order is squarely distinguishable. Thus, the judgment of Hon'ble Patna High Court is of no help to the Revenue.
25. On perusal of the two letters of MAHADA dt. 22nd Nov., 1990 and 30th Oct., 1992, it indicates that the assessee vide letter No. Nil dt. 31st Oct., 1990, negotiated for both the projects. It is seen from the letter dt. 22nd Nov., 1990, that the various jobs to be executed include work in Phase-II of MAHADA. Thus, the submission of the counsel for the assessee that Phase-I and Phase-II are classifications of total project of MAHADA is correct and to the extent observation of the AO that the assessee has undertaken two separate projects is not correct. The income of MAHADA project has to be determined taking the project as one only. The aforesaid project is incomplete is also undisputed.
26. We also found that the assessee has maintained regular books of account and the AO has not found any defect or omission on examination of books. When the assessee is consistently following project completion method, the AO has no power to re-write the books of account. In the absence of any adverse comment by the auditors, who has audited the books of account of the assessee under Section 44AB, the AO has estimated the income of the assessee on mere doubts and suspicion.
27. The counsel for the assessee invited attention to the facts in the case of Champion Construction Co. (1983) 5 ITD 495 (Bom) relied upon by the learned Departmental Representative to show that in the aforesaid case 90 per cent of the work was already completed in the previous year under consideration. In the aforesaid decision, it was also noted that the assessee had not shown possibility of any major event to take place in future. The receipts and expenses upto the close of the accounting year indicated that the assessee has substantial profit. It is under these circumstances that the estimation by the AO of net profit was upheld. In the facts of the present case there is excess of expenditure over income and huge claim is made by the MAHADA and the matter is under litigation. These facts clearly make the case of the assessee distinguishable from that of Champion Construction Co. (supra) and, therefore, the contention of the learned counsel for the assessee that the ratio as laid down in the said case is not applicable to the present case, is correct.
28. On perusal of the chart indicating various receipts and expenses incurred by the assessee-company over a period of years on MAHADA project, particularly receipts and expenses for the assessment year under appeal, clearly indicate that the assessee has incurred more expenditure than receipt. The counsel for the assessee also submitted that huge claim has been made by the MAHADA against the assessee-company. The issue in the present case is squarely cover by the judgment of the Hon'ble jurisdictional High Court in the case of V.S. Dempo & Co. (P) Ltd. (supra) in favour of the assessee. The Hon'ble High Court has upheld the order of the Tribunal, which is (a) recognised, completed contract method for determination of income. We, respectfully following the decision of the Hon'ble jurisdictional High Court in the case of V.S. Dempo & Co. (P) Ltd. (supra) hold that project completed method is only appropriate method which was followed by the assessee-company and accepted in the past and subsequent years. We, therefore, hold that the AO erred in determining and estimating the income at 4 per cent of receipt during the year. Therefore, we direct to delete the same.
29. In view of our decision in ground Nos. 1 to 6, the grounds raised by the assessee in ground Nos. 7 to 9 have become (rendered) infructcous, therefore, need no adjudication.
30. In the result, the appeal of the assessee is allowed