Income Tax Appellate Tribunal - Delhi
Assistant Commissioner Of Income-Tax vs Magnum International Trading Co. (P.) ... on 3 January, 2002
Equivalent citations: [2003]84ITD113(DELHI)
ORDER
R.K. Gupta, Judicial Member
1. This is an appeal by department and Cross Objection by assessee relating to assessment year 1988-89. The department originally taken four grounds of appeal in its appeal, which are as under :-
1. On the facts and in the circumstances of the case, the CIT(A) has erred in holding that the rental income of Rs. 72,252 should be taken as income from business and not income from other sources.
2. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in directing the Assessing Officer to exclude the sum of Rs. 1,01,912 as interest free benefit from the value of the benefits.
3. On the facts and in the circumstances of the case, the ld. CIT(A) erred in holding that no tax need be deducted on any payment chargeable under the head "Salary" even if it is paid outside India. The learned CIT(A) has ignored the fact that the only condition to be fulfilled is that the payment should be taxable under the head "Salaries" and it should be paid outside India.
4. On the facts and in the circumstances of the case, the CIT (Appeals) has erred in deleting the addition of Rs. 2.80 crores made on account of supply of barges during the year under consideration.
Later on the department has requested to substitute a new ground in place of ground No. 1, which is as under :-
On the facts and in the circumstances of the case, the learned CIT (Appeals) erred in directing that the interest income of Rs. 8,87,522 assessed under the head "Income from other sources" should be considered as business income and assessed as such.
2. Regarding the substitution of new ground the learned DR submitted that the ground originally taken against the direction of CIT (Appeals) in regard to rental income of Rs. 72,252 was taken inadvertently, as the same was already restored by the CIT (Appeals) by following his order for earlier year. In reply the learned counsel stated that this is not a legal ground. The department now wants to raise a fresh ground, which is not permissible as per law. The learned DR fairly admitted that of course, this is not a legal ground but to meet the end of justice the substitution of the ground be allowed.
3. After considering the submissions of both the sides, we find that this issue was decided by CIT (Appeals) by following his own order for assessment year 1987-88, wherein similar additions were deleted and no appeal had been filed by the department against that decision of CIT (Appeals) for assessment year 1987-88. The department has already accepted the decision on this point for earlier year i.e. assessment year 1987-88. Therefore, for these reasons the substitution of this ground is declined.
4. Regarding the original ground this matter was restored by the CIT (Appeals) to decide the issue in accordance with the direction given in earlier year i.e., for assessment year 1987-88. Therefore, this ground is accordingly disposed off.
5. Ground Nos. 2 and 3 are in regard to the direction of CIT (Appeals) to exclude the sum of Rs. 1,01,912 as interest free benefit from the value of the benefits and in holding that no tax need be deducted on any payment chargeable under the head "Salaries" even if it is paid outside India. These two grounds are covered by the decision of the Tribunal for assessment year 1987-88. The department had filed appeal against the direction of CIT (Appeals) in regard to these two additions before Tribunal and the Tribunal decided these grounds, whereby ground No. 2 was confirmed and ground No. 3 was restored to the file of the Assessing Officer. Accordingly these two grounds are disposed off here also and the Assessing Officer is directed to give effect and to decide afresh in view of the decision of the Tribunal for immediately preceding year i.e., on pages at 11 Para 17 and Page 6 Para 12 respectively of order of the Tribunal for assessment year 1987-88.
6. The last ground is in regard to deletion of addition of Rs. 2.8 crores made on account of supply of barges during the year under consideration. The Assessing Officer made this addition by placing reliance on the decision of the Hon'ble Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 : 54 Taxman 499. He estimated the expenses for the year at Rs. 71,44,496 and the profit was estimated on the sale of two Barges at Rs. 2,80,05,504. In view of the Assessing Officer, the assessee shifted the income to the subsequent year. Therefore, he made the addition of this amount on substantive basis in this year and on protective basis in next year i.e., assessment year 1989-90. The CIT (Appeals) after discussing the issue in detail deleted this addition. Against the deletion of this addition, the department has filed appeal and assessee has filed cross objection here before the Tribunal. The Cross Objection filed by assessee is late and reason was given that the appeal memo filed by the department was received late. Therefore, the cross objection was filed late. The learned Departmental Representative did not make any objection in condoning the delay. Accordingly the delay was condoned and the same was announced in the open court.
7. After hearing rival submissions and perusing the material on record, we find that CIT (Appeals) was correct in deleting the addition. The assessee entered into an agreement in 1984 and the method of accountancy was regularly maintained and followed as in past. The assessee adopted the completed work method and accordingly he has shown the profit when the contract was completed in assessment year 1989-90. The Assessing Officer during this year disturbed the accounting method followed by the assessee year after year and by holding that the assessee had shifted its taxability to next year and by applying the ratio of the decision of Apex Court in the case of British Paints, he assessed the income during this year. While doing so he estimated the expenses made by assessee on manufacturing etc. In our considered view, the estimation of expenses made by the Assessing Officer was totally wrong, as the assessee is maintaining complete books of account and no defects of any kind was found in the books of account. The assessee was maintaining and following its accountancy system year after year. Therefore also, the disturbance of accounts by splitting the contract was also not correct. The receipts received in earlier years were shown by the assessee and they were not disturbed by the Assessing Officer. Only in this year these receipts were disturbed. On this reasoning also we hold that the order of the CIT (Appeals) is correct. During assessment years 1985-86 to 1987-88, the enquiries were made and the assessments were completed under Section 143(3). No such type of additions were made by the Assessing Officer. We have also seen the contract, a copy of which is placed at page 125 of the paper book and after perusing the contract we noted that this was a single contract and terms and conditions laid down by this contract are very stringent. If assessee violates any of the condition, then there is a provision for heavy penalty, even cancellation of the contract. Therefore, we hold that this was a composite contract which cannot be splitted. We further noted that insurance etc. was made on the basis of single contract. The duty was exempted by a single order. Therefore, all these facts establish that the contract was a composite and single. Accordingly, we hold that CIT (Appeals) rightly deleted the addition by holding that the contract cannot be splitted. As we have already stated, the assessee has shown the profit on this point in the subsequent assessment year 1989-90, the findings of CIT (Appeals) are given at pages 36 and 37, which are reproduced here as under :-
I have considered the submissions with reference to the findings of the Officer and the documents furnished before me. It is a fact that the contract in question has come into existence in the year 1984 and that expenses on this project were being incurred and capitalised from year to year from 1984 onwards. It was only after a lapse of 3 years that the delivery of two barges was possible. The other 4 barges were delivered in the immediately succeeding year when the appellant had shown the total profits on this project. The reference to the licence issued by the Import Trade Control Authorities indicates that it is a consolidated licence for import of these six unfinished barges. The reference to the terms and conditions for registration of Export contract also indicates that each single contract is registered and in the instant case the registration is one for this contract, which is for supply of six barges. The political risk covered by Export Guarantee Corporation of India Ltd. also indicates that it is for the one contract with Sudo Import, USSR for export of this sea-going barges. The premium is worked out on the total value of the contract and not on individual price of the ship. The cash incentive on export is also claimed after supply of all the six barges which is with reference to the FOB value of the total contract and not with reference to the FOB value of individual ships. It is true that expenses incurred prior to the year of delivery and subsequent to the year of delivery cannot be apportioned shipwise and have to be taken into account as a single project and, therefore, keeping in view the instructions of the Institute of Chartered Accountant of India and the accounting method followed by the appellant of showing the profit on project completion basis the directions by the DCIT to work out the profit of delivery basis are not justified. The case laws relied upon by the DCIT and ACIT are not applicable and relevant to the facts of the case. There is no question of treating the appellant as having not changed his accounting system on the basis of the 'notes' given in the balance-sheet in the earlier year and as given in the year in question. On facts I would agree that the contract is a single contract for supply of six ships and that the appellant had followed recognised method of accounting the profits on completion project basis rather than on percentage basis. In view thereof the addition is directed to be deleted.
8. These findings of the CIT (Appeals) could not be controverted by the learned DR as he simply placed reliance on the order of the Assessing Officer. Therefore, in view of the observations made by us above and in view of the findings of the CIT (Appeals), we confirm the order of CIT (Appeals) on this point.
9. The cross objection filed by assessee is consequential. Therefore, we dispose off the cross objection of the assessee accordingly.
10. In the result, the appeal of the department is partly allowed for statistical purposes and the Cross objection of the assessee is allowed accordingly.
R.S. Syal, Accountant Member
1. I have meticulously gone through the proposed order of my learned brother. As regards the first three grounds of the revenue's appeal, there is no difference of opinion and the findings and the conclusions recorded by my learned brother in respect of these grounds are fully acceptable to me.
2. However, insofar as the ground No. 4 and the related cross-objection of the assessee are concerned, I hold different view. My discussions with the learned Judicial Member failed to convince him on this issue. As such, I am left with no option but to write my own order on this issue.
3. The facts recorded on this issue by the revenue authorities are that the assessee-company was awarded contract for supply of six Sea-going Hopper barges by M/s. Sudo-Import, Moscow, USSR vide agreement dated 20-6-1984. For this purpose the assessee obtained import licence from Government of India for six unfinished barges of total value of Rs. 2992.00 lakhs carrying export obligation for the export of six barges to the tune of Rs. 4054.14 lakhs and the company supplied two barges worth Rs. 13.38 crores to M/s. Sudo-Import, Moscow in the year under consideration and billed the same. The total expenditure of Rs. 1,95,44,241.31 spent up to December, 1987 was capitalised as attributable to and incidental to the supply of all barges. The company received various advance amounts starting from the year 1984 and these were shown under the head "Advance account". According to assessee, it was following "Completed contract method" of accounting as prescribed by the Institute of Chartered Accountants of India in Accounting Standard No. 7. The Company supplied the last barge in assessment year 1989-90 and accordingly accounted for entire income in respect of six barges, in the assessment year 1989-90. On the basis of directions given by D.C. C.R.-II, the Assessing Officer proceeded to assess the income in respect of two barges supplied during the year, in the year under consideration. The assessee was requested repeatedly to furnish the details of expenses relatable to these barges. Since the assessee failed to furnish necessary details in respect of the expenses attributable to these two barges, the Assessing Officer placing reliance on the Apex Court decision in the case of British Paints India Ltd. (supra) estimated the expenses in this regard and accordingly worked out the profit on the sale of barges at Rs. 2,80,05,504.
4. Before the first appellate authority it was contended on behalf of the assessee that the assessee had adopted completed contract method of accounting in accordance with the guidelines issued by the Institute of Chartered Accountants of India - Accounting Standard No. 7. It was contended that the licence for import was for the composite FOB value of Rs. 4054.14 lakhs. It was also pointed out that there was a single policy to cover the export risk for six barges which was issued by Export Credit Guarantee Corporation of India Ltd. and also single Duty Entitlement Certificate was issued in this regard. It was also pointed out that the cash compensatory support benefit was available to the assessee only on the completion of supply of all the six barges. It was, therefore, contended that there was a single composite contract for supply of six barges and the profit as determined by the Assessing Officer in respect of two barges was not in consonance with the terms of contract. The learned CIT (Appeals) concurred with the submissions advanced on behalf of the assessee and accordingly deleted the addition, as made by the Assessing Officer.
5. Before us the learned Departmental Representative heavily relied on the order passed by the Assessing Officer and contended that though there was one contract entered into by the assessee with the Russian party, yet it related to six different barges and six different contracts were instituted in one contract. It was finally submitted by the learned Departmental Representative that the contract entered into was a divisible one and the Assessing Officer was fully justified in estimating the income in respect of two barges supplied during the year under consideration.
6. On the other hand, the learned Counsel for the assessee opened his arguments by contending that there was only one composite and integral contract for the supply of six barges. He further pleaded that the assessee incurred expenses in respect of six barges together and it was not possible to segregate expenses with respect to each vessel separately. The learned counsel for the assessee reiterate the submissions as advanced before the first appellate authority and on the basis of his reasoning urged that his order be maintained.
6.1 The learned counsel relied on the terms of contract which are placed at the assessee's paper book pages 109 to 135. To buttress the point that the contract entered into by the assessee with the Russian party was a single contract more specifically, he relied on pages 124 and 125 of the Paper Book to emphasize that if the assessee failed to fulfil the terms and conditions of the contract, it was bound to refund to the buyer immediately all amounts together with interest at the rate of 8 per cent per annum from the date of receipt of these amounts up to the date of refunding them, as also to pay penalty at the rate of 8 per cent. The learned counsel emphasized that in accordance with the terms and conditions of the contract, if there occurred any failure at any point of time, the assessee was under obligation to refund the entire amount received by the assessee in connection with this contract as a whole.
6.2 The learned counsel further submitted that the assessee was regularly maintaining complete books of account and no defects of any kind were found by the Assessing Officer in these books of account. It was further submitted that the assessee was maintaining and following its accounting system year after year and, therefore, the disturbance of accounts by splitting the contract was not justified. The learned counsel pointed out that all receipts received in the earlier year from the foreign buyer were shown by the assessee in its books of account and those were accepted by the Assessing Officer in the relevant assessment years and no addition on this score was made in these years. It was also pointed out that during the assessment years 1985-86 to 1987-88 the assessments were framed under Section 143(3) and no such addition was made by the Assessing Officer. The learned counsel pointed out that the books of account of the assessee-company were in accordance with the Accounting Standard No. 7 issued by the Institute of Chartered Accountants of India, whereby the assessee was following one of the two recognised methods, being the "Contract completion method".
6.3 The learned counsel further submitted that the Assessing Officer was not justified in making the addition in the relevant assessment year for the reason that the assessee supplied the balance four barges in the assessment year 1989-90 and had shown income in respect of all the six barges in that assessment year. On the basis of these submissions, the learned counsel submitted that the action of the first appellate authority was justified.
7. The only question that falls for consideration is whether the profit in respect of two barges supplied and billed during the year under consideration should be taxed in this year or in the next year when the balance four barges were supplied.
7.1 The main emphasis of the learned counsel for the assessee is on the point that the assessee was following "Contract completion method" and hence the profit should be assessed when the contract is completed after the supply of all the six barges. In order to appreciate the stand of the assessee it is necessary to look into the fact that what is "Contract completion method."
7.2 There are different stages of completion of contract. For example, in the case of construction of building, firstly foundation has to be done; then construction is brought up to the plinth level; then in stage three, construction is raised up to the roof level; in stage four, roofing is done; and in final stage, plastering of roofs and walls and laying of floors are done. In "Contract completion method", in contrast to percentage of completion method, income is recognised only when the contract is completed or substantially completed, i.e., when the last stage of laying floors, etc. is reached. Till that stage arises, no income is accounted for. It implies that the income is to be reckoned only when the last stage of the contract is fulfilled. When these features of contract completion method are applied to the facts under consideration, it comes to light that the assessee had not only reached the last stage of completing the barges but had also supplied the same to the buyer and had also billed it.
7.3 As regards the contention advanced by the learned counsel for the assessee that the entire profit in respect of six barges has been accounted for in the assessment year 1989-90 and therefore, there is no need to tax the income in respect of two barges in the relevant assessment year, it is noted that each year is a separate and independent unit of assessment. All the profits resulting in one year have to be taxed in that year itself. The deferment of income to the subsequent assessment years, is neither justified nor permitted by the law. The Hon'ble Supreme Court in the case of British Paints India Ltd. (supra) has held as under :-
The profit of one year was likely to be shifted to another year which would be an incorrect method of computing profits. Each year being a self-contained unit and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the respondent was found to be such that income could not properly be deducted therefrom. It was, therefore, not only the right but the duty of the Income-tax Officer to act in exercise of his statutory power for determining what, in his opinion, would be the correct income.
There are catena of judgments supporting the view that income of a year has to be taxed in that year itself and by no means the tax burden can be deferred to the subsequent assessment year. Way back in 1963, the Apex Court in the case of Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506 held that for income-tax purposes each year is a self-contained accounting period and the income-tax authorities can only take into consideration the income, profits and gains made in that year and they are not concerned with potential profits which may be made in another year. Thus it becomes evident that income arising in one year has to be taxed in that year itself and the assessee can, by no means, shift the income earned in one year to a subsequent year by contending that in the ultimate, the income has been assessed to tax, the year in which it is being taxed or should have been taxed is immaterial. In order to determine as to whether a given contract in respect of supply of more than one item, is composite or divisible contract, the relevant factors can be jotted down as under :-
(i) whether the contract is for a lump sum price or with reference to each item separately;
(ii) On a default being committed by either party for a particular item, whether the whole contract would be repudiated or only with reference to that particular item; and
(iii) whether the payment, billing, etc. would be done with reference to each item or for all the items taken together.
7.4 Now I shall proceed to apply these tests to the contract under consideration. Clause 5 of the contract at page 110 of the assessee's paper book reads as under :-
5. The price of one vessel is Indian Rs. 67,569,000 (Rs. Sixty Seven Million Five Hundred Sixty Nine Thousand Only), inclusive of spare parts worth Rs. 669,000 (Rs. Six Hundred Sixty Nine Thousand) only. The total Contract price for the 6 (six) Vessels is Rs. 405,414,000 (Rs. Four Hundred Five Million Four Hundred Fourteen Thousand) only. (Underlined to lay emphasis).
From this clause it is palpable that the price had been settled for each vessel separately and not a lump sum consideration for the contract as a whole is fixed.
7.5 The next relevant question to be decided is that if the buyer is not satisfied with regard to the working of the vessels, would he be entitled to refuse all the vessels taken together or on individual basis. Clause 49 at page 121 reads as under :-
If the stability of any vessel does not satisfy the requirements of the regulations of the RS, the Buyer has the right to refuse the acceptance of the Vessel. (Underlined to lay emphasis).
Clause 51 at page 122 further reads as under :-
Should the shortage of deadweight be higher than 6 (six) per cent the Buyer is entitled to refuse acceptance of such a. Vessel. (Underlined to lay emphasis).
A bare perusal of these clauses brings to light the fact that if the buyer is not satisfied as to the stability of any vessel or shortage of dead-weight, the buyer is entitled to refuse acceptance of the particular vessel only and not all the vessels.
7.6 The learned counsel for the assessee, relying on the Clauses 54 to 56 of the contract at pages 124 and 125 of the Paper Book, stressed that if the buyer refused the acceptance of any vessel, the assessee was bound to refund all the amounts received by it, including interest and penalty in respect of all the vessels. This contention of the learned counsel is not based on the appreciation of all the relevant clauses of the contract. Clauses 54 to 56 at pages 124 and 125 are not independent clauses in themselves. These are complementary to Clause 9 at page 113 of the Paper Book. Relevant portion of Clause 9 reads as under :-
Should through the fault of the CONTRACTOR the delivery of the Vessel be delayed for more than 6 (six) months, with exception of delay mentioned in Clause 56 the Buyer will be entitled to cancel the contract with regard to the delayed Vessel, without recourse to Arbitration and the CONTRACTOR in such a case shall refund to the Buyer immediately all instalments paid by the Buyer plus 8 (eight) percent interest per annum from the date of payment of the instalment until the date of reimbursement and also pay penalty at the rate of 8 (eight) per cent of the Contract price of the delayed vessel.
A combined reading of Clause 9, as extracted above together with Clauses 54 to 56, clearly leads to the conclusion that if there is any delay, the buyer will be entitled to cancel the contract with regard to the delay vessels only. As the assessee in that situation would be liable to refund the amount received from the buyer together with interest and penalty with respect to contract relating to that delayed vessel only and not the entire amount received in respect of all the six vessels. It is further important to notice that both the parties to contract themselves had treated contract in respect of each vessel independently, that is why the language employed in Clause 9 is that "... buyer will be entitled to cancel the contract with regard to the delayed vessel."
7.7 The contention of the learned counsel for the assessee that there is one composite contract on the ground that there was a single policy to cover the export contract for the six barges and also the licence for import for the composite value and also the cash compensatory support was available only on the completion of the supply of six barges, is devoid of merit. In order to determine the taxability of income in the relevant assessment year, the important thing is the terms and conditions of the contract and not that what is stated on behalf of the assessee. If the terms of contract stipulate that there are different contracts embedded in one contract, then other circumstances like one insurance policy for all these contracts, etc. become extraneous considerations.
7.8 If a person enters into a contract for supply of its entire production for seven years to a particular supplier and during the course of seven years, not only he raises the bill after supplying the goods but also receives the payment, would it mean that the entire sale will be taken into consideration at the end of seventh year only ? Would it not be out of place to defer the income of the earlier six years to the last year ?
7.9 The plea of the learned counsel for the assessee that the Assessing Officer was not justified in rejecting the method of accounting regularly employed and accepted by the Department in the assessments for the assessment years 1985-86 to 1987-88, is not forceful for the reason that in these years the assessee was only receiving the payments and doing the work in connection with the six barges. It was only during the relevant assessment year that there arose an occasion of accrual of income when the assessee completed contracts with reference to two barges by billing and supplying the same. So the Assessing Officer had neither disturbed the following of the "Contract Completion Method" by the assessee in consonance with the Accounting Standard No. 7 of the Institute of Chartered Accountants of India, not deviated from the earlier accounting method.
7.10 In the instant case the assessee not only received the payment but also issued bills in respect of these two barges after supplying the same to the Russian buyer. The terms of the contract being clear that if there is delay in the supply of vessels, the buyer will be entitled to cancel the contract with regard to that delayed vessel only and there being no claim by the assessee that the buyer refused the acceptance of the two vessels thereby affirming sales for two barges and also other terms of the contract being clear that price was also settled with reference to each vessel separately, it leads to the conclusion that the contract entered into by the assessee with the foreign buyer was a divisible contract and six independent contracts were embedded into this one contract. Under these circumstances, I am of the considered view that the CIT (Appeals) was not justified in disturbing the finding of the Assessing Officer on this issue that the income in respect of two barges supplied and billed during the year was liable to tax in the relevant assessment year. It is noted that the Assessing Officer proceeded to estimate the income of Rs. 2.80 crores and odd by taking into consideration the administrative, selling and labour expenses, in respect of these two barges at Rs. 71,44,496 in the absence of relevant details supplied by the assessee about the expenses incurred in respect of these two barges. The cross objection of the assessee is also directed against the estimate made by the Assessing Officer in regard to expenses in respect of these two barges and also in not allowing deduction under Section 80HHC. Under these circumstances, it would meet the ends of justice if the matter of determination of the expenses and the consequential profits on these two barges along with the claim for deductions under Chapter VI-A of the Income-tax Act, in accordance with law, is restored to the file of the Assessing Officer with direction to decide these issues afresh after affording an opportunity of being heard to the assessee.
8. In the result, the ground No. 4 of the appeal by the revenue and the cross-objection by the assessee are allowed for statistical purposes.
REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT TO THE HON'BLE PRESIDENT ON POINT OF DIFFERENCE.
Since there is a difference of opinion between the Members of the Bench, we state following point of difference and refer the same to the Hon'ble President for further necessary action as envisaged under Section 255(4):-
Whether on the facts and in the circumstances of the present case "the Contract Completion Method" will be applicable or not ?
REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT TO THE HON'BLE PRESIDENT ON POINT OF DEFFERENCE.
Since there is a difference of opinion between the Members of the Bench, we state the following point of difference and refer the same to the Hon'ble President for further necessary action as envisaged under Section 255(4) :-
Whether on the facts and in the circumstances of the present case, the contract entered into by the assessee with Russian Party is a divisible one or not and accordingly, whether the income from two barges supplied and billed during the year will be taxed in the relevant assessment year ?
ORDER V. Dongzathang, President
1. The following point of difference was referred to me :
By the Accountant Member :
Whether, on the facts and in the circumstances of the present case, the contract entered into by the assessee with Russian party is a divisible one or not and accordingly, whether the income from two barges supplied and billed during the year will be taxed in the relevant assessment year?
By the Judicial Member:
Whether, on the facts and in the circumstances of the present case 'the Contract Completion Method' will be applicable or not?
2. The assessee is private limited company. Its previous year is the calendar year ending on 31-12-1987.
3. The assessee entered into an Agreement dated 20-6-1984 with All Union Self-Supporting Foreign Trade Association "Sudo Import", Moscow, USSR, for the supply of six Sea Going Hopper Barges, (hereinafter referred to as the "Vessel(s)". As per the Agreement, the price of one Vessel is Indian Rupees 67,569,000 only inclusive of spare parts worth Rs. 669,000. The total contract price for the six vessels comes to Rs. 405,414,000. As per the agreement the term of delivery is set as follows :
1st vessel by June, 1986;
2nd vessel by August, 1986;
3rd vessel by October, 1986;
4th vessel by November, 1986;
5th vessel by February, 1987; and 6th vessel by April, 1987.
With regard to the payment, the assessee was to receive payment of 1st instalment at 10 per cent and 2nd instalment at 5 per cent and the 3rd instalment at 10 per cent. The last instalment was to be 75 per cent of the total price.
4. The assessee accordingly applied for import licence for import of six unfinished barges of the total value of Rs. 2992.00 lakhs carrying an export obligation for the export of 6 barges of total value of Rs. 4054.14 lakhs. The import licence was issued for the whole contract. The assessee also entered into another contract with F.E.L.S. Singapore for the contruction of Barges at Singapore, which were to be delivered to the company in unfinished state. The company was to work upon them at Vizag and the ships were to be delivered to M/s Sudo Import, Moscow. The first barge was delivered in October, 1987 i.e. after a period of three years. During the accounting year ended 31-12-1987 relevant to assessment year 1988-89, the assessee supplied two Hopper Barges worth Rs. 13.38 crores to M/s Sudo Import. The entire amount spent up to 31-12-1987 was Rs. 1,95,44,241.31 which was capitalised and shown under the head "Ship Export Project". The amount advanced to FELS, Singapore, the sub-contractor amounting to Rs. 15,44,71,825.32 stood debited in advances. Against this the advances received by the assessee from the buyer are as follows :
31-12-1985 : 401,40,000
31-12-1986 : 200,70,000
31-12-1987 : 1,204,20,000
1,806,30,000
5. In the course of the assessment proceedings for the assessment year 1988-89, the Dy. Commissioner, CR-2 issued instruction to the Assessing Officer directing him to assess the profit on sale of two barges during the year. On the basis of the said instruction, the Assessing Officer requested the assessee to furnish the details of expenses relating to these two barges so as to compute the profit thereon. It was explained by the assessee that the contract for supply of Six Sea Going Hopper Barges was a composite and single agreement and, therefore, the assessee followed the system of completed contract method under which the profit has to be worked out on the final completion of the contract. In that view of the matter, the assessee capitalised the entire amount spent up to 31-12-1987 and shown the same under the head "Ship Export Project" in the current assets, loans and advances. The assessee, therefore, explained that in the scheme of the agreement it was not possible to work out the specific expenditure for the supply of two Barges from the total expenditure incurred for the six barges to be supplied to the buyer M/s. Sudo Import, Moscow. The Assessing Officer, however, did not accept the contentions of the assessee.
According to him the inability of the assessee to furnish details of expenses was to support the claim that the contract was a single project for which expenses could not be allocated to individual units. Such claim, according to the Assessing Officer, was not genuine. Since the assessee could reasonably identify expenses relatable to the two barges sold during the year and since the same has not been furnished, he was of the view that it is a fit case for invocation of the provision of Section 145. Relying further on the decision of the Hon'ble Supreme Court in the case of British Paints India Ltd. (supra), it was held that the income-tax which is a tax on annual profit cannot be postponed for the future year. He, therefore, estimated the manufacturing expenses for the sale of two barges during the year at Rs. 71,44,496 and arrived at the profit at Rs. 2,80,05,504.
6. Aggrieved by the said order, the assessee took up the matter in appeal before the CIT (Appeals) who accepted the claim of the assessee and deleted the addition.
7. Aggrieved by the said order, the Revenue came up in appeal before the Tribunal contending, among other things, that the CIT(A) erred in deleting the addition of Rs. 2.80 crores made on account of supply of barges during the year under consideration.
8. The learned Judicial Member concurred with the CIT (Appeals) and held that he was correct in deleting the addition. According to him the assessee entered into an agreement in 1984 and the method of accountancy was regularly maintained and followed as in the past. The assessee adopted the completed work method and accordingly the profit was shown when the contract was completed during the previous year relevant to assessment year 1989-90. The Assessing Officer simply interfered with the accounting method followed by the assessee year after year by applying the ratio of the decision of the Hon'ble Supreme Court in the case of British Paints India Ltd. (supra). While doing so, he estimated the expenses made by the assessee on manufacturing etc. which according to him was totally wrong as the assessee was maintaining complete books of account and no defects of any kind were found in the books of account. Since the system of accounting was accepted for the assessment years 1985-86 to 1987-88 in the order under Section 143(3), there was no reasonable ground for disturbing the system of accounting followed by the assessee during the present assessment year. The learned Judicial Member further observed that the terms of the agreement placed at page 125 of the paper book fully support the claim that the contract was a single and composite one and any violation of the conditions would invite heavy penalty including cancellation of the contract. The learned Judicial Member approved the order of the learned CIT (Appeals) and reproducedthe operative part of the order which according to him was not controverted by the revenue.
9. On the other hand, the learned Accountant Member did not agree on this point. After discussing the various arguments advanced by the learned counsel of the assessee, it was his view that the only question that falls for consideration was whether the profit in respect of two barges supplied and billed during the year under consideration should be taxed in this year or in the next year when the balance 4 barges were supplied. The first point at issue, according to him, was whether the assessee was following contract completion method and whether the profit should be assessed when the contract is completed after the supply of all the six barges. According to the learned Accountant Member, the completion of contract can mean different things and the completion can be at different stages like in the case of construction of building the completion of contract can be at the stage of laying of foundation or construction up to the plinth level or up to the roof level or at the final stage. In such a case, if the claim of the learned counsel of the assessee is accepted it implies that the income is to be reckoned only when the last stage of the contract is fulfilled. This claim cannot be accepted in view of the decision of the Hon'ble Supreme Court in the case of British Paints India Ltd. (supra). He, therefore, held that the income arising in one year has to be taxed in that year itself and the assessee can by no means shift the income earned in one year to a subsequent year.
10. The learned Accountant Member further held that in order to determine as to whether a given contract in respect of supply of more than one item is composit or divisible contract, the relevant factors are :
(i) whether the contract is for a lump sum price or with reference to each item separately;
(ii) on a default being committed by either party for a particular item, whether the whole contract would be repudiated or only with reference to that particular item; and
(iii) whether the payment, billing, etc. would be done with reference to each item or for all the items taken together.
11. Coming to the first test, it was his view that the price of each vessel was specified in the contract at Rs. 67,569,000. The total contract was also was indicated at Rs. 405,414,000 for six vessels.
Clauses 49 and 51 further reveals that the buyer has the right to refuse acceptance of any particular vessel and not all the vessels to be supplied under the contract. Even on default the refund or interest on the refund has to be determined in each case and not on the whole contract. The learned Accountant Member further held that the insurance of the entire export contract by a single policy or the issue of a composite import and export licence for the import and export of six barges does not lead to the contract being one composite contract as each individual item of supply can be identified. The learned Accountant Member further held that the acceptance of the system of accounting regularly employed by the assessee in the earlier years does not prevent the revenue from rejecting the same during the year in view of the facts and peculiar circumstances of the case. Since the assessee not only received the payment but also issued bills in respect of these two barges, it was his view that the Assessing Officer was fully justified in assessing the profit arising out of this transaction. He, however, held that the Assessing Officer was not justified in estimating the expenses in respect of these two barges and also in not allowing deduction under Section 80HHC. He, therefore, held that the determination of the expenses and the consequential profits on these two barges along with the claim for deduction under Chapter VI-A of the IT Act should be restored to the file of the Assessing Officer with a direction to decide these issues afresh after affording an opportunity of being heard to the assessee.
12. It is on these facts that the above points of difference was referred to me.
13. Shri Arvind Kumar, the learned D.R. appeared for the revenue and Shri M.S. Syali, learned counsel along with Shri Anil Bhalla, CA for the assessee. Shri M.S. Syali, learned counsel opined that the said difference of opinion arose due to certain misunderstandings. In such a case, it was opined that the case should have been refixed for clarification so that the alleged difference of opinion on the points can be fully explained as there is no room for difference of opinion in this regard. According to him the contract referred to above is a single indivisible contract as evidenced by the import licence and the registration of export contract by the Government of India. Similarly, the Duty Exemption Entitlement Certificate to the assessee-company for the contract to export six Barges to USSR was granted as a single contract. The assessee also was issued a single specific contract (Political Risks) policy to cover the contract with M/s. Sudo Import, USSR for export of a 6 sea going hopper barges by Export Credit Guarantee Corporation India Ltd. The said contract, therefore, cannot be treated as a separate contract for supply of each vessel.
14. The learned counsel of the assessee drew our attention to the various Clauses of the contract agreement entered into by the assessee with Sudo Import to show that the contract was a composite contract for supply of six vessels and the consideration for the said supply has to be taken as a whole. As per Clause 1, the contractor undertakes to get built out of his materials and deliver to the buyer six Sea Going Hopper Barges. The supply is for six vessels. If the contract is for six different contracts then the contract number, the terms of the delivery and the payment will have to be specified. However, as per Clauses 5 and 6 read with Clause 53, the total contract price was to be paid by advance instalment at 10 per cent of the contract price for the supply of six vessels initially. The second, third and fourth part of this clause lists out the payment to be made subsequently. The final payment has to be made at 75 per cent of the total contract price calculated at percentage of each vessel.
15. Similarly, the contract with F.E.L.S. Singapore was on identical lines for supply of six barges as a single contract.
16. The learned counsel further drew our attention to the possible loss on account of contractual obligation with the customers. According to him should the assessee fails to comply with the terms of the contract for not delivering in time or fails to deliver the vessels then the assessee was liable to pay 8 per cent interest plus 8 per cent penalty on the contract price of vessel delayed or refused by the buyer. Taking into account Clauses 56 and 61, it is submitted that the buyer has got the power not only to charge interest and levy penalty but also cancel the contract as such. It is, therefore, submitted that there is no scope for splitting the composite contract into two. The learned counsel further submitted that the contract was entered into in assessment year 1984-85. The assessee started receiving advances from the party w.e.f. 1985. In the year ending on 31-12-1985, it received Rs. 401,40,000, by 31-12-1986 it received another sum of Rs. 200,70,000. During the previous year relevant to the present assessment year, the assessee received a sum of Rs. 1,204,20,000. The Assessing Officer himself treated the entire contract as composite one and did not make any assessment in the earlier years even though the assessee started receiving the advance payments. Since the amount received during the year also is in the same nature of advance payment, there is no distinguishing factor for treating the receipt as in the nature of payment for two barges. Since the assessee is following Contract Completion Method, the expenses incurred were capitalised and the same was not claimed in the profit and loss account. There is, therefore, no reason to estimate the expenditure for two barges during the year as the contract work, as also the payment received are a continuing process.
17. On the other hand Shri Arvind Kumar the learned D.R. supported the order of the learned Accountant Member. According to him the learned Accountant Member correctly appreciated the terms of the agreement. The nature of the contract depends on the intention of the parties and, therefore, the real intention of the assessee in this case is to postpone the payment of tax which is otherwise payable in the year of receipt as held by the Hon'ble Supreme Court in the case of British Paints India Ltd. (supra). The learned D.R. further submitted that the reliance of the assessee on the order of the Assessing Officer for assessment years 1991-92 and 1992-93 for the proposition that similar contract was accepted as a composite agreement cannot be binding to the revenue as there is no res judicata and each assessment year is a separate assessment. There is no denying the fact that the assessee supplied two barges during the year. The assessee also received full amount for the said supply of the two barges. In such a case the Assessing Officer is fully justified in assessing the income from the said two barges earned during the year.
18. The learned D.R. Shri Arvind Kumar further submitted that the alleged interest, penalty and refund claimed to have been payable by the assessee on the whole contract price is without any basis as the levy of interest, penalty or refund is to be made with the specific vessel for which default is committed by the assessee. Reference was made to Clauses 49 and 51 and submitted that the specific liabilities are to the particular vessel for which the default was committed and not for the entire contract. Referring again to Clause 5 of the agreement it was submitted that the price of each vessel was specified and the supply has to be made accordingly. All the considerations including the specification for the items supplied have to be assessed individually and the assessee will be liable only for the specific default in respect of a particular vessel. There is, therefore, no reason to hold that the entire contract is a composite one for which no separate consideration could be made. Since the Assessing Officer has rightly made and the learned Accountant Member has upheld the order on valid reasons, it is submitted that the order of the learned Accountant Member should be upheld.
19. I have carefully considered the rival submissions in the light of the material on record. From the orders of the revenue authorities and of the learned Members, it is evident that there is no dispute to the basic facts. The assessee in this case entered into agreement with Sudo Import, USSR for the supply of six barges vide agreement dated 20-6-1984. In terms of the agreement the buyer was to pay a sum of Rs. 405,414,000 for six vessels @ Rs. 67,569,000 per vessel. As per terms of the contract the first vessel was to be delivered by the contractor to the buyer by June, 1986, followed by the second by August, 1986 and the third by October, 1986, fourth by November, 1986, the fifth by February, 1987 and the sixth by April, 1987. It is also a fact admitted by the parties that the assessee could deliver the first barge by October, 1987. By 31st December, 1987 which is the end of the previous year relevant to the present assessment year, the assessee supplied two barges only. The remaining four barges were supplied by 31-3-1989. It is also seen that the assessee in this case received the following payments :
Rs. 401,40,000 by 31-12-1985;
Rs. 200,70,000 by 31-12-1986;
and Rs. 1,204,20,000 by 31-12-1987.
The assessee is following mercantile system of accounting. It claimed that it followed Contract Completion Method by which the entire contract amount would be subjected to tax in the year of completion. From the order of the Assessing Officer for the assessment years 1986-87 and 1987-88, it is seen that the Assessing Officer did not make any attempt to work out the profit from the contract business though the assessee incurred considerable expenses during the first two assessment years itself. In other words the claim of the assessee appears to have been accepted. From the order of the Assessing Officer it is seen that the assessment of the two barges during the year was made on the basis of the instructions issued by the Dy. Commissioner, CR-II. It is not clear under what circumstances and in what context the learned Dy. Commissioner considered it necessary to interfere with the method of accounting followed by the assessee from the inception of the contract agreement. It is, however, apparent that the revenue authorities are mainly influenced by the decision of the Hon'ble Supreme Court in the case of British Paints India Ltd. (supra). It is further seen that by interfering with the system of accounting followed by the assessee, the Assessing Officer has to estimate the expenditure for manufacture of two barges on the aggregate expenditure capitalised by the assessee to be adjusted in the year of completion. From the balance sheet as also from the order of the learned CIT (Appeals), it is seen that the amount spent on the entire contract up to 31-12-1987 was Rs. 1,95,44,241.31 which was capitalised and shown under the head "Ship Export Project". The amount advanced to FELS, Singapore, the sub-contractor amounted to Rs. 15,44,71,825.32. As per the provisions of the contract agreement the assessee was to receive 10 per cent of the contract price of Rs. 401,40,000 within 30 days upon receipt by the buyer in Moscow of the contractor's invoice etc. The assessee accordingly received the said amount by 31-12-1985. The second instalment was to be 5 per cent and the third instalment was to be 10% of the total contract price. By 31-12-1986, the assessee received Rs. 200,70,000. However, the assessee did not make any bifurcation of the expenses per vessel. As on 31-12-1987, the assessee received a further sum of Rs. 1,204,20,000 making a total receipt of Rs. 1,806,30,000 against which the assessee spent a sum of Rs. 1,95,44,190 and also made advance payment of Rs. 15,44,71,825 to the suppliers on this account. It is, therefore, not possible for the assessee nor for the revenue authorities to correctly work out the profit by changing the system of accounting midway and make estimate of the income for the two barges for which there is no specific allocation of expenditures. Having regard to the practical aspect of the matter also, it is seen that there is no reason for the revenue to suddenly reject the system of accounting followed by the assessee and estimate the income when the contract is not yet complete and the accounts have not been finalised and closed.
20. It is also seen that the assessee in this case disclosed the receipt during the year under consideration as follow at Note 10 of the Schedule to the Balance Sheet for the year ending 31-12-1987 as follows :
10. The company was awarded export contract for supply of 6 Barges by the V/o Sudo Import Moscow @ Rs. 6,69,00,000 per Barge (ship). Barges were to be supplied one by one on the basis of delivery schedule as laid down in the contract. During the year company supplied 2 Barges worth Rs. 13,38,00,000 to the V/o Sudo Import Moscow and billed the same. The company is of the opinion that supply of 6 Barges constitute a single contract and that the complete sale will be accounted for in the year in which last of the Barge is supplied. Hence entire amount spent by company up to 31-12-1987 including expenses attributable and incidental to this activity shown under the head "Ship Export Project" and totally to Rs. 1,95,44,241.31 and advances of Rs. 15,44,71,825.32 paid to the suppliers on this account and included under the head advances recoverable in cash or in hand (both of which include amount spent towards 2 Barges delivered) are carried forward and therefore consequential profit or loss on export of 2 Barges as well as export incentives receivable will be accounted for in the year of delivery of the sixth and last Barge.
21. The assessee disclosed entire receipt in the next assessment year 1989-90 for which the previous year is the year ending 31-3-1989. The Auditors vide Note 12 of Schedule 16 made the following remarks :
12. The company was awarded an export contract for supply of 6 (six) Sea-Going Hopper Barges @ Rs. 669,00,000 per Barge (ship) by V/o Sudo Import, Moscow, USSR on June 20,1984. Last shipment was made under the contract on May 10, 1988. Being a single contract the company was issued by the Government of India one Advance Import Licence carrying an export obligation for the whole contract. Therefore, the expenses, sales/purchase and profit relating to the contract of all six barges (including 2 barges which have been delivered in the previous period) are being accounted for completely in the current period i.e. the period in which the contract has been completed and the company has fulfilled its export obligation under the Advance Import Licence.
It is a fact that the assessee has fully disclosed the entire receipts and also accounted for all the expenses during the assessment year 1989-90. It is also a fact that the Assessing Officer has already assessed the same (though provisionally). There is no element of any evasion or suppression of any of the receipts or any of the income earned from the said contract for supply of six barges. There is, therefore, no valid reason to interfere with the system of accounting maintained by the assessee.
22. The Hon'ble Supreme Court in the case of British Paints India Ltd. (supra) considered the provisions of Section 145 in the context of valuation of stock and it was observed that each year being a self-contained unit and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the assessee has been found to be such that income cannot be properly deduced therefrom. The profit of one year is likely to be shifted to another year which is an incorrect method of computing profits and gains for the purpose of assessment. It is, therefore, not only the right but the duty of the Assessing Officer to act in exercise of his statutory power as he has done in the instant case for determining what, in his opinion, is the correct taxable income. If the case of the assessee is examined in the context of the above observations of the Hon'ble Supreme Court, even then the order of the Assessing Officer for the present assessment year cannot be sustained. If the profits of each year are to be assessed in each year, then the Assessing Officer in this case should have assessed the income right from assessment year 1986-87 when the assessee incurred expenses to the tune of Rs. 6,68,139. Similarly, in the previous year relevant to the assessment year 1987-88, the assessee incurred a sum of Rs. 70,54,445 in respect of the Ship Export Project. If the ratio of the decision of the Hon'ble Supreme Court is to be strictly followed the Assessing Officer has to assess the element of profit out of the expenses incurred during the earlier assessment years also in terms of Section 145 of the Act. By doing this, the Assessing Officer could make final assessment in the year of completion of contract and make suitable adjustment. This also has not been done. Therefore, the assessment made by the Assessing Officer for the assessment year 1988-89 neither followed the principle laid down by the Hon'ble Supreme Court nor bring out the correct income as the specific details are not available for assessing the income out of the supply of two barges during the year.
23. With regard to the terms of the agreement, it is seen that the Assessing Officer raised various objections on the various provisions of the agreement without considering the agreement as a whole. The learned Accountant member also appears to have committed the same mistake. If the agreement is read as a whole, the terms of agreement, contemplate supply of six Sea Going Hopper Barges by the assessee to Sudo Import, Moscow, USSR. The agreement provides for terms of delivery, as also for terms of payment. From the above details, it is seen that it is an on going project for which final determination and payment has to be made at the completion of the project. The assessee has to receive 25 per cent in the form of advance and final payment of 75 per cent is to be made on the completion of the project. There is no specification for determination of profit or loss at any point of time till the whole project is completed. All payments are in the nature of running payment which is not stipulated for any specific item. The assessee, therefore, did not attempt nor maintain separate account for each vessel to be supplied.
24. On the same lines the assessee entered into similar contract with FELS Singapore for the construction of Barges at Singapore which were to be delivered to the company in an unfinished state. The execution of the contract with foreign party involved various permits/licences from the Government. The assessee obtained Import Licence and also registered the export contract as a single indivisible contract. Similarly, the Duty Exemption Entitlement Certificate also was granted as a single contract. It is also seen that the assessee was issued a single specific contract (Political Risks) policy to cover the contract with M/s. Sudo Import, USSR for export of 6 sea going hopper barges by Export Credit Guarantee Corporation India Ltd.
25. The assessee, therefore, fully accounted for the expenses, sales/ purchases and profit relating to the contract of all six barges in the previous year relevant to the assessment year 1989-90. The Assessing Officer also assessed the same provisionally. It is also seen that the assessee made a claim of Rs. 2,68,13,520 as cash incentive on export of six Sea Going Hopper Barges which was rejected and for which the assessee went in appeal before the Addl. Chief Controller of Import and Export. While completing the assessment, the Assessing Officer observed as follows :
Accordingly, the profit during the year would be determined for all the six ships out of which the profit already taxed for two ships in assessment year 1988-89 amounting to Rs. 2,80,05,504 would be included protectively since the assessee has been contending that it is a single project an argument which has not been found favour with the revenue.
26. From the above it is seen that by following a single project system, there is no loss to the revenue as the profit has been properly accounted for and the assessment was completed by the Assessing Officer accepting the system of accounting followed by the assessee during the assessment year 1989-90. On the other hand, by tampering with the system of accounting followed by the assessee for assessment year 1988-89, the Assessing Officer merely complicated the issue. Eventually he had to include provisionally the income computed by him for assessment year 1988-89 in the income of the assessment year 1989-90. This is more an exercise in futility.
27. It is also seen that the assessee entered into similar contract during the assessment years 1991-92 and 1992-93 and the revenue department did not interfere with the system of accounting adopted by the assessee. There is, therefore, no reason to interfere with the system of accounting adopted by the assessee in respect of the agreement dated 20-6-1984 entered into by the assessee. I hold accordingly and concur with the learned Judicial Member.
28. The matter will now go before the regular Bench for decision according to majority opinion.
ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT Jordan Kachchap, Judicial Member
1. Their being difference of opinion among the members. The following respective questions were referred to Third Member for a decision.
2. The question referred by the Judicial Member :-
Whether on the facts and in the circumstances of the present case "the Contract Completion Method" will be applicable or not ?
3. The question referred by the Accountant Member :-
Whether on the facts and in the circumstances of the present case, the contract entered into by the assessee with Russian party is a divisible one or not and accordingly, whether the income from two barges supplied and billed during the year will be taxed in the relevant assessment year ?
4. The Ld. Third Member examined the matter in great detail and has finally concurred with the finding of the ld. Judicial Member. The judicial Member has upheld the order of the CIT(A). The learned CIT(A) deleted the addition of Rs. 2.80 crores having held that the assessee has rightly followed the method of accounting to compute income on project completion basis and than on percentage basis. Consequent upon the decision of the Third Member, the order of the CIT(A) is sustained.
5. In the result, on this issue, the appeal of the Revenue is dismissed.