COMMISSIONER OF INCOME TAX V V. UMANG HIRALAL THAKKAR

TAXAP/1000/2013

AI Insights

The case revolves around a dispute concerning the method of accounting for income from construction projects by Umang Hiralal Thakkar, who was engaged in multiple business activities including construction and hotel management. The Assessing Officer had added Rs.1,66,70,811 to the assessee's income for the Assessment Year 2006-07, applying the percentage completion method of accounting, which was contested by the assessee. The CIT(A) and subsequently the ITAT found in favor of the assessee, leading to the deletion of the addition. The Commissioner of Income Tax appealed to the Gujarat High Court, which upheld the ITAT's decision, emphasizing the consistency and legality of the project completion method adopted by the assessee.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 728695 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 18-11-2013
• Assessment Year: misc
• Other Referred Cases: Vraj Developers in ITA No.19/AHD/2008, Nandi Housing (P) Ltd. Vs. DCIT, Khoday Distillers Ltd., Sanjeev Woolen Mills vs. CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: MAUNA BHATT
• Keywords: Assessment; Construction business; Income Tax; Percentage completion method; Percentage completion method; Project completion method
• Section: 142(1); 143(2); 145(1)

Judgement Text

"O/TAXAP/1000/2013 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1000 of 2013 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE M.R. SHAH ­sd/­ and HONOURABLE MR.JUSTICE R.P.DHOLARIA ­ sd/­ ============================================= 1. Whether Reporters of Local Papers may be allowed to see the judgment ? NO 2. To be referred to the Reporter or not ? NO 3. Whether their Lordships wish to see the fair copy of the judgment ? NO 4. Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? NO 5. Whether it is to be circulated to the civil judge ? NO ============================================= COMMISSIONER OF INCOME TAX V....Appellant(s) Versus UMANG HIRALAL THAKKAR....Opponent(s) ============================================= Appearance: MRS MAUNA M BHATT, ADVOCATE for the Appellant(s) No. 1 ============================================= CORAM: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE R.P.DHOLARIA Date : 18/11/2013 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) 1.0. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Income Appellate Tribunal (hereinafter referred to as the \"Tribunal\") dated 15.2.2013 passed in ITA No.560/AHD/2010 for AY 2006­07, the revenue has preferred present appeal with the following proposed substantial question of law. Page 1 of 8 O/TAXAP/1000/2013 JUDGMENT \"A. Whether the Appellate Tribunal is correct in deleting the addition of Rs. 1,66,70,811/­ made on account of business income by computed percentage completion method? B. Whether the Appellate Tribunal is correct in holding the Accounting Standard 7 as prescribed by ICAI are not applicable to the assessee ?\" 2.0. The facts leading to the present appeal in nutshell are as under: 2.1. That the assessee filed return of income for the AY 2006­07 disclosing total income at Rs.32,33,520/­. The case was taken up for scrutiny assessment and notice under Section 143(2) which was duly served upon the assessee. Subsequently, under Section 143(2) and 142(1) alongwith detailed questionnaire issued and and served to the assessee. In response to the notice of hearing, the assessee appeared through his authorized representative and submitted the details as called for. It was found that the assessee derived the income by way of profit from construction business. It was found that during the year, he was proprietor of Sahajanand Enterprise, Swaminarayan Enterprise, Dharmdev Housing Corporation, Neelkhanth Enterprise, Ghanshyam Enterprise, Devnandan Builders and Ghanshyam Builders. It was also found that the assessee is also engaged in the business of hotel in the name of Hotel Neelkanth and Hotel Neeltop. He was also found to be partner in M/s. Akshar Enterprise, M/s. Neelkanth Enterprise, M/s. Akshar Associates, M/s. Swaminarayan Builders and M/s. Hirav Advertising. During the assessment, it was found that assessee’s nature of business for the period under consideration is \" Developers and Hotel Business\". It was found that in the statement of total income, assessee shown income from house property, profits and gains of business or Page 2 of 8 O/TAXAP/1000/2013 JUDGMENT profession, share income from various firms, wherein he is partner, income from other sources and also income from various concerns, wherein he is proprietor. It was noticed from the state of affairs of the business activity carried out by the assessee, in the construction activity carried out by the assessee, income has been offered from M/s. Sahjanand Enterprises by percentage completion of method and no income is being offered against business activity carried out in the proprietary concerns M/s. Swaminarayan Enterprise, Ghanshyam Enterprise and Neelkanth Enterprise. Since no income against the project undertaken has offered by the assessee, specific show cause notice was given on 1.12.2008 calling upon the assessee to furnish the details with respect to income against the project undertaken, total work done, booking advance received and income offered, if any. In reply to the same, assessee filed in reply dated 27.12.2008. The Assessing Officer was not satisfied with the assessee reply and held that assessee's contention of income offering by project completion method is not acceptable and assessee ought to have shown income of percentage completion method, which is recognized method of showing income. Consequently, it is held that the quantum of income required to be brought to tax is restricted to the total work done for the period under consideration i.e. percentage completion at average rate of income shown in the later period and Assessing Officer worked out the total of project completed at Rs.3,70,46,247/­ and income thereon was taken @ 45% amounting to Rs.1,66,70,811/­ and passed the assessment order considering the total income of assessee at Rs.2,00,01,137/­. 2.2. Feeling aggrieved and dissatisfied with the order of assessment passed by the Assessing Officer, the assessee preferred appeal before the learned CIT(A) and relying upon the decision of the Appellate Tribunal in the case of Vraj Developers in ITA Page 3 of 8 O/TAXAP/1000/2013 JUDGMENT No.19/AHD/2008 and observing that in construction, the project completion method and percentage completion method, both have also been recognized by the CBDT in the instruction No.4/2009 dated 30.9.2009, therefore, the Assessing Officer is not considered justified in bringing to tax profit of Rs.1,66,70,811/­ in the year under consideration. Consequently, learned CIT (A) directed to delete the addition of Rs.1,66,70,811/­ by observing that the accounting system adopted by the assessee i.e. on the basis of the project completion is legal and permissible. 2.3. Feeling aggrieved and dissatisfied with the order passed by the CIT(A) in directing to delete addition of Rs.1,66,70,811/­, the revenue preferred appeal before the learned ITAT and by judgment and order dated 15.2.2013 learned ITAT has dismissed the appeal preferred by the revenue confirming the deletion of Rs.1,66,70,811/­ made by the CIT(A). 2.4. Feeling aggrieved and dissatisfied with impugned judgment and order passed by the learned ITAT, the revenue has preferred present appeal with the aforesaid proposed substantial question of law. 3.0. Ms. Mauna Bhatt, learned counsel for the appellant has vehemently submitted that assuming that both accounting system i.e. project completion and percentage completion methods are held to be permissible, in that case also, assessee cannot be permitted to follow method of accounting such as percentage completion as well as project completion method for same source of income. It is submitted that in the present case it has been found that one of the proprietary concern i.e. M/s. Sahjanand Enterprise, the assessee is following completion project and therefore, learned Appellate Tribunal has materially erred in Page 4 of 8 O/TAXAP/1000/2013 JUDGMENT confirming the accounting system of project completion method adopted by the assessee. 3.1. It is submitted that the decision of the Appellate Tribunal is erroneous as assessee is following mercantile system of accounting and expenses are booked/ claimed on mercantile basis, profits from construction / development work is to be assessed on accrual basis considering the work done i.e. on percentage completion method basis and therefore, as such A.O rightly applied percentage completion method. 3.2. Making above submissions, it is requested to admit / allow the present appeal. 4.0. Heard Ms. Mauna Bhatt, learned counsel for the appellant and perused the impugned judgment and order passed by the learned ITAT as well as order passed by the learned CIT(A) and the even the assessment order passed by the A.O. 4.1. At the outset, it is required to be noted that the assessee is consistently following accounting system of project completion method. It is not disputed that the accounting system on project completion method is recognized and even approved by the CBDT. Merely because, another assessee, in which, present assessee might be concerned as a partner and / or proprietor is following another accounting system i.e. on percentage completion method, it cannot be said that the assessee could not have followed the accounting system of project completion method. 4.2. From the perusal of the order passed by the learned CIT(A) Page 5 of 8 O/TAXAP/1000/2013 JUDGMENT while deleting the addition of Rs.1,66,70,811/­, it appears that in para 10.4 and 10.5, learned CIT (A) has observed as under: \"10.4.In the present case, it is not the Assessing Officer's case that the appellant is not reporting or under reporting its income. In fact, I find in the subsequent assessment year i.e. A.Y. 2007­08, the appellant has disclosed substantial income from the projects undertaken in the business proprietary concerns viz. M/s. Neelkanth Enterprises, M/s. Ghanshyam Enterprises and M/s. Swaminarayan Enterprises. In the subsequent year i.e. A.Y 2007­08 the profit declared from the projects run by these three proprietary concerns ranges from 43% to 46%. The Supreme Court in the case of Sanjeev Woolen Mills vs. CIT, supra, has clearly held that to attract the proviso to Section 145(1) of the Act, the Assessing Officer should be of the view that the accounts are correct and complete but the method employed is such that the income cannot be property deduced therefrom. The choice of method of accounting regularly employed by the assessee lies with the assessee but the assessee would be required to show that he has followed the chosen method regularly. The department is bound by the assessee's choice of method regularly employed unless by this method, the true income, profit or gain cannot be arrived at. The assessee's regular method would not be rejected as improper merely because it gives the assessee the benefit in certain years or that as per the Assessing Officer, the other method would have been more preferable. If the method adopted does not afford true picture of profit, it would be rejected, but then such rejection should be based on cogent evidence and should be done with caution. 10.5.In the present case, the appellant has declared substantial profits on the basis of project completion method in the subsequent years. In construction, the project completion method and percentage completion methods, both have also been recognized by the CBDT in the instruction No.4 of 2009 dated 30.9.2009. Therefore, the Assessing Officer is not considered justified in bringing to tax the profit of Rs.1,66,70,811/­ in the year under consideration, particularly when such profits have already been offered to tax by the appellant in the AY 2007­08. The addition of Rs.1,66,70,811/­ are directed to be deleted.\" 4.3. It is also required to be noted that while passing the impugned judgment and order, learned ITAT has heavily relied upon the Page 6 of 8 O/TAXAP/1000/2013 JUDGMENT decision of the Coordinate Bench Tribunal in the case of Vraj Developers (supra) passed in ITA No. 19/AHD/2008, in which, the Coordinate Bench, has held as under: \"5. The Ld. D.R supported the order of the Ld. A.O and the L.D A.R of the assessee supported the order of Ld. CIT(A) and also placed reliance on Bangalore Bench of the Tribunal in the case of Nandi Housing (P) Ltd. Vs. DCIT (2003) 80 TTJ 750 (Bang), wherein Tribunal followed decision of the Karnataka High Court in the case of Khoday Distillers Ltd., in ITRC Nos. 19 to 21 of 1993. This, it is observed that the issue which requires our adjudication is that the income in the instant case is to be computed as per system of accounting followed by the assessee or as per accounting followed by the assessee or as per accounting standard AS­7 for the purpose of charging of income tax. We find that the issue is to be decided in accordance with the provisions of section 145 of the Act shows that the business income which is assessable under the Income Tax Act is to be computed in accordance with the consistent system of accounting followed by the assessee unless such system, of accounting is defective and / or from such system of accounting, profit cannot be deduced. Thus, in our considered opinion, the option for choosing the system of account is wit the assessee and not with the Ld. A.O provided the system chosen by the assessee is consistently followed by him and such system is not a defective system. In our considered view, provisions of AS­7 cannot override the provisions of Section 145Jn so far as the computation of business income under the Income Tax Act for the purpose of determining income is concerned. In the instant case, we find that the Ld.A.O has brought no material on record to show that the system of accounting adopted by the assessee for the year under appeal was not consistently followed by the assessee or the system adopted was a defective system. In our considered view, even a project completion method is also a recognized system of accounting. Simply the Institute of Chartered Accountants of India has recommended percentage completion method does not mean that project accounting or the same is a defective system of accounting. The ld. CIT (A) has recorded a finding after perusing the assessment records of the subsequent years that the assessee has offered for taxation its income in the subsequent year as per the consistent system of accounting followed by the assessee. The Ld. D.R could not point out any error in the above finding of Ld. CIT(A). In view of the above discussion, we do not find any error in the order of the Ld. CIT(A) and therefore, the same is upheld and the appeal of the Revenue is dismissed\". 4.4. It is reported that the decision of the Appellate Tribunal in the Page 7 of 8 O/TAXAP/1000/2013 JUDGMENT case of Vraj Developers (Supra) has attained the finality as the said decision is not challenged by the department before Higher Forum. In view of the above and more particularly, when it has been found that the assessee is consistently following accounting system of percentage completion method, which is permissible and accepted by ICAI and CBDT with respect to construction work, it cannot be said that the learned Appellate Tribunal has committed any error and / or illegality, which call for the interference of this Court. We see no reason to see to interfere with the impugned judgment and order passed by the learned Tribunal. We are in complete agreement with the view taken by the learned ITAT as well as learned CIT (A) deleting the addition of Rs.1,66,70,811/­ which was made by the Assessing Officer on rejecting the accounting system on percentage completion method followed by assessee. No question of law much less any substantial question of law arise in the present appeal. Hence, present appeal deserves to be dismissed and is accordingly dismissed. sd/­ (M.R.SHAH, J.) sd/­ (R.P.DHOLARIA,J.) Kaushik Page 8 of 8 "