The ADIT(Intl. Taxn), Ahmedabad V. Shandong Tiejun Electric Power Engg. Co.Ltd., Kutch

ITA 1707/AHD/2013

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 9464 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-01-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 09-01-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 11-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HARE GOVIND SINGH
• Assessee Lawyers: MRUNAL N SHAH
• Keywords: Rejection of books of accounts; Presumptive income; Capital asset; Business income; Residential status; Additional evidence; Permanent establishment; Advance ruling
• Section: 5(2); 145; 12

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, AHMEDABAD BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER ./ ITA NO. 1707/AHD/2013 / ASSESSMENT YEAR : 2009-2010 THE ASSISTANT DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION), AHMEDABAD VS SHANDONG TIEJUN ELECTRIC POWER ENGINEERING CO. LTD., SURVEY NO.180P, VILLAGE TUNDA AND SIRACHA, TALUKA MUNDRA, KUTCH-370435 PAN : AALCS 4118 F / (APPELLANT) / (RESPONDENT) REVENUE BY : SHRI HARE GOVIND SINGH, CIT-DR ASSESSEE BY : SHRI VARTIK CHOKSI, AR & SHRI MRUNAL N. SHAH, AR DATE OF HEARING : 0 9/01/2017 DATE OF PRONOUNCEMENT IN COURT : 18/01/2 017 / O R D E R PER R.P. TOLANI, JUDICIAL MEMBER:- THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS), GANDH INAGAR DATED 18.03.2013 FOR ASSESSMENT YEAR 2009-2010. 2. FOLLOWING GROUNDS ARE RAISED:- (I) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOL DING THAT THE AOS ACTION OF REJECTING BOOKS OF ACCOUNTS IN TERMS OF S ECTION 145(3) OF THE ACT AND INVOKING THE PROVISIONS OF SECTION 44BBB(1), IS NOT JUSTIFIED, WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS ESTIMAT ED COST TAKEN AS BENCHMARK IN ABSENCE OF SUPPORTING DOCUMENTS. (II) THE LD. CIT(A) HAS FURTHER ERRED IN LAW AND ON FACT S IN NOT CONSIDERING THE FACT THAT THE ASSESSEE BEING A FOREIGN COMPANY, AS- 7 IS NOT APPLICABLE IN THIS CASE, AND INCOME SHOULD BE OFFERED AS PER THE PROVI SIONS OF SECTION 145 R.W.S. 44BBB OF THE I.T. ACT, 1961. 3. BRIEF FACTS ARE ASSESSEE IS A FOREIGN COMPANY IN CORPORATED UNDER THE LAWS OF REPUBLIC OF CHINA AND IS ENGAGED IN THE BUS INESS OF ERECTION, TESTING ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 2 AND COMMISSIONING OF POWER PLANTS, IT HAS OPENED A PROJECT OFFICE FOR THE EXECUTION OF PROJECTS ASSIGNED TO IT BY POWER GENER ATING COMPANIES IN INDIA. IN THE IMPUGNED YEAR ASSESSEE HAS BEEN EXECUTING TW O PROJECTS ON FIXED PRICE CONTRACT BASIS, ONE AWARDED BY ADANI POWER LT D FOR 5 X 660 MW POWER PLANT AT MUDRA IN GUJARAT AND THE OTHER BY JH AJJAR POWER LTD. FOR 2 X 660 MW POWER PROJECT AT KHURD VILLAGE, JHAJJAR, HAR YANA. THE CONTRACT WITH JHAJJAR POWER LTD WAS ENTERED IN THE IMPUGNED YEAR AND WAS AT INITIAL STAGE; THEREFORE, THERE IS NO REVENUE RECOGNITION THIS YEA R. 3.1 FOR THE YEAR UNDER CONSIDERATION, ASSESSEE FILE D RETURN OF INCOME DECLARING TOTAL INCOME AT RS.12,31,63,640/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE LD. AO CALLED FOR VARIOUS INFORMAT ION AND DOCUMENTS, WHICH WERE DULY SUBMITTED. LD. AO WAS OF THE VIEW T HAT METHOD OF ACCOUNTING FOLLOWED BY ASSESSEE AS PER AS7 WAS NOT CORRECT AND PROPER INCOME CANNOT BE DETERMINED ON THE BASIS THEREOF. C ONSEQUENTLY, REJECTING ASSESSEE DETAILED SUBMISSIONS, LD. AO REJECTED ASSE SSEES BOOKS OF ACCOUNTS AND INVOKED PRESUMPTIVE PROVISIONS OF SEC. 44BBB(1) OF THE ACT. LD. AO DID NOT APPRECIATE THAT THE BOOKS OF ACCOUNTS WERE DULY MAINTAINED THE BOOKS OF ACCOUNTS IN COMPLIANCE OF SEC. 44AA AS ALSO AUDITED U/S 44AB OF THE ACT. LD. AO THUS BY ARBITRARY APPLICATION OF SEC.44BBB(1 ) ASCERTAINED THE PROFITS AT RS.232,55,33,438/- AND DETERMINED INCOME OF RS.2 3,25,53,344/- @ 10% OF RS.232,55,33,438/-. AGGRIEVED ASSESSEE PREFERRED FI RST APPEAL BEFORE LD. CIT(A). 3.2 LD. CIT(A) UPHELD THE ASSESSEES CONTENTIONS AND AL LOWED THE APPEAL BY FOLLOWING OBSERVATIONS: 6.5 I HAVE GONE THROUGH THE ASSESSMENT ORDER, SUB MISSIONS, CASE LAW ETC. CAREFULLY. THE FOLLOWING PERTINENT OBSERVATIONS/DE CISIONS ARE MADE AFTER THOROUGH CONSIDERATION OF ALL FACTS, SUBMISSIONS, E VIDENCES: A) THE APPELLANT HAS OPTED FOR BEING ASSESSED UNDER SE CTION 44BBB(2) OF THE IT ACT. THE SUB-SECTION IS REPRODUCED HEREIN UNDER :- ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 3 NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SECTION (1), AN ASSESSEE MAY CLAIM LOWER PROFITS AND GAINS THAN THE PROFITS AND GAINS SPECIFIED IN THAT SUB-SECTION, IF HE KEEPS AND MAINTAINS SUCH BO OKS OF ACCOUNT AND OTHER DOCUMENTS AS REQUIRED UNDER SUB-SECTION (2) O F SECTION 44AA AND GETS HIS ACCOUNTS AUDITED AND FURNISHES A REPORT OF SUCH AUDIT AS REQUIRED UNDER SECTION 44AB, AND THEREUPON THE ASSESSING OFF ICER SHALL PROCEED TO MAKE AN ASSESSMENT OF THE TOTAL INCOME OR LOSS OF T HE ASSESSEE UNDER SUB- SECTION (3) OF SECTION 143 AND DETERMINE THE SUM PA YABLE BY, OR REFUNDABLE TO, THE ASSESSEE (EMPHASIS SUPPLIED) THE SECTION CLEARLY PROVIDES AN OPTION TO AN ASSESS EE BEING A FOREIGN COMPANY ENGAGED IN THE BUSINESS OF CIVIL CONSTRUCTI ON, ERECTION OF PLANT OR MACHINERY, TESTING AND COMMISSIONING OF POWER PROJE CT TO OFFER TO TAX LOWER PROFITS AND GAINS THAN PROFIT DEEMED OF 10% OF THE AMOUNT RECEIVABLE BY THE APPELLANT UNDER SUB SECTION (1) OF SECTION 44BBB OF THE IT ACT PROVIDED FOLLOWING TWIN CONDITIONS ARE FULFILLED: (1) THE APPELLANT SHALL KEEP AND MAINTAIN SUCH BOOK S OF ACCOUNT AND OTHER DOCUMENTS AS REQUIRED UNDER SUB-SECTION(2) OF SECTION 44AA OF THE IT ACT. (2) THE APPELLANT SHALL GET HIS ACCOUNTS AUDITED AN D FURNISHES A REPORT OF SUCH AUDIT AS REQUIRED UNDER SECTION 44AB OF THE IT ACT. (B) ADMITTEDLY, AS CLAIMED BY APPELLANT NO SPECIFIC BOOKS OF ACCOUNTS ARE PRESCRIBED U/S 44AA OF THE IT ACT READ WITH RELEVAN T IT RULES FOR THE NATURE OF BUSINESS CARRIED ON BY THE APPELLANT. IT HAS MAINTAINED BOOKS OF ACCOUNT AND GOT THEM AUDITED ALSO. BESIDES, THE APP ELLANT HAS SUBMITTED AUDIT REPORT OF A CHARTERED ACCOUNTANT ON VERACITY OF FINANCIAL STATEMENTS AND AUDIT REPORT AS PER COMPANIES (AUDITOR'S REPORT ), 2003 IN TERMS OF SECTION 227(4A) OF THE COMPANIES ACT. (C) SO FAR AS THE APPLICABILITY OF THE AS-7 IS CONCERNE D, ONE OF THE OBJECTIONS OF ID. AO WAS THAT THE SAME IS NOT APPLICABLE TO TH E APPELLANT COMPANY BEING A FOREIGN COMPANY. I DO NOT FIND IT TRUE, BEC AUSE AS PER SECTION 594 OF THE COMPANIES ACT, 1956 THE COMPANY, WHICH IS IN CORPORATED OUTSIDE INDIA AND HAS ESTABLISHED PLACE OF A BUSINESS IN IN DIA, IS REQUIRED TO PREPARE ITS BALANCE SHEET AND PROFIT & LOSS ACCOUNT AS PER THE VARIOUS PROVISIONS OF THE COMPANIES ACT, AS IF IT IS A INDI AN COMPANY WITH THE MEANING OF THE COMPANIES ACT. CONSEQUENTLY, IT FOLL OWS THAT THE ACCOUNTING STANDARD AS-7 IS APPLICABLE TO IT. (D) ACCORDINGLY, THE APPELLANT HAS CLAIMED TO HAVE RECOGNIZED REVENUE AND COST FOLLOWING THE PERCENTAGE COMPLETION METHOD ON THE BASIS OF PROPORTION OF COST CONTRACT COSTS INCURRED FOR WORK PERFORMED TILL THE REPORTING DATE TO THE ESTIMATED TOTAL CONTRACT COST S. IT IS FURTHER AN ADMITTED FACT THAT THE BOOKS OF ACCOUNTS OF THE APP ELLANT ARE AUDITED UNDER THE COMPANIES ACT AND IN THE NOTES TO THE FIN ANCIAL STATEMENT, THE ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 4 METHOD RECOGNIZED TO ACCOUNT FOR REVENUE AND EXPEND ITURE HAS BEEN GIVEN IN SCHEDULE - 11 OF SIGNIFICANT ACCOUNTING PO LICIES AND NOTES TO THE ACCOUNTS. ACCOUNTING POLICY (E) WITH REGARD TO REVENUE RECOGNITION IS REPRODUCED HEREUNDER: NOTE(E) 'SHANDONG TIEJUN ELECTRIC POWER ENG CO. LTD IS FOLL OWING THE 'PERCENTAGE OF COMPLETION METHOD' OF ACCOUNTING FOR THE PROJECT AS PER ACCOUNTING STANDARD 7(REVISED) CONSTRUCTION CON TRACTS. ACCORDINGLY PROJECT REVENUE IS RECOGNIZED AS UNDER: THE COMPANY HAS FIXED PRICE CONSTRUCTION CONTRACT W ITH ADANI POWER LIMITED AND JHAJJAR POWER LIMITED. THE COMPANY STAR TED RECOGNIZING REVENUE IN THE FINANCIAL YEAR 2007-2008 AS THE OUTC OME OF THE CONTRACT CAN BE ESTIMATED RELIABLY. CONTRACT REVENUE AND EXP ENSES ARE RECOGNIZED AS REVENUE AND EXPENSES ARE RECOGNIZED A S REVENUE AND EXPENSES UP TO THE STAGE OF COMPLETION AS ON 31.03. 2009. THE MANAGEMENT HAS ESTIMATED COST FOR THE ENTIRE CO NTRACT AND WORKED OUT PERCENTAGE OF COMPLETION FOR EACH YEAR O N THE BASIS OF COST INCURRED AS PER AUDITED ACCOUNTS. ACCORDI NGLY, REVENUE IS RECOGNIZED ON THE BASIS OF CORRESPONDING PE RCENTAGE TO COST ESTIMATES GIVEN BY THE MANAGEMENT FOR THE ENTIRE PR OJECT PERIOD TILL DATE I.E. 31.03.2009 AS PER AUDITED ACCOUNTS. DE TERMINATION OF REVENUES UNDER THE PERCENTAGE OF COMPLETION METHOD AND PROVISION FOR LOSS NECESSARILY INVOLVES MAKING ESTIMATES OF C OSTS TO BE INCURRED BY THE MANAGEMENT, WHICH IS BEING OF TECHNICAL NATU RE, HAVE BEEN RELIED UPON BY THE AUDITORS. THE DIFFERENCE BETWEEN BILLED REVENUE AND WORKING BELOW IS ACCOUNTED AS UNBILLED CONTRACT REVENUE DUE'. (E) THE AO DURING THE COURSE OF ASSESSMENT PROCEE DINGS ASKED THE APPELLANT TO FURNISH BASIS OF ESTIMATING BUDGETED COST. IN TH IS CONNECTION, THE APPELLANT VIDE LETTERS DATED 21/12/2011 AND 29/12/2 011 SUBMITTED TO THE AO THAT THE MANAGEMENT HAS ESTIMATED TOTAL COST OF THE PROJECT HAVING REGARD TO THE EXPERIENCE IN EXECUTING THE CONTRACTS , TENDERS AND QUOTATIONS FROM VARIOUS VENDORS AND SUB-CONTRACTORS . THE APPELLANT FURTHER SUBMITTED DETAILED BREAK-UP OF THE ESTIMATE D PROFIT & LOSS ACCOUNT FOR ENTIRE PROJECT FOR FIVE FINANCIAL YEARS 2007-08 TO 2011-12. THE APPELLANT FURTHER SUBMITTED TO THE AO THAT WHIL E OBTAINING ORDER U/S 197 OF THE ACT, THE APPELLANT HAS BEEN SUBM ITTING THE DETAILS OF BUDGETED COST TO THE TAX OFFICE, WHICH HAVE ALREADY BEEN ACCEPTED BY THE DEPARTMENT. THE APPELLANT ALSO PLACED ON RECORD THE AUDITED FINANCIAL STATEMENTS FOR F.YS.2009-10 AND 2010-11 AND SUBMITTED AND CLAIMED THAT FROM THE PERUSAL OF SUCH FINANCIAL STA TEMENTS, IT IS ESTABLISHED THAT THE APPELLANT HAS ACTUALLY INCURRE D THE COST AS ESTIMATED. ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 5 (F) ONE OF THE OBJECTIONS OF THE AO IS THAT THE APPELLANT OUGHT TO HAVE FOLLOWED ANOTHER METHOD OF STAGE OF COMPLETION OF THE PROJECT I.E (C) COMPLETION OF A PHYSICAL PROPORTION OF THE CONTRACT WORK. THE AO HAS FURTHER OBSERVED THAT AS PER ANNEXURE-3 OF THE CONTRACT ENTERED INTO BY THE APPELLANT WITH ADANI POWER LTD., THE PAYMENT TO THE APPELLANT SHALL BE RELEASED ON THE BASIS OF MILESTONES PRESCR IBED IN ANNEXURE - 3, AND TILL THE REPORTING DATE, THE APPELLANT HAS RAIS ED INVOICES OF RS. 130,86, 91 ,429/-, WHICH SHOWS THAT PHYSICAL WORK O F THE CONTRACT IS COMPLETED TO THAT / EXTENT ONLY. THEREFORE, AO WAS OF THE VIEW THAT THE APPELLANT OUGHT TO HAVE FOLLOWED METHOD (C) COMPLET ION A PHYSICAL PROPORTION OF THE CONTRACT WORK AS PRESCRIB ED IN PARA 29 OF AS-7, AND ACCORDINGLY, THE DIFFERENCE BETWEEN THE ACTUAL EXPENDITURE INCURRED I.E RS.211,41,21,308/- AND THE INVOICES RAISED I. E RS.130,86,91,429/- TO ADANI POWER LTD. FOR PHYSICAL WORK PERFORMED, OUGHT TO HAVE BEEN REFLECTED IN ACCOUNTS AS WORK-IN-PROGRESS, THE INVO ICES FOR WHICH SHOULD BE RAISED IN THE NEXT ACCOUNTING YEAR. THE AO HAS F AILED TO REALIZE THAT THIS WOULD HAVE RESULTED IN MUCH LESSER REVENUE BEI NG RECOGNIZED IN THE YEAR UNDER APPEAL AND MOST PROBABLY NET LOSS BEING REPORTED. NOW, TO SUM UP, BOOKS OF ACCOUNT HAVE BEEN MAINTAIN ED AND PRODUCED, THE ACCOUNTS HAVE BEEN SUBJECTED TO AUDIT AS REQUIR ED, AND THE APPELLANT HAS FINALIZED THE ANNUAL ACCOUNTS, ON THE BASIS OF PERC ENTAGE COMPLETION METHOD BASED ON TOTAL ESTIMATED COST. AS FAR AS THE ESTIMA TED COST OF PROJECT IS CONCERNED, I AGREE WITH THE APPELLANT THAT THE ASSE SSEE HAVING EXPERIENCE IN THE FIELD OF WORK AND WHO IS TAKING THE CONTRACT IS NORMALLY THE BEST JUDGE. THE ONLY FOUL PLAY SUSPECTED IN ESTIMATION CAN BE T O INITIALLY SHOW VERY HIGH ESTIMATED COST OF COMPLETION SO THAT IT MAY LEAD TO DEFERMENT OF TAX. IN THE PRESENT CASE, I FIND THAT THE FIGURES OF 3 YEARS WE RE MADE AVAILABLE TO THE AO AT THE ASSESSMENT STAGE ITSELF. THERE IS NO BIG DIF FERENCE IN ESTIMATED COST AND PROFIT PERCENTAGE DECLARED FROM YEAR TO YEAR, THERE IS NO REASON THEREFORE TO SUSPECT THAT THE FIGURES OF ESTIMATED COST WERE DEL IBERATELY TINKERED WITH. IN FACT THE PROJECT HAS BEEN COMPLETED IN 2012 ITSELF AND IT IS NOT THE CASE THAT IT IS A LONG DRAWN PROJECT WHERE UNDUE DEFERMENT OF TA X WAS THE MOTIVE. THE AO'S REMARK THAT STAGE OF COMPLETION IS A BETTER ME THOD IS NOT UNIVERSALLY APPLICABLE. THAT IS WHY DIFFERENT METHODS INCLUDING THE PERCENTAGE OF TOTAL ESTIMATED COST APPLIED BY THE APPELLANT HAVE BEEN S UGGESTED IN THE ACCOUNTING STANDARDS. THE MILESTONE METHOD OR THE S TAGE OF COMPLETION METHOD CAN BE VERY INAPPROPRIATE WHERE THE CONTRACT OR AND THE CONTRACTEE AGREE FOR TERMS OF PAYMENT MUCH DIFFERENT FROM THE ACTUAL STAGE OF WORK (COST OF WORK COMPLETED). IN SOME CASES THE CONTRACTEE WH O BECOMES VERY DEPENDENT ON THE CONTRACTOR FOR COMPLETION OF WORK ONCE THE WORK IS GIVEN AND STARTED WOULD LIKE TO RETAIN SUBSTANTIAL PORTIO N OF PAYMENT TILL COMPLETION AS A GUARANTEE FOR THE CONTRACTOR BEING FORCED TO COMPLETE THE WORK. IN OTHER CASES, THE CONTRACTOR MAY HAVE CAPIT AL DEFICIENCY/REQUIRE HEAVY MACHINERY TO BE PURCHASED ETC., AND MAY BARGA IN FOR UPFRONT HEAVY ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 6 PAYMENTS AT INITIAL STAGES. IN BOTH THESE CASES, RE COGNIZING REVENUE ON COMPLETION OF CERTAIN STAGES ACCORDING TO PAYMENT T ERMS/RAISING OF BILLS CANNOT BE THE BEST METHOD. I DO NOT FIND ANY WRONG IN THE METHOD ADOPTED BY THE APPELLANT. AS OBSERVED EARLIER, THERE IS NO BIG DIFFERENCE IN ESTIMATED COST AND PROFIT PERCENTAGE DECLARED FROM YEAR TO YEAR. T HE EXPENSES HAVE BEEN AUDITED AND NO SUBSTANTIVE DEFECT HAS BEEN DISCOVER ED/POINTED OUT. THE REJECTION OF BOOKS OF ACCOUNTS U/S 145(3) IS NOT HE LD JUSTIFIED IN THESE CIRCUMSTANCES. I HAVE NOTED THAT THE JURISDICTIONAL GUJARAT HIGH COURT DECISION IN THE CASE OF CIT VS. ADVANCED CONSTRUCTI ON CO. (P) LTD REPORTED IN 275 ITR 30, WHEREIN IT HAS BEEN HELD THAT 'THE P ROVISION, THEREFORE, SPECIFICALLY PROVIDES THAT THE CHOICE OF METHOD OF ACCOUNTING LIES WITH THE ASSESSEE, THE ONLY CAVEAT BEING THAT IT HAS TO SHOW THAT THE CHOSEN METHOD HAS BEEN REGULARLY FOLLOWED. THE SECTION IS COUCHED IN MANDATORY TERMS AND THE DEPARTMENT IS BOUND TO ACCEPT THE ASSESSEE'S CHOICE OF METHOD AND REGULARLY EMPLOYED, EXCEPT FOR THE SITUATION, WHEREIN THE ASS ESSING OFFICER IS PERMITTED TO INTERVENE, IN CASE IT IS FOUND THAT TR UE INCOME, PROFITS AND GAINS CANNOT BE ARRIVED AT BY THE METHOD EMPLOYED BY THE ASSESSEE. IN THE PRESENT CASE, THE TRIBUNAL HAS CATEGORICALLY FOUND THAT 'TH E ASSESSEE HAS FOLLOWED THE STANDARD ACCOUNTING METHOD AS THIS BEING THE FIRST YEAR OF THE BUSINESS IT WAS THE SOLE CHOICE OF THE ASSESSEE TO ADOPT A PARTICUL AR METHOD OF ACCOUNTING CONTEMPLATED UNDER SECT/ON 145 OF THE ACT'. I HAVE ALSO NOTED THAT IN THE ABOVE REFERRED CASE T HE JURISDICTIONAL GUJARAT HIGH COURT HAS OBSERVED ON FACTS IN PARA 13 OF THE ORDER THAT 'THEREFORE, ON FACTS IT BECOMES APPARENT THAT BY TH E TIME THE CONTRACT WAS COMPLETED THE TOTAL RECEIPTS HAD BORNE CHARGE OF TA X AND THE ASSESSEE HAD DERIVED NO ADVANTAGE AS SUCH.' SAME WOULD BE THE CA SE HERE. I THEREFORE, HOLD THAT THE APPELLANT HAS FULFILLED ALL CONDITIONS PRESCRIBED U/S 44BBB(2) OF THE IT ACT AND ALSO HAS FOLLOWED ON E OF THE METHODS PRESCRIBED FOR DETERMINATION OF STAGE OF COMPLETION OF CONTRACT FOR RECOGNIZING REVENUE AND EXPENSES AS PRESCRIBED IN P ARA 29 OF THE ACCOUNTING STANDARD-7 'CONSTRUCTION CONTRACTS' AS RECOGNIZED B Y THE ICAI AND THE CENTRAL GOVERNMENT, THE APPELLANT HAS FOLLOWED CORR ECT METHOD OF ACCOUNTING IN TERMS OF SECTION 44BBB(2) READ WITH S ECTION 145(1) & (2) OF THE IT ACT. IT IS HELD THAT THE AO'S ACTION OF REJE CTING BOOKS OF ACCOUNTS IN TERMS OF SECTION 145(3) OF THE IT ACT AND ASSESSING INCOME U/S 44BBB(1) OF THE IT ACT ON PRESUMPTIVE BASIS IS NOT JUSTIFIED IN VIEW OF THE OBSERVATIONS MADE EARLIER. THE VARIATION IN THE INCOME DECLARED BY THE APPELLANT IS HELD NOT SUSTAINABLE AND IS DIRECTED TO BE DELETED. THE RELEVANT GROUNDS OF APPEAL ARE DECIDED ACCORDINGLY. 3.3 AGGRIEVED, THE REVENUE IS NOW IN APPEAL BEFORE US. 4. LD. DEPARTMENTAL REPRESENTATIVE RELIED ON THE CO NTENTS OF ORDER OF AO AND CONTENDS THAT: ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 7 (I) ASSESSEE DID NOT SUBMIT PROPER WORKING OF ESTIM ATED COST OF THE CONTRACT OF RS. 1694,63,01,948/-, BESIDES FOR A BIG PROJECT, THERE MUST HAVE BEEN DELIBERATIONS AND HUNDREDS OF PAGES OF DO CUMENTS ON THE BASIS OF WHICH ESTIMATES WERE PREPARED. ASSESSEE DI D NOT FURNISH SUPPORTING DOCUMENTS IN THIS BEHALF AND NO DETAILS OF SCHEDULES, MATERIALS OR OTHER EXPENSES WERE SUBMITTED IN SUPPO RT OF THE ESTIMATE OF THE COST. (II) THE WORKS TO BE PERFORMED BY THE ASSESSEE WERE EARMARKED IN FORM OF MILESTONES, THE ASSESSEE SHOULD HAVE DETERMINED THE STAGE OF COMPLETION ON THE BASIS OF ACTUAL WORK PERFORMED. A S PER ANNEXURE-3, OF THE CONTRACT, CERTAIN MILESTONES HAV E BEEN DEFINED AGAINST WHICH INVOICES ARE RAISED. THUS THE ACTUAL WORK PERFORMED HAD INTRINSIC LINK WITH MILESTONES AS WELL AS PART MILESTONES AS CERTIFIED BY A TECHNICAL SUPERVISOR. THE % OF MILES TONES COMPLETION FOR THE PROJECT WILL DETERMINE THE STAGE OF COMPLET ION OF THE PROJECT. SINCE THE PAYMENT ITSELF IS RELEASED BY THE EMPLOYE R ON THE BASIS OF MILESTONES, THIS SHOULD HAVE BEEN THE MOST SUITABLE BASIS OF DETERMINING STAGE OF COMPLETION AND HENCE RECOGNIZI NG REVENUE. (III) AS AGAINST INVOICES RAISED OF RS. 130,86,91,429/-, EXPENSES HAVE BEEN INCURRED IN EXCESS I.E RS.2,114,121,308WHICH COMES TO ABOUT 60% OF WORK PERFORMANCE, BUT NO INVOICES WERE RAISED. NO C ERTIFICATE OF PHYSICAL VERIFICATION HAS BEEN PRODUCED, TO SEE AND VERIFY AS TO WHAT EXPENSES WERE INCURRED TO COMPLETE A PART OF WORK. AS THE CONTRACT ITSELF RESTS ON MILESTONES TO MAKE PAYMENT, THE EXP ENSES INCURRED FOR WHICH NO INVOICES WAS RAISED, SHOULD CORRESPOND TO MILESTONES FOR WHICH WORK IS YET TO COMPLETE OR PART COMPLETE. NO EVIDENCE OF PHYSICAL ACTIVITY PERFORMED AGAINST SUCH EXPENSES W AS PRODUCED. ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 8 (IV) THE ESTIMATE OF COST OF CONTRACT SHOULD NEARLY JUST IFY THE ESTIMATE TAKEN BY THE ASSESSEE, ON THIS BASIS ASSESSEE DETER MINED ONLY ON STAGE OF COMPLETION AND OFFERING INCOME ACCORDINGLY . BESIDES FOR FOLLOWING TWO YEARS DOCUMENTARY BASIS HAVE NOT BEEN SUBMITTED. THE CHARTS SUBMITTED BY ASSESSEE REVEALED FOR EACH YEAR THERE IS CHANGE IN THE COST ESTIMATED EACH YEAR. (V) CONTRACT INCOME HAS BEEN RECOGNIZED BY THE ASSESSEE AS PER PERCENTAGE COMPLETION METHOD, AND INVOICES HAVE BEE N RAISED FOR RS.1,308,691,429/-. THOUGH THE ASSESSEE TRIED TO SH OW, AS IF IT HAS INDEPENDENTLY CALCULATED AND ARRIVED AT THE FIGURE OF RS.890,225,026/-( 2,198,916,453 - 1,308,691,427), H OWEVER BEFORE AO THE FIGURES COULD NOT BE RECONCILED WITH THE ACTUAL BILLS AND INVOICES RAISED BY SUBCONTRACTORS AND FOR MATERIAL EXPENSES. (VI) THE ASSESSEE SHOULD ALSO HAVE RECONCILED THE UNBILL ED REVENUE AS DERIVED FROM THE FIRST EQUATION WITH THE FIGURE RES ULTING FROM THE SECOND EQUATION FRAMED BY LD. AO, WHICH WAS NOT DON E. (VII) THE LIST OF REQUIREMENTS OF THE AS-7 ARE AS UNDER: - THERE SHOULD BE A RELIABLE ESTIMATE OF CONTRACT COS T - DETERMINING STAGE OF COMPLETION (I.E VARIOUS MILEST ONES MENTIONED IN THE CONTRACT) - RECOGNIZE REVENUE AS SUCH % OF THE CONTRACT REVEN UE.( BASED ON STAGE OF COMPLETION) SINCE THE WHOLE PREMISE OF DETERMINING STAGE OF COM PLETION DEPENDS UPON ESTIMATED COST ASSESSEE WAS NOT ABLE T O SUBSTANTIATE SUCH ESTIMATED COST, THE STAGE OF COMPLETION DETERM INED BY THE ASSESSEE WAS NOT RELIABLE AS COMPARED TO CORRECT ST ATUS OF COMPLETION OF THE CONTRACT. IN THAT CASE THE PHYSICAL COMPLETI ON WILL BE THE ONLY RELIABLE METHOD WHICH IN ASSESSEE'S CASE SHOULD HAV E BEEN ENGINEER'S CERTIFICATE OR PROGRESS REPORTS BY TECHNICAL STAFF AS SENT TO EMPLOYER AS ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 9 PER TERMS OF CONTRACT OR AS PER ACTUAL MILESTONES. FOR PROPERLY DETERMINING ACTUAL OR PART OF MILESTONES COMPLETED, AGAIN PHYSICAL WORK COMPLETION IS REQUIRED TO BE KNOWN. IN VIEW O F THESE INCONSISTENCIES LD. AO HELD THAT ASSESSEE'S A/C BOO K, METHOD AND CONTENTIONS WERE NOT ACCEPTABLE AND CONSEQUENTLY ME THOD OF ACCOUNTING AND BOOK RESULTS WERE REJECTED U/S 145. (VIII) SINCE ASSESSEE DID NOT DETERMINE THE STAGE OF COMPL ETION AS PER AS-7, THEREFORE, REVENUE RECOGNIZED IN BOOKS FOR THE YEAR WAS NOT ACCEPTABLE. IF THE ASSESSEE WAS TO FOLLOW THE AS-7, IT SHOULD HAVE TAKEN THE PHYSICAL WORK COMPLETED AS A PERCENTAGE O F THE TOTAL WORK TO BE PERFORMED AS PER THE CONTRACT AND RECOGNIZING REVENUE AS SUCH PERCENTAGE OF CONTRACT REVENUE. BESIDES IN THE ABSE NCE OF ANY DETAILS WHICH CAPITAL ASSET WIP WAS REFERRED WAS ALSO NOT A SCERTAINABLE. ASSESSEE DOES NOT EXPLAIN AS TO WHY THIS SHOULD NOT BE PART OF PROJECT WIP OF JHAJJAR PROJECT I.E. RS.61,199,983/- AS PER BALANCE SHEET. ALSO EVEN AS PER AS-7, WHICH ASSESSEE HAS RELIED UPON TO MAINTAIN THE ACCOUNT, IT IS REQUIRED TO PREPARE ACCOUNTS FOR EAC H CONTRACT. (IX) IN LEDGER OF EXPENSES THERE WAS NO NARRATION OF THE NATURE OF EXPENSES OR TDS DEDUCTED. THEREFORE, EXPENSES COULD NOT BE V ERIFIED AS AGAINST THE BOOKED AMOUNT. ASSESSEE COULD NOT RECONCILE THE EXPENSES BOOKED UNDER SUBCONTRACTOR AND MATERIAL EXPENSES FO R THE MONTH OF MARCH 2009. ASSESSEE HAD SUBMITTED THAT UNBILLED C ONTRACT REVENUE OF RS.890,225,026/- WAS THE DIFFERENCE BETWEEN THE PHYSICAL WORKS COMPLETED AS PER THE MILESTONES, AND PHYSICAL WORK COMPLETED AT THE END OF THE FINANCIAL YEAR, BUT NOT SUFFICIENT ENOUG H TO RAISE INVOICE. THE WORK THAT HAS BEEN COMPLETED AND TO WHAT EXTENT HAS TO BE CERTIFIED BY SOME TECHNICAL PERSONNEL. AO POINTED O UT THAT ASSESSEE HAS NOT DETERMINED THE STAGE OF COMPLETION AS WELL AS REVENUE AS PER AS-7, IT SHOULD HAVE RECOGNIZED REVENUE AS PER ACCR UAL BASED ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 10 ACCOUNTING AS PER INCOME TAX ACT U/S 145 RWS 44BBB. THEREFORE THE ASSESSEE SHOULD HAVE RAISED INVOICES FOR THE REST O F THE WORK AS AGAINST COST OF RS. 211,14,121,308/- AS THIS COST P LUS PROFIT MARGIN ON THIS COST WAS PAYABLE TO THE COMPANY DURING THE YEA R. IN VIEW OF THESE OBSERVATIONS LD. AO HELD THAT ASSE SSEE HAS NOT MAINTAINED BOOKS OF ACCOUNTS AS REQUIRED UNDER THE PROVISIONS OF THE ACT AND IT IS NOT POSSIBLE TO DETERMINE CORRECT AMO UNT OF PROFITS BOOKS WERE REJECTED U/S 145 OF ACT. SINCE PRESUMPTIVE TAX ATION METHOD U/S 44BBB IS PRESCRIBED BY THE ACT ITSELF, THERE IS NO ILLEGALITY IN APPLYING PRESUMPTIVE RATE AS A BETTER ESTIMATE. LD. CIT(A) D ID NOT APPRECIATE ALL THESE ASPECTS AND REVERSED THE AOS ORDER. ORDER OF LD. AO IS RELIED ON. 5. LD. COUNSEL FOR THE ASSESSEE CONTENDS THAT LD. A O WAS WORKING UNDER MISCONCEPTION AND CONFUSION. AT ONE PLACE IT IS HEL D AS7 IS NOT APPLICABLE TO ASSESSEE BEING A FOREIGN COMPANY, AT OTHER PLACE ME THOD OF ACCOUNTING IS OBJECTED, ANOTHER PLACE WORKING IS OBJECTED. EACH A ND EVERY DETAIL WAS FURNISHED BEFORE LD. AO AND BEFORE LD. CIT(A) AS WE LL. THERE IS NO REFERENCE TO ANY ADDITIONAL EVIDENCE FILED BY THE ASSESSEE BE FORE LD. CIT(A). ALL THE OBJECTIONS OF LD. AO HAVE BEEN CLARIFIED, RECONCILE D AND TABULATED BEFORE LD. CIT(A) BASED ON THE SAME MATERIAL WHICH WAS AVAILAB LE ON RECORD. IN THESE CIRCUMSTANCES THERE IS NO MERIT IN THE CONTENTIONS OF LD. DR THAT ASSESSEE DID NOT RECONCILE, SUBSTANTIATE OR FURNISH DETAILS IN R ESPECT OF ITS CONTENTIONS. LD. CIT(A) HAS DEALT WITH ALL THE AOS OBJECTIONS AND TH EREAFTER DECIDED THE ISSUES BASED ON MERITS SUPPORTED BY JUDICIAL PRECED ENTS. FOR REJECTING BOOKS OF ACCOUNTS OF ASSESSEE AND DISCARDING THE METHOD O F ACCOUNTING FOLLOWED BY THE APPELLANT AS PER AS 7 LD. AO WENT ON SHIFT ING HIS STAND, OBJECTIONS AND OBSERVATIONS IN ARBITRARY MANNER TO SOMEHOW DIS CREDIT ASSESSEES CONTENTIONS . ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 11 5.1 BOTH THE CONTRACTS I.E. MUNDRA AND JAJHAR WERE FIXED PRICE CONTRACTS FOR ERECTION, TESTING AND COMMISSIONING OF POWER PL ANTS IN TERMS OF CONTRACT ENTERED INTO WITH ADANI AND JHAJHAR POWER IN INDIA. ASSESSEE ADOPTED RECOGNIZED METHOD OF ACCOUNTING BY RECOGNIZING REVE NUE AND EXPENSES BY FOLLOWING ACCOUNTING STANDARD-7 (AS-7) NAMELY CONS TRUCTION CONTRACTS. IN PURSUANCE THERETO, ASSESSEE RECOGNIZED REVENUE A ND EXPENSES BY FOLLOWING PERCENTAGE OF PROJECT COMPLETION METHOD AS PER THE REQUIREMENT OF AS-7 WHICH A RECOGNIZED AND PRESCRIB ED METHOD IN THIS BEHALF. THERE IS NO DISPUTE THAT ASSESSEE DULY MAIN TAINED BOOKS OF ACCOUNTS AS PER S.44AA(2) OF THE ACT GOT THEM AUDITED AS PER PROVISIONS OF S.44AB OF THE ACT. IN VIEW THEREOF ASSESSEE DULY OFFERED ITS TAXABLE INCOME IN CONFORMITY WITH PROVISIONS OF S.44BBB(2) OF THE ACT . HOWEVER LD. AO UNDULY PRESUMED THAT THE METHOD OF ACCOUNTING FOLLO WED BY THE ASSESSEE DID NOT REFLECT CORRECT PROFITS FOR WHICH NO COGENT AND CONVINCING REASONS ARE ASCRIBED. 5.2 IT IS CONTENDED THAT ASSESSEE IN TERMS OF SECTI ON 594 OF THE COMPANIES ACT, 1956 IS FOREIGN COMPANY INCORPORATED OUTSIDE I NDIA AND HAS ESTABLISHED PLACE OF A BUSINESS IN INDIA. IT IS REQUIRED TO PRE PARE ITS BALANCE SHEET AND PROFIT & LOSS ACCOUNT AS PER THE VARIOUS PROVISIONS OF THE COMPANIES ACT, AS IF IT IS AN INDIAN COMPANY WITHIN THE MEANING OF TH E COMPANIES ACT. FOLLOWING ARE THE RELEVANT PROVISIONS OF S.594 OF T HE COMPANIES ACT, 1956: S.594 (1) EVERY FOREIGN COMPANY SHALL, IN EVERY CAL ENDAR YEAR, - (A) MAKE OUT A BALANCE SHEET AND PROFIT AND LOSS AC COUNT IN SUCH FORM CONTAINING SUCH PARTICULARS AND INCLUDING OR HAVING ANNEXED OR ATTACHED THERETO SUCH DOCUMENTS (INCLUDING, IN PARTICULAR DO CUMENTS RELATING TO EVERY SUBSIDIARY OF THE FOREIGN COMPANY) AS UNDER T HE PROVISIONS OF THIS ACT IT WOULD, IF IT HAD BEEN A COMPANY WITHIN THE MEANI NG OF THIS ACT, HAVE BEEN REQUIRED TO MAKE OUT AND LAY BEFORE THE COMPANY IN GENERAL MEETING; AND (B) DELIVER THREE COPIES OF THOSE DOCUMENTS TO THE REGISTRAR : ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 12 5.3 SEC. 211(3A) AND (3C) OF THE COMPANIES ACT, 195 6, PROVIDES THAT BALANCE SHEET AND PROFIT & LOSS OF THE COMPANY SHAL L COMPLY WITH THE ACCOUNTING STANDARDS AS PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS (ICAI) OF INDIA. FOLLOWING RELEVANT PRO VISIONS OF S.211(3A)/(3C) OF THE COMPANIES ACT, 1956 WERE REFE RRED : [(3A) EVERY PROFIT AND LOSS ACCOUNT AND BALANCE-SHE ET OF THE COMPANY SHALL COMPLY WITH THE ACCOUNTING STANDARDS. XXX (3C) FOR THE PURPOSES OF THIS SECTION, THE EXPRESSI ON ACCOUNTING STANDARDS MEANS THE STANDARDS OF ACCOUNTING RECOMMENDED BY TH E INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA CONSTITUTED UNDER TH E CHARTERED ACCOUNTANTS ACT, 1949 (38 OF 1949), AS MAY BE PRESC RIBED BY THE CENTRAL GOVERNMENT IN CONSULTATION WITH THE NATIONAL ADVISO RY COMMITTEE ON ACCOUNTING STANDARDS ESTABLISHED UNDER SUB-SECTION (1) OF SECTION 210A : PROVIDED THAT THE STANDARDS OF ACCOUNTING SPECIFIED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA SHALL BE DEEMED TO B E THE ACCOUNTING STANDARDS UNTIL THE ACCOUNTING STANDARDS ARE PRESCR IBED BY THE CENTRAL GOVERNMENT UNDER THIS SUB-SECTION.] 5.4 THESE MANDATORY PROVISIONS OF THE COMPANIES ACT , 1956, OBLIGED THE ASSESSEE FOREIGN COMPANY TO PREPARE BALANCE SHEET A ND PROFIT & LOSS ACCOUNT IN COMPLIANCE TO THE ACCOUNTING STANDARDS N OTIFIED BY THE ICAI INCLUDING AS-7. THEREFORE, THE OBSERVATION AND REAS ONING OF LD. AO TO HOLD THAT AS-7 IS NOT APPLICABLE IS ASSESSEE IS CONTRARY TO LAW AND WITHOUT ANY BASIS. THE REJECTION OF BOOKS ON SUCH UNTENABLE REA SONING IS ARBITRARY AND UNSUSTAINABLE. LD. CIT(A) HAS ELABORATELY DEALT WIT H THESE ASPECTS AND HELD THE AOS ACTION TO BE WITHOUT JUSTIFICATION. 5.5 THE AS-7 IS APPLICABLE TO EACH AND EVERY CONSTR UCTION CONTRACTOR FOR ACCOUNTING RECEIPTS OF REVENUE AND COST RELATED TO CONSTRUCTION CONTRACT IN THE FINANCIAL STATEMENTS. THE OBJECTIVE AND SCOPE O F THE AS-7 AS LAID INDICTED BY ICAI IS AS UNDER: OBJECTIVE ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 13 THE OBJECTIVE OF THIS STANDARD IS TO PRESCRIBE THE ACCOUNTING TREATMENT OF REVENUE AND COSTS ASSOCIATED WITH CONSTRUCTION CONT RACTS. BECAUSE OF THE NATURE OF THE ACTIVITY UNDERTAKEN IN CONSTRUCTION C ONTRACTS, THE DATE AT WHICH THE CONTRACT ACTIVITY IS ENTERED INTO AND THE DATE WHEN THE ACTIVITY IS COMPLETED USUALLY FALL INTO DIFFERENT ACCOUNTING PE RIODS. THEREFORE, THE PRIMARY ISSUE IN ACCOUNTING FOR CONSTRUCTION CONTRA CTS IS THE ALLOCATION OF CONTRACT REVENUE AND CONTRACT COSTS TO THE ACCOUNTI NG PERIODS IN WHICH CONSTRUCTION WORK IS PERFORMED. THIS STANDARD USES THE RECOGNITION CRITERIA ESTABLISHED IN THE FRAMEWORK FOR THE PREPARATION AN D PRESENTATION OF FINANCIAL STATEMENTS TO DETERMINE WHEN CONTRACT REV ENUE AND CONTRACT COSTS SHOULD BE RECOGNIZED AS REVENUE AND EXPENSES IN THE STATEMENT OF PROFIT AND LOSS. IT ALSO PROVIDES PRACTICAL GUIDANCE ON THE AP PLICATION OF THESE CRITERIA. SCOPE 1. THIS STANDARD SHOULD BE APPLIED IN ACCOUNTING FO R CONSTRUCTION CONTRACTS IN THE FINANCIAL STATEMENTS OF CONTRACTORS. THUS AS-7 WAS APPLICABLE TO EVERY CONTRACTOR CARRY ING OUT CONSTRUCTION CONTRACT IN INDIA, IRRESPECTIVE OF THE FACTS WHETHER THE CONTRACTOR IS INDIAN COMPANY OR FOREIGN COMPANY. LO OKING INTO ALL THESE PARAMETERS PRESCRIBED BY LAW AND APPLICABLE AS-7, T HE VERY OBJECTION OF LD. AO WAS BASELESS AND UNTENABLE IN THE EYES OF LAW AN D REALM OF ACCOUNTING PRACTICES AND METHODOLOGY. 5.6 APROPOS ANOTHER OBJECTION BY LD. AO THAT THE ES TIMATED COST TAKEN AS BENCHMARK BY THE ASSESSEE WAS NOT RELIABLE IN ABSEN CE OF SUPPORTING DOCUMENTS. LD. COUNSEL CONTENDS THAT BOTH CONTRACTS WERE TO ATTAIN COMPLETION IN DIFFERENT ACCOUNTING PERIODS RESULTIN G IN ALLOCATION OF CONTRACT REVENUE AND CONTRACT COST TO RESPECTIVE ACCOUNTING PERIODS CORRESPONDING TO EXECUTION OF CONSTRUCTION. AS 7 IS ISSUED BY THE ICAI FOR CONSTRUCTION CONTRACTS FOR APPLICATION OF THESE EFFECTIVE AND PR ACTICAL RECOGNITION CRITERIA TO DETERMINE WHEN CONTRACT REVENUE AND CONTRACT COS TS SHOULD BE RECOGNIZED AS REVENUE AND EXPENSES IN THE STATEMENT OF PROFIT & LOSS ACCOUNT. SUCH LEGALLY APPLICABLE GUIDELINES HAVE BE EN ARBITRARILY BRUSHED ASIDE BY LD. AO TO SUPERIMPOSE HIS VIEW AS TO HOW T HE ASSESSEE SHOULD ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 14 ADOPT METHOD OF ACCOUNTING. LD. CIT(A) HAS DEALT WI TH THIS ASPECT IN OBJECTIVE AND IN TERMS OF LEGAL POSITION. 5.7 THE GUIDELINES FOR RECOGNITION OF CONTRACT REVE NUE AND COST ARE MENTIONED AT PARAS 21 TO 34 OF THE AS-7 AS UNDER: 21. WHEN THE OUTCOME OF A CONSTRUCTION CONTRACT CAN BE ESTIMATED RELIABLY, CONTRACT REVENUE AND CONTRACT COSTS ASSOCIATED WITH THE CONSTRUCTION CONTRACT SHOULD BE RECOGNISED AS REVENUE AND EXPENSES RESPEC TIVELY BY REFERENCE TO THE STAGE OF COMPLETION OF THE CONTRACT ACTIVITY AT THE REPORTING DATE. AN EXPECTED LOSS ON THE CONSTRUCTION CONTRACT SHOULD BE RECOGNI SED AS AN EXPENSE IMMEDIATELY IN ACCORDANCE WITH PARAGRAPH 35. 22. IN THE CASE OF A FIXED PRICE CONTRACT, THE OUTC OME OF A CONSTRUCTION CONTRACT CAN BE ESTIMATED RELIABLY WHEN ALL THE FOL LOWING CONDITIONS ARE SATISFIED: (A) TOTAL CONTRACT REVENUE CAN BE MEASURED RELIABLY ; (B) IT IS PROBABLE THAT THE ECONOMIC BENEFITS ASSOC IATED WITH THE CONTRACT WILL FLOW TO THE ENTERPRISE; (C) BOTH THE CONTRACT COSTS TO COMPLETE THE CONTRAC T AND THE STAGE OF CONTRACT COMPLETION AT THE REPORTING DATE CAN BE MEASURED RE LIABLY; AND (D) THE CONTRACT COSTS ATTRIBUTABLE TO THE CONTRACT CAN BE CLEARLY IDENTIFIED AND MEASURED RELIABLY SO THAT ACTUAL CONTRACT COSTS INC URRED CAN BE COMPARED WITH PRIOR ESTIMATES. XXX.. 24. THE RECOGNITION OF REVENUE AND EXPENSES BY REFE RENCE TO THE STAGE OF COMPLETION OF A CONTRACT IS OFTEN REFERRED TO AS TH E PERCENTAGE OF COMPLETION METHOD. UNDER THIS METHOD, CONTRACT REVENUE IS MATC HED WITH THE CONTRACT COSTS INCURRED IN REACHING THE STAGE OF COMPLETION, RESULTING IN THE REPORTING OF REVENUE, EXPENSES AND PROFIT WHICH CAN BE ATTRIB UTED TO THE PROPORTION OF WORK COMPLETED. THIS METHOD PROVIDES USEFUL INFORMA TION ON THE EXTENT OF CONTRACT ACTIVITY AND PERFORMANCE DURING A PERIOD. XXX. 28. AN ENTERPRISE IS GENERALLY ABLE TO MAKE RELIABL E ESTIMATES AFTER IT HAS AGREED TO A CONTRACT WHICH ESTABLISHES: (A) EACH PARTYS ENFORCEABLE RIGHTS REGARDING THE A SSET TO BE CONSTRUCTED; (B) THE CONSIDERATION TO BE EXCHANGED; AND (C) THE MANNER AND TERMS OF SETTLEMENT. ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 15 IT IS ALSO USUALLY NECESSARY FOR THE ENTERPRISE TO HAVE AN EFFECTIVE INTERNAL FINANCIAL BUDGETING AND REPORTING SYSTEM. THE ENTER PRISE REVIEWS AND, WHEN NECESSARY, REVISES THE ESTIMATES OF CONTRACT REVENU E AND CONTRACT COSTS AS THE CONTRACT PROGRESSES. THE NEED FOR SUCH REVISIONS DO ES NOT NECESSARILY INDICATE THAT THE OUTCOME OF THE CONTRACT CANNOT BE ESTIMATE D RELIABLY. 29. THE STAGE OF COMPLETION OF A CONTRACT MAY BE DE TERMINED IN A VARIETY OF WAYS. THE ENTERPRISE USES THE METHOD THAT MEASURES RELIABLY THE WORK PERFORMED. DEPENDING ON THE NATURE OF THE CONTRACT, THE METHODS MAY INCLUDE: (A) THE PROPORTION THAT CONTRACT COSTS INCURRED FOR WORK PERFORMED UPTO THE REPORTING DATE BEAR TO THE ESTIMATED TOTAL CONTRACT COSTS; OR (B) SURVEYS OF WORK PERFORMED; OR (C) COMPLETION OF A PHYSICAL PROPORTION OF THE CONT RACT WORK. PROGRESS PAYMENTS AND ADVANCES RECEIVED FROM CUSTOM ERS MAY NOT NECESSARILY REFLECT THE WORK PERFORMED. 5.8 PARA 21 OF AS-7 PROVIDES THAT WHEN THE OUTCOME OF A CONSTRUCTION ACTIVITY CAN BE ESTIMATED RELIABLY, REVENUE AND CON TRACT COST THEREOF SHOULD BE RECOGNIZED AS REVENUE AND EXPENSES RESPECTIVELY WITH REFERENCE TO THE STAGE OF COMPLETION OF THE CONTRACT ACTIVITY AS ON THE REPORTING DATE. THIS IS REFERRED TO AS PERCENTAGE OF COMPLETION METHOD (PAR A 24). FURTHER PARA 29 OF AS 7 PROVIDES THAT STAGE OF COMPLETION OF THE CON TRACT CAN BE DETERMINED IN VARIOUS WAYS, AND DEPENDING UPON THE NATURE OF C ONTRACT, IT MAY INCLUDE (A) THE PROPORTION THAT CONTRACT COSTS INCURRED FOR WORK PERFORMED UPTO THE REPORTING DATE BEAR TO THE ESTIMATED TOTAL CONTRACT COSTS; OR (B) SURVEYS OF WORK PERFORMED; OR(C) COMPLETION OF A PHYSICAL PROPORTION OF THE CONTRACT WORK . 5.9 THE MANAGEMENT OF THE COMPANY ESTIMATED TOTAL C OST OF THE PROJECT HAVING REGARD TO THE EXPERIENCE IN EXECUTING THE CO NTRACTS, TENDERS AND QUOTATIONS FROM VARIOUS VENDORS AND SUB-CONTRACTORS . IN VIEW OF ALL THE FACTS AND CIRCUMSTANCES, THE FIRST METHOD AS GIVEN IN PAR A 29 OF AS-7 WAS APPLIED, BEING THE MOST SUITABLE METHOD FOR RECOGNIZING REVE NUE AND COST RELATED TO THE CONTRACT. FOLLOWING THESE PARAMETERS AND GUIDEL INES ASSESSEE DULY ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 16 RECOGNIZED ITS REVENUE AND COST FOR THE IMPUGNED YE AR FOLLOWING THE PERCENTAGE COMPLETION METHOD ON THE BASIS OF PROPOR TION OF COST CONTRACT COSTS INCURRED FOR WORK PERFORMED UPTO THE REPORTIN G DATE TO THE ESTIMATED TOTAL CONTRACT COSTS. IT IS ALSO AN ADMITTED FACTS THAT ASSESSEES BOOKS OF ACCOUNTS ARE AUDITED UNDER THE COMPANIES ACT AND IN THE NOTES TO THE FINANCIAL STATEMENT, THE METHOD RECOGNIZED TO ACCOU NT FOR REVENUE AND EXPENDITURE HAS BEEN GIVEN IN SCHEDULE 11 OF SIGN IFICANT ACCOUNTING POLICIES AND NOTES TO THE ACCOUNTS. COPY OF FINANCI AL STATEMENT FOR F.Y.2008-09 DETAILING AS UNDER: NOTE (S) SHANDONG TIEJUN ELECTRIC POWER ENG CO. LTD IS FOLL OWING THE PERCENTAGE OF COMPLETION METHOD OF ACCOUNTING FOR THE PROJECT AS PER ACCOUNTING STANDARD 7 (REVISED) CONSTRUCTION CO NTRACTS. ACCORDINGLY PROJECT REVENUE IS RECOGNIZED AS UNDER: THE COMPANY HAS FIXED PRICE CONSTRUCTION CONTRACT W ITH ADANI POWER LIMITED AND JHAJJAR POWER LIMITED. THE COMPANY STAR TED RECOGNIZING REVENUE IN THE FINANCIAL YEAR 2007-2008 AS THE OUTC OME OF THE CONTRACT CAN BE ESTIMATED RELIABLY. CONTRACT REVENUE AND EXP ENSES ARE RECOGNIZED AS REVENUE AND EXPENSES ARE RECOGNIZED A S REVENUE AND EXPENSES UP TO THE STAGE OF COMPLETION AS ON 31.03. 2009. THE MANAGEMENT HAS ESTIMATED COST FOR THE ENTIRE CO NTRACT AND WORKED OUT PERCENTAGE OF COMPLETION FOR EACH YEAR O N THE BASIS OF COST INCURRED AS PER AUDITED ACCOUNTS. ACCORDINGLY, REVENUE IS RECOGNIZED ON THE BASIS OF CORRESPONDING PERCENTAGE TO COST ESTIMATES GIVEN BY THE MANAGEMENT FOR THE ENTIRE PROJECT PERI OD TILL DATE I.E. 31.03.2009 AS PER AUDITED ACCOUNTS. DETERMINATION O F REVENUES UNDER THE PERCENTAGE OF COMPLETION METHOD AND PROVISION F OR LOSS NECESSARILY INVOLVES MAKING ESTIMATES OF COSTS TO B E INCURRED BY THE MANAGEMENT, WHICH IS BEING OF TECHNICAL NATURE, HAV E BEEN RELIED UPON BY THE AUDITORS. THE DIFFERENCE BETWEEN BILLED REVENUE AND WORKING BELOW IS ACCOUNTED AS UNBILLED CONTRACT REV ENUE DUE. 5.10 DURING THE COURSE OF THE ASSESSMENT PROCEEDING S, ASSESSEE SUBMITTED THE WORKING OF CONTRACT INCOME ON PERCENTAGE OF COM PLETION METHOD BEFORE AO BY FOLLOWING TABLE : S.N PARTICULARS RS. ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 17 A COST INCURRED IN CURRENT PERIOD 207,80,61,302/- B TOTAL BUDGET COST OF CONTRACT 1694,63,01,948/- C CONTRACT PRICE 1762,60,00,000/- D CUMULATIVE COSTS INCURRED PRIOR PERIOD 3,60,66,355/- E CUMULATIVE REVENUE RECOGNIZED IN PRIOR PERIOD NIL F PERCENTAGE OF COMPLETION (A+D)/B 12.48% G CURRENT YEARS REVENUE (C X F) 219,89,23,057/- 5.11 LD. AO ASKED TO FURNISH BASIS OF ESTIMATING BU DGETED COST, ASSESSEE VIDE LETTERS DATED 21/12/2011 AND 29/12/2011 EXPLAI NED THAT THE ESTIMATED TOTAL COST OF THE PROJECT WAS WORKED OUT ON THE BAS IS OF EXPERIENCE IN EXECUTING THE CONTRACTS, TENDERS AND QUOTATIONS FRO M VARIOUS VENDORS AND SUB-CONTRACTORS. DETAILED BREAK-UP OF THE ESTIMATED PROFIT & LOSS ACCOUNT FOR ENTIRE PROJECT FOR FIVE FINANCIAL YEARS 2007-08 TO 2011-12 WAS ALSO FURNISHED. BESIDES WHILE OBTAINING ORDER U/S 197 OF THE ACT, T HE IT HAD SUBMITTED THE DETAILS OF BUDGETED COST WHICH HAVE ALREADY BEEN AC CEPTED BY THE DEPARTMENT. AUDITED FINANCIAL STATEMENTS FOR F.YS.2 009-10 AND 2010-11 WERE ALSO SUBMITTED A PERUSAL THEREOF SUCH DEMONSTRATED THAT THE ASSESSEE HAD ACTUALLY INCURRED THE COST AS ESTIMATED. 5.12 HOWEVER, THE LD. AO DID NOT APPRECIATE THESE D ETAILS AND UNFORTUNATELY HELD THAT RELEVANT DETAILS WERE AND S UPPORTING DOCUMENTS FOR ESTIMATE OF COST OF CONTRACT WERE NOT FILED WHICH I S CONTRARY TO RECORD. ASSESSEE FURTHER PROVIDED THE RELEVANT DETAILS OF A CTUAL COST INCURRED FOR THE ENTIRE PROJECT DURING THE F.YS.2007-08 TO 2011-12 AS UNDER : FINANCIAL YEAR ACTUAL COST INCURRED 2007-08 3,60,60,007/- 2008-09 210,53,13,715/- 2009-10 443,80,34,837/- 2010-11 665,68,98,166/- 2011-12 626,27,59,911/- TOTAL COST INCURRED *1950,20,66,635 ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 18 *THE TOTAL COST INCURRED BY THE APPELLANT INCLUDES COST INCURRED FOR THE ADDITIONAL SCOPE OF WORK GIVEN THROUGH AN ADDITIONA L CONTRACT OF RS.139,27,21,200/-. 5.13 A PERUSAL OF THE ABOVE TABLE REVEALS THAT THE COST ESTIMATED FOR THE ENTIRE PROJECT IS NEARLY SIMILAR TO ACTUAL COST INC URRED FOR THE ENTIRE PROJECT. THUS THE ESTIMATED COST IS BACKED BY THE ACTUAL COS T FOR WHICH AUDITORS ALSO HAVE NOT GIVEN ANY QUALIFICATION THUS OBJECTIVELY T HE ESTIMATED COST AND RECOGNITION OF REVENUE AS PER AS-7 STANDS FULLY SUB STANTIATED BY ASSESSEE BY CREDITABLE EVIDENCE. LD. AO HAS FURTHER ERRONEOUSLY OBSERVED THAT THERE IS A CHANGE IN THE COST ESTIMATED EACH YEAR AND IT WAS N OT POSSIBLE TO VERIFY THE CORRECTNESS OF THE CLAIM OF STAGE OF COMPLETION AS OFFERED. IT WAS EXPLAINED TO LD. AO THAT DETAILS OF REVENUE RECOGNIZED GIVEN FOR F.YS. 2008-09 AND 2009-10 MENTIONED IN THE TABLE WERE IN RESPECT OF O NLY ONE PROJECT I.E 5 X 660 MW POWER PLANT FOR A CONSIDERATION OF RS.1762,60,00 ,000/-; WHEREAS, FOR F.Y.2010-11, FIGURES WERE FOR BOTH THE PROJECTS RES ULTING INTO HIGHER CONTRACT COST AT RS.18,17,07,19,496/- AND INCOME AT RS.1901, 87,21,200/- (RS.1762,60,00,000/-+ RS.139,27,21,200/-). THUS THE RE IS NO CHANGE IN THE ESTIMATED COST FOR BOTH PROJECT, LD. AO IGNORED THI S SIMPLE ARITHMETIC. THE ACTUAL COST AND ESTIMATED COST BEING NEARLY SAME, A LITTLE BIT OF CHANGE NEITHER DISTORTS THE PROFITS OF THE ENTIRE PROJECT NOR CAN LEAD TO REJECTION OF METHOD OF ACCOUNTING. 5.14 APROPOS AOS SUGGESTION CUM OBJECTION THAT ASS ESSEE OUGHT TO HAVE FOLLOWED ANOTHER METHOD ACCOUNTING I.E. STAGE OF CO MPLETION OF THE PROJECT METHOD, IT WAS CONTENDED BEFORE LD. CIT(A) THAT LD. AO CANNOT OVERRIDE ASSESSEES COMMERCIAL DECISION WHICH ARE WITHIN THE FRAMEWORK OF SEC. 145 AND CONFORMING TO ICAI ACCOUNTING STANDARDS. IT WAS EXPLAINED TO THE LD. AO THAT AS THE COST INCURRED UPTO THE REPORTING DAT E IS RS.211,41,21,308/- AND THE ESTIMATED COST FOR THE PROJECT IS RS.1694,6 3,01,948/-, THE REVENUE IS RECOGNIZED TAKING INTO CONSIDERATION BOTH THE FIGUR ES AS PER METHOD (A) ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 19 PROPORTION OF CONTRACT COST INCURRED FOR THE WORK P ERFORMED UPTO THE REPORTING DATE TO THE ESTIMATED CONTRACT COST AS CE RTIFIED BY THE MANAGEMENT, PROVIDED IN PARA 29 OF THE AS-7. FOR TH E SAKE OF CONVENIENT, A TABLE WAS FURNISHED TO DEMONSTRATE HOW THE REVENUE WAS RECOGNIZED IN THE PROFIT & LOSS ACCOUNT: S.N PARTICULARS RS. A COST INCURRED IN CURRENT PERIOD 211,41,21,309/- B TOTAL BUDGET COST OF CONTRACT 1694,63,01,948/- C CONTRACT PRICE 1762,60,00,000/- D CUMULATIVE COSTS INCURRED PRIOR PERIOD 3,60 60 00 7/- E CUMULATIVE REVENUE RECOGNIZED IN PRIOR PERIOD NI L F PERCENTAGE OF COMPLETION (A+D)/B 12.48% G CURRENT YEARS REVENUE (C X F) 219,89,16,454/- 5.15 LD. AO IN ORDER TO SUPERIMPOSE HIS METHOD OF A CCOUNTING WAS OF THE VIEW THAT AS PER THE CONTRACT WITH ADANI POWER LTD. , THE PAYMENT SHOULD HAVE BEEN RELEASED ADANI ON THE BASIS OF MILESTONES INDICATED IN ANNEXURE 3; TILL THE REPORTING DATE, ASSESSEE HAS RAISED I NVOICES OF RS.130,86,91,429/- INDICATING THAT PHYSICAL WORK OF THE CONTRACT IS CO MPLETED TO THAT EXTENT ONLY. THEREFORE, LD. AO WAS OF THE VIEW THAT ASSESS EE OUGHT TO HAVE FOLLOWED METHOD (C) COMPLETION OF A PHYSICAL PROPOR TION OF THE CONTRACT WORK AS PRESCRIBED IN PARA 29 OF AS-7. CONSEQUENTLY THE DIFFERENCE BETWEEN THE ACTUAL EXPENDITURE INCURRED I.E RS.211,41,21,30 8/- AND THE INVOICES RAISED I.E RS.130,86,91,429/- TO ADANI POWER LTD. F OR PHYSICAL WORK PERFORMED, OUGHT TO HAVE BEEN REFLECTED IN ACCOUNTS AS WORK-IN-PROGRESS. ASSESSEE VIDE LETTER DATED 29/12/2011 EXPLAINED TO LD. AO THAT THE CONTRACT ENTERED INTO WITH ADANI POWER LTD. PRESCRIBES ONLY MILESTONES AS A MODICUM TO RAISE INVOICES AND NOT DETERMINATIVE OF PROFITS. THIS IS CLEAR FROM FOLLOWING RELEVANT PARA OF CONTRACT: CONTRACT PRICE: PAYMENT FOR THE WORKS SHALL BE MADE ON THE BASIS OF THE BILLS SUBMITTED BY THE CONTRACTOR FROM TIME TO TIME IN ACCORDANCE WITH THE MILESTONE AND PAYMENT SCHEDULE. ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 20 THEREFORE, GOING BY THIS STIPULATION, ASSESSEE WAS REQUIRED TO RAISE INVOICES ON THE BASIS OF MILESTONES PRESCRIBED IN A NNEXURE 3 TO THE CONTRACT, THE FACTUM OF PAYMENT BY ADANIS DEPENDED ON THEIR SATISFACTION ABOUT RELEVANT CONDITIONALITYS. BESIDES ASSESSEE A LSO HAD ENGAGED SUB- CONTRACTORS WITH WHOM NO CORRESPONDING MILESTONES W ERE STIPULATED. THUS WITH SUB CONTRACTORS WHICH WERE ESSENTIAL FOR TIMEL Y EXECUTION OF PROJECT THE PAYMENTS WERE TO BE BASED NOT LOOKING AT MILE S TONES BUT PREDOMINANTLY ON THE BASIS OF PHYSICAL WORK CERTIFI ED BY TECHNO-COMMERCIAL EMPLOYEES I.E ENGINEERS, PROJECT HEAD AND FINANCE D EPARTMENT. THESE FACTS AND CONTENTIONS HAVE NEITHER BEEN DISPUTED NOR CONT ROVERTED BY LD. AO. 5.16 THUS THE REVENUE RECOGNITION IN TERMS OF PARA 29 OF AS-7 WAS PERFECTLY JUSTIFIED AND THE ADANI MILESTONE WERE ON LY FOR THE LIMITED PURPOSE OF EVENT OF RELEASE OF PAYMENT. THIS METHOD OLOGY OF RELEASING PAYMENT CANNOT BE SUPERIMPOSED TO REJECT THE ASSESS EE LAWFUL METHOD OF ACCOUNTING AND FOR RECOGNIZING REVENUE BY A METHOD FOUND SUITABLE TO LD. AO AS IT HAD PROPENSITY TO INFLATE TAXABLE PROFITS BY A FICTION. 5.17 LD. COUNSEL CONTENDS THAT ASSESSEE ALSO DEMONS TRATED THAT EVEN IF METHODOLOGY PROPOSED BY LD. AO OF METHOD (C) I.E. C OMPLETION OF A PHYSICAL PROPORTION OF THE CONTRACT WORK, WAS ADOPTED, THE R ESULT WILL BE LOSS TO REVENUE. ON THE BASIS OF MILESTONES PRESCRIBED IN T HE ANNEXURE 3, THE REVENUE RECOGNITION WILL COME TO A LOWER AMOUNT THA N THE REVENUE OF RS.219,89,16,453/- AS RECOGNIZED BY THE ASSESSEE AS UNDER : S.N. PARTICULARS RS. A PHYSICAL COMPLETION OF CONTRACT AS PER MILESTONES PRESCRIBED 130,86,91,427/- B MARK-UP OF 10% (AS SUGGESTED BY AO) 13,08,69,143/- C COST OF PHYSICAL COMPLETION OF CONTRACT (A-B) 117,78,22,284/- D ESTIMATED CONTRACT COST 1694,63,01,948/- ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 21 E PERCENTAGE OF COMPLETION (C/D*100) 7% F CONTRACT REVENUE 1762,60,00,000/- G REVENUE TO BE RECOGNIZED (E X F) AS PER METHOD (C) OF PARA 29 OF AS -7 AS SUGGESTED BY AO. 122,50,63,477/- THUS IN REAL TERMS ASSESSEES METHOD HAS RECOGNIZE D MORE REVENUE THAN THE METHOD (C) COMPLETION OF PHYSICAL WORK TO CONTRACT COST AS PROPOSED BY THE LD. AO. 5.18 ADVERTING TO OBSERVATION OF LD. AO THAT THE AS SESSEE COULD NOT RECONCILE UNBILLED CONTRACT REVENUE OF RS.89,02,25, 026/- WITH THE COST INCURRED, IT IS CONTENDED THAT UNBILLED CONTRACT RE VENUE IS NOTHING BUT THE AMOUNT OF REVENUE WHICH HAS BEEN RECOGNIZED FOL LOWING THE METHOD (A) OF PARA29 OF AS-7, FOR WHICH INVOICES HAVE NOT BEEN RAISED BY THE ASSESSEE FOR NOT-ACHIEVING THE STIPULATED MILESTONE S. IT IS CONTENDED THAT UNBILLED REVENUE OF RS.89,02,25,026/- WAS DULY RECO NCILED BY THE ASSESSEE AS UNDER: S.N PARTICULARS AMOUNT IN RS. A CONTRACT INCOME 219,89,16,454/- B INVOICES RAISED TILL 31.03.09 130,86,91,427/- C UNBILLED CONTRACT REVENUE 89,02,25,026/ S.N PARTICULARS AMOUNT IN RS. A COST INCURRED UPTO REPORTING DATE 211,41,21,308/- B INVOICES RAISED TILL 31.03.09 130,86,91,427/- C UNBILLED AMOUNT FOR WORK PERFORMED (UNBILLED FOR ADANI, HOWEVER, BILLED BY SUB-CONTRACTORS AND OTHERS) 80,54,29,879/- D PROFIT ELEMENT (CONTRACT REVENUE OF RS.219,89,16,454/- MINUS CONTRACT COST OF RS.211,41,21,309/- 8,47,95,147/- E TOTAL (C + D) 89,02,25,026/- 5.19 BESIDES THE PROFIT ELEMENT OF RS.8,47,95,147/- IS FURTHER ADJUSTED WITH THE OPENING AND CLOSING WIP COST OF MUDRA PROJECT, NET PROJECT WIP OF THE ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 22 JHAJJAR PROJECT AND OTHER INCOME. THE DECLARED PROF IT OF RS.6,16,93,392/- WAS ALSO RECONCILED AS UNDER : S.N PARTICULARS AMOUNT IN RS. A PROFIT ELEMENT (CONTRACT REVENUE OF RS.219,89,16,454/- MINUS CONTRACT COST OF RS.211,41,21,309/- 8,47,95,147/- B LESS: PROJECT WIP OF MUDRA PROJECT FOR FY 2007-08 2,72,52,413/- C ADD: COST OF MUDRA PROJECT INCURRED IN FY 2007-08 3,60,60,007/- D LESS : NET PROJECT WIP OF JHAJJAR PROJECT 6,13,75,443/- E PROFIT DERIVED AT FROM THE PROJECT (A- B+C-D) 3,22,27,928/- F OTHER INCOME 2,94,66,096/- G NET PROFIT BEFORE TAXATION 6,16,93,392/- 5.20 THESE TABLES DEMONSTRATE THAT THERE IS NO MERI T IN AOS ALLEGATION THAT THE UNBILLED REVENUE ACCOUNT IS NOT RECONCILED. THE REFORE, IN A THESE FACTS, CIRCUMSTANCES AND DETAILS NEITHER THE BOOKS OF ACCO UNTS CAN BE REJECTED NOR METHOD OF ACCOUNTED BE FAULTED NOR A NEW METHOD PRO POSED BY AO IS SUPER IMPOSABLE. 5.21 SEC. 211(3C) OF THE COMPANIES ACT, 1956, WHICH READS AS UNDER, MANDATORILY OBLIGED ASSESSEE TO FOLLOW THE ACCOUNTI NG STANDARDS PRESCRIBED BY THE ICAI: FOR THE PURPOSES OF THIS SECTION, THE EXPRESSION A CCOUNTING STANDARDS MEANS THE STANDARDS OF ACCOUNTING RECOMMENDED BY TH E INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA CONSTITUTED UNDER TH E CHARTERED ACCOUNTANTS ACT, 1949 (38 OF 1949), AS MAY BE PRESC RIBED BY THE CENTRAL GOVERNMENT IN CONSULTATION WITH THE NATIONAL ADVISO RY COMMITTEE ON ACCOUNTING STANDARDS ESTABLISHED UNDER SUB-SECTION (1) OF SECTION 210A : PROVIDED THAT THE STANDARDS OF ACCOUNTING SPECIFIED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA SHALL BE DEEMED TO B E THE ACCOUNTING STANDARDS UNTIL THE ACCOUNTING STANDARDS ARE PRESCR IBED BY THE CENTRAL GOVERNMENT UNDER THIS SUB-SECTION. ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 23 THE ASSESSEE HAVING RIGHTLY RECOGNIZED THE REVENUE AND COST FOLLOWING THE AS-7 AS ISSUED BY THE ICAI IN CONFORM ITY WITH STATUTORY AND REGULATORY MANDATE THE ACTION OF AO IS UNJUSTIFIED. 5.22 BESIDES, IT IS CONTENDED THAT PROVISO TO S.211 (3C) OF THE ACT, PROVIDES THAT ACCOUNTING STANDARDS SPECIFIED BY THE ICAI SHA LL BE APPLICABLE UNTIL SEPARATE ACCOUNTING STANDARDS ARE PRESCRIBED BY THE CENTRAL GOVERNMENT. GOVERNMENT VIDE ITS NOTIFICATION NO.G.S.R.739(E), D ATED 07/12/2006 HAS NOTIFIED COMPANIES (ACCOUNTING STANDARD) RULES, 200 6, WHEREIN, VIDE RULE 3(1), IT IS PRESCRIBED THAT ACCOUNTING STANDARDS 1 TO 7 AND 9 TO 29 AS RECOMMENDED BY ICAI ARE APPLICABLE (REFER TO ANNEXU RE TO RULES), COPY THEREOF IS PLACED ON PB. THUS EVEN THE CENTRAL GOVE RNMENT MANDATE ALSO PRESCRIBES THE STAGE COMPLETION METHOD AS RECOGNIZE D METHOD OF ACCOUNTING AS PROVIDED IN THE AS-7. THUS LOOKING FR OM ANY ANGLE, IT IS CLEAR THAT THE METHOD OF ACCOUNTING AS ADOPTED BY ASSESSE E IS WELL RECOGNIZED AND STATUTORILY AUTHENTICATED METHOD OF ACCOUNTING. LD. AO HAS NO POWER TO DISREGARD THIS METHOD IN THE PRETEXT OF INVOKING S.145 TO REJECT A LAWFUL METHOD WITHOUT POINTING OUT ANY SPECIFIC DEFECTS IN THE BOOKS OF ACCOUNTS OR REASONS FOR SUO MOTU CHANGING THE REGULARLY EMPL OYED METHOD. 5.23 RELIANCE IS PLACED ON HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. VIRTUAL SOFT SYSTEMS LTD. IN 341 ITR 593. ASSESSING OFFICER REJECTED BOOKS OF ACCOUNTS BY REJECTING ASSESSES METHOD OF ACCOUN TING IN RESPECT OF LEASE RENTAL WHICH WAS RECOGNIZED IN TERMS OF ICAI GUIDEL INES. DELHI HIGH COURT HELD THAT ICAI IS RECOGNIZED AS BODY VESTED WITH AU THORITY TO RECOMMEND ASS FOR ENDORSEMENT BY CENTRAL GOVERNMENT IN CONSUL TATION WITH NATIONAL ADVISORY COMMITTEE OF ACCOUNTING STANDARDS, FOR PRE SENTATION OF FINANCIAL STATEMENTS. THIS BEING SO THE ASSESSING OFFICER CAN NOT DISREGARD THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE ON THE BASIS OF GUIDELINES PROVIDED ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 24 BY THE ICAI AND CANNOT REJECT BOOKS OF ACCOUNTS OF THE ASSESSEE. RELEVANT EXTRACT OF WHICH IS REPRODUCED HEREUNDER : 8. HAVING HEARD THE LEARNED COUNSELS FOR THE PARTIES AND PERUSED THE RECORD, WHAT EMERGES IS AS FOLLOWS: HOWEVER, BEFORE WE PROC EED FURTHER, WE MAY INDICATE THAT, WE WOULD BE ANSWERING THE QUESTIONS OF LAW FRAMED; IN THE REVERSE ORDER, IN AS MUCH AS, THE SECOND QUESTION W OULD BE ANSWERED FIRST AND THEN, WE WOULD TAKE UP THE OTHER QUESTION OF LA W. 8.1 . THE FOREMOST ASPECT WHICH, THUS ARISES FOR CONSID ERATION IN THIS CASE IS: WHETHER THE METHOD OF ACCOUNTING EMPLOYED BY THE AS SESSEE TO DETERMINE THE REAL INCOME EVIDENTLY DERIVED FROM LEASE OF ASSETS, COULD BE GIVEN A GO-BY. IN DETERMINING ITS INCOME AND ITS PRESENTATION, THE AS SESSEE TOOK RECOURSE TO THE GUIDANCE NOTE, ISSUED BY THE ICAI, ON ACCOUNTING FO R LEASES. THE ICAI'S PUBLICATION ON THE SUBJECT INDICATES THAT THE GUIDA NCE NOTE ON ACCOUNTING OF LEASES WAS ISSUED BY IT, FOR THE FIRST TIME, IN 198 8, WHICH WAS, THEN REVISED IN 1995. THE HIATUS BETWEEN THE DATE WHEN IT WAS FIRST ISSUED, AND ITS REVISION, APPEARS TO BE ON ACCOUNT OF AN INTERIM ORDER GRANTE D BY THE MADRAS HIGH COURT IN A CASE, WHICH WAS, DISPOSED OF ON, 14.07.1 995. IT APPEARS THAT THE CASE WAS DISMISSED AS WITHDRAWN. 8.2 WE MAY ALSO NOTE THAT OUR DISCUSSION IS PREFACED B Y THE FACT THAT ON 01.04.2001, THE ICAI DID PUBLISH A.S. 19 IN RESPECT OF LEASES. THE SAID A.S. 19, IS APPLICABLE, IN RESPECT OF, ASSETS LEASED DUR ING ACCOUNTING PERIODS COMMENCING ON OR AFTER 01.04.2001. THE PERIODS, WHI CH ARE UNDER CONSIDERATION, IN THE PRESENT APPEALS, ARE PRIOR TO 01.04.2001. 9. IN THIS BACKGROUND WHAT IS REQUIRED TO BE CONSIDER ED IS WHETHER THE BOOKS OF ACCOUNTS COULD BE REJECTED BY THE ASSESSING OFFI CER MERELY FOR THE REASON THAT RECOURSE TO THE GUIDANCE NOTE WAS TAKEN BY THE ASSESSEE. IN THIS REGARD, WE WOULD BE REQUIRED TO EXAMINE THE PROVISIONS OF S ECTION 145 OF THE I.T. ACT. SECTION 145 OF THE I.T. ACT ADVERTS TO THE MET HOD OF ACCOUNTING FOLLOWED BY AN ASSESSEE. SUB-SECTION (1) OF SECTION 145 PROV IDES THAT INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUS INESS OR PROFESSION' OR 'INCOME FROM OTHER SOURCES' SHALL BE COMPUTED EITHE R ON CASH BASIS OR ON MERCANTILE SYSTEM, WHICHEVER METHOD BEING REGULARLY EMPLOYED BY THE ASSESSEE. THIS PROVISION IS, HOWEVER, SUBJECT TO TH E CENTRAL GOVERNMENT NOTIFYING A.S. IN RESPECT OF ANY CLASS OF ASSESSEE OR CLASS OF INCOME. SUB- SECTION (3) OF SECTION 145, EMPOWERS THE ASSESSING OFFICERS TO DISREGARD THE BOOKS OF ACCOUNTS SUBMITTED BY THE ASSESSEE ONLY IF HE IS NOT SATISFIED WITH: THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE OR, THE METHOD OF ACCOUNTING EMPLOYED BY THE ASSESSEE OR ON ACCOUN T OF A.S. NOTIFIED UNDER SUB-SECTION (2), NOT BEING PARTICULARLY FOLLOWED BY THE ASSESSEE. IN THIS PARTICULAR CASE, THE ASSESSING OFFICER HAS DISREGAR DED, IN SUBSTANCE, THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE QUA L EASE RENTALS WITHOUT BASING IT ON THE GROUNDS PROVIDED IN SECTION 145 OF THE IT ACT. THE FACT THAT THE ASSESSEE JUSTIFIED ITS METHOD OF ACCOUNTING, BY TAKING RECOURSE TO THE ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 25 GUIDANCE NOTE ISSUED BY THE ICAI IN THAT BEHALF, WA S DISREGARDED, ON WHAT WE WOULD TERM AS, A DISJOINTED READING OF THE PROVI SIONS OF THE SAID GUIDANCE NOTE. BOTH THE ASSESSING OFFICER AS WELL AS THE CIT (A) HAVE ADVERTED TO PARAGRAPH 2 OF THE GUIDANCE NOTE TO COME TO, WHAT W E CONSIDER AN ERRONEOUS CONCLUSION IN AS MUCH AS THEY HAVE HELD THAT IN DET ERMINING AS TO WHETHER DEDUCTION ON ACCOUNT OF LEASE EQUALIZATION CHARGES OUGHT TO BE ALLOWED OR NOT, WHAT HAS TO BE BORNE IN MIND IS ULTIMATELY THE PROVISIONS OF THE IT ACT. IN OUR VIEW, SUCH AN OBSERVATION IN PARAGRAPH 2 OF THE GUIDANCE NOTE IS REALLY SAYING THE OBVIOUS. THEREFORE, EVEN IF THIS GUIDANCE NOTE WAS SILENT ON THIS ASPECT THE PROVISIONS OF THE I.T. ACT WOULD UN DOUBTEDLY STILL APPLY. THUS, AS TO WHAT IS THE IMPACT OF PROVISION OF PARA 2 OF THE GUIDANCE NOTE WILL BE CONSIDERED BY US AS WE PROGRESS FURTHER WIT H OUR JUDGMENT. 9.1 HOWEVER, WHAT IS IMPORTANT AT THIS STAGE IS TO FIRST ADDRESS OURSELVES TO THE ASPECT AS TO WHETHER THE ASSESSING OFFICER COULD HAVE DISREGARDED THE METHOD OF ACCOUNTING FOLLOWED BY TH E ASSESSEE IN RESPECT OF LEASE RENTALS. IN OUR VIEW, THE ASSESSIN G OFFICER COULD NOT HAVE DO SO, AS THE METHOD OF ACCOUNTING WAS BASED O N A GUIDELINE COMMENDED FOR ADOPTION BY A PROFESSIONAL BODY SUCH AS THE ICAI. THE GUIDANCE NOTE REFLECTS THE BEST PRACTICES ADOPT ED BY ACCOUNTANTS THE WORLD OVER. THE FACT THAT, AT THE RELEVANT POIN T IN TIME, IT WAS NOT MANDATORY TO ADOPT THE METHODOLOGY PROFESSED BY THE GUIDANCE NOTE ISSUED BY THE ICAI, IS IRRELEVANT, FOR THE REASON T HAT, AS LONG AS THERE WAS A DISCLOSURE OF THE CHANGE IN ACCOUNTING POLICY IN THE ACCOUNTS, WHICH HAD A BACKING OF A PROFESSIONAL BODY SUCH AS THE ICAI, IT COULD NOT BE DISCARDED BY THE ASSESSING OFFICER. THIS IS SPECIALLY SO, SINCE THE ICAI IS, RECOGNIZED AS THE BODY VESTED WITH THE AUTHORITY TO RECOMMEND A.SS FOR ULTIMATE PRESCRIPTION BY THE CEN TRAL GOVERNMENT IN CONSULTATION BY THE NATIONAL ADVISORY COMMITTEE OF ACCOUNTING STANDARDS, FOR PRESENTATION OF FINANCIAL STATEMENTS . THE PROVISIONS OF SECTION 211(3C) OF THE COMPANIES ACT ARE QUITE CLEA R ON THIS ASPECT. AS A MATTER OF FACT, THE PROVISO TO THE SAID SUB-SE CTION, QUITE CLEARLY SPECIFIES THAT TILL SUCH TIME THE CENTRAL GOVERNMEN T PRESCRIBES THE ACCOUNTING STANDARDS THE ACCOUNTING STANDARDS ISSUE D BY THE ICAI, SHALL BE DEEMED TO BE THE RELEVANT ACCOUNTING STAND ARDS. THE RELEVANT PROVISION READS AS FOLLOWS : '211(3C) FOR THE PURPOSES OF THIS SECTION, THE EXPR ESSION 'ACCOUNTING STANDARDS' MEANS THE STANDARDS OF ACCOUNTING, RECOM MENDED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA CONSTIT UTED UNDER THE CHARTERED ACCOUNTANTS ACT, 1949 (30 OF 1949), AS MAY BE PRESC RIBED BY THE CENTRAL GOVERNMENT IN CONSULTATION WITH THE NATIONAL ADVISO RY COMMITTEE ON ACCOUNTING STANDARDS ESTABLISHED UNDER SUB-SECTION (1) OF SECTION 201A. PROVIDED THAT THE STANDARDS OF ACCOUNTING SPECIFIED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA SHALL BE DEEMED TO B E THE ACCOUNTING ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 26 STANDARDS UNTIL THE ACCOUNTING STANDARDS ARE PRESCR IBED BY THE CENTRAL GOVERNMENT UNDER THIS SUB-SECTION.' 10. IN THIS CONTEXT IT WOULD BE IMPORTANT TO NOTE THAT AS1 PERTAINING TO DISCLOSURE OF ACCOUNTING POLICIES HAS ALREADY BEEN NOTIFIED BY THE ICAI AS HAVING ATTAINED MANDATORY STATUS FOR PERIODS COMMEN CING ON OR AFTER 01.04.1991. IT IS NOT, THE ASSESSING OFFICER'S CASE , THAT THE ACCOUNTING POLICY WITH REGARD TO LEASE RENTALS WAS NOT DISCLOSED BY T HE ASSESSEE. THE ASSESSING OFFICER SEEMS TO HAVE TAKEN UMBRAGE TO THE CHANGE I N ACCOUNTING POLICY HAVING BEEN BROUGHT ABOUT ONLY WITH EFFECT FROM AY 1996-97. IN OUR VIEW, AS LONG AS THERE WAS A DISCLOSURE OF THE FACTUM OF CHANGE IN THE ACCOUNTING POLICY AND ITS EFFECT, IN THE ACCOUNTS, NO FAULT COULD BE FOUND WITH THE CHANGE IN ACCOUNTING POLICY MERELY O N ACCOUNT OF THE FACT THAT IT WAS EMPLOYED FOR THE FIRST TIME IN AY 1996-97. THE CHANGE IN ACCOUNTING POLICY, AS NOTICED BY US ABOVE, HAD T HE IMPRIMATUR OF A DULY RECOGNIZED PROFESSIONAL BODY, I.E., THE ICAI. THEREFORE, NOTWITHSTANDING THE FACT THAT THE OPINION OF THE IC AI WAS EXPRESSED IN A GUIDANCE NOTE WHICH HAD NOT ATTAINED A MANDATO RY STATUS, WOULD NOT, IN OUR VIEW, PROVIDE A BASIS TO THE ASSE SSING OFFICER TO DISREGARD THE BOOKS OF ACCOUNTS OF THE ASSESSEE AND IN EFFECT METHOD OF ACCOUNTING FOR LEASES, FOLLOWED BY THE ASSESSEE. 5.24 FURTHER RELIANCE IS PLACED UPON THE FOLLOWING JUDICIAL PRECEDENTS EMPHASIZING THAT PERCENTAGE OF COMPLETION METHOD PR ESCRIBED IN AS-7 IS AN APPROPRIATE AND RECOGNIZED METHOD FOR CONSTRUCTION CONTRACT SPREAD OVER SEVERAL YEARS. THE AO CANNOT DISREGARD THE SAID MET HOD OF ACCOUNTING TO REJECT BOOKS OF ACCOUNTS. MKB (ASIA) (P) LTD. VS. CIT 294 ITR 655 (GAU.) CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. 294 ITR 45 1 (DELHI) CONFIRMED BY THE APEX COURT IN 312 ITR 254. CIT V. HYUNDAI HEAVY INDUSTRIES CO. LTD. [2007] 210 CTR (SC) 178 : [2007] 291 ITR 482 (SC) DDIT (INTERNATIONAL TAXATION) VS. SEPCO ELECTRIC PO WER CONSTRUCTION CORPORATION LTD. 126 TTJ 539 (BILASPUR ) M.N.DASTUR& CO. LTD. VS. DCIT 61 ITD 167 (CAL) THERMAX BABCOCK & WILCOX LTD. VS. DCIT 79 ITD 63 (P UNE)(TM) ASSTT. CIT V DHARTI ESTATE [2011] 129 ITD 1 (HEADNO TES) AWADHESH BUILDERS VS. ITO 37 SOT 122 (MUM.) NANDI HOUSING (P) LTD. VS. DCIT 2 SOT 395 (BANG.) RAMNIKLAL J. NATHWANI VS. ITO 28 SOT 276 (MUM.) ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 27 5.25 JURISDICTIONAL GUJARAT HIGH COURT DECISION IN THE CASE OF CIT VS. ADVANCED CONSTRUCTION CO. (P.) LTD. REPORTED IN 275 ITR 30, WHEREIN IT HAS BEEN HELD THAT: 'THE PROVISION, THEREFORE, SPECIFICALLY PROVIDES TH AT THE CHOICE OF METHOD OF ACCOUNTING LIES WITH THE ASSESSEE, THE ONLY CAV EAT BEING THAT IT HAS TO SHOW THAT THE CHOSEN METHOD HAS BEEN REGULARLY FOLLOWED . THE SECTION IS COUCHED IN MANDATORY TERMS AND THE DEPARTMENT IS BOUND TO ACCE PT THE ASSESSEE'S CHOICE OF METHOD AND REGULARLY EMPLOYED, EXCEPT FOR THE S ITUATION, WHEREIN THE ASSESSING OFFICER IS PERMITTED TO INTERVENE, IN CAS E IT IS FOUND THAT TRUE INCOME, PROFITS AND GAINS CANNOT BE ARRIVED AT BY T HE METHOD EMPLOYED BY THE ASSESSEE. IN THE PRESENT CASE, THE TRIBUNAL HAS CAT EGORICALLY FOUND THAT 'THE ASSESSEE HAS FOLLOWED THE STANDARD ACCOUNTING MET HOD AS THIS BEING THE FIRST YEAR OF THE BUSINESS IT WAS THE SOLE CHOICE OF THE ASSESSEE TO ADOPT A PARTICULAR METHOD OF ACCOUNTING CONTEMPLATED UNDE R SECTION 145 OF THE ACT. DCIT V. M/S. ASSOCIATED PETROLEUM CORPORATION (AHD, ) CIT VS. VIKRAM PLASTICS &ORS. [239 ITR 161 (GUJ.)] 5.26 ASSUMING BUT NOT CONCEDING EVEN IF REJECTION OF BOOKS OF ACCOUNTS IS UPHELD IN THIS EVENTUALITY ALSO LD. AO IS NOT EMPOW ERED TO INVOKE PROVISIONS OF S.44BBB(1) WHICH READS AS UNDER: SPECIAL PROVISION FOR COMPUTING PROFITS AND GAINS O F FOREIGN COMPANIES ENGAGED IN THE BUSINESS OF CIVIL CONSTRUC TION, ETC., IN CERTAIN TURNKEY POWER PROJECTS. 44BBB. [(1)] NOTWITHSTANDING ANYTHING TO THE CONTR ARY CONTAINED IN SECTIONS 28 TO 44AA , IN THE CASE OF AN ASSESSEE, BEING A FOREIGN COMPA NY, ENGAGED IN THE BUSINESS OF CIVIL CONSTRUCTION OR TH E BUSINESS OF ERECTION OF PLANT OR MACHINERY OR TESTING OR COMMISSIONING THER EOF, IN CONNECTION WITH A TURNKEY POWER PROJECT APPROVED BY THE CENTRAL GOVER NMENT IN THIS BEHALF 67 [***], A SUM EQUAL TO TEN PER CENT OF THE AMOUNT PA ID OR PAYABLE (WHETHER IN OR OUT OF INDIA) TO THE SAID ASSESSEE O R TO ANY PERSON ON HIS BEHALF ON ACCOUNT OF SUCH CIVIL CONSTRUCTION, ERECTION, TE STING OR COMMISSIONING SHALL BE DEEMED TO BE THE PROFITS AND GAINS OF SUCH BUSINESS CHARGEABLE TO TAX UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PR OFESSION'.] [(2) NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SECT ION (1), AN ASSESSEE MAY CLAIM LOWER PROFITS AND GAINS THAN THE PROFITS AND GAINS SPECIFIED IN THAT SUB- ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 28 SECTION, IF HE KEEPS AND MAINTAINS SUCH BOOKS OF AC COUNT AND OTHER DOCUMENTS AS REQUIRED UNDER SUB-SECTION (2) OF SECTION 44AA AND GETS HIS ACCOUNTS AUDITED AND FURNISHES A REPORT OF SUCH AUDIT AS REQ UIRED UNDER SECTION 44AB , AND THEREUPON THE ASSESSING OFFICER SHALL PROCEED T O MAKE AN ASSESSMENT OF THE TOTAL INCOME OR LOSS OF THE ASSESSEE UNDER SUB- SECTION (3) OF SECTION 143 AND DETERMINE THE SUM PAYABLE BY, OR REFUNDABLE TO, THE ASSESSEE.] 5.27 A PERUSAL OF THE PROVISIONS OF SUB-SECTION (2) OF S.44BBB OF THE ACT, MAKES IT CLEAR THAT IF THE ASSESSEE MAINTAINS BOOKS OF ACCOUNT AND OTHER DOCUMENTS UNDER SUB-SECTION (2) OF S.44AA OF THE AC T AND GETS HIS THEM AUDITED AND FURNISHES A REPORT OF SUCH AUDIT AS REQ UIRED U/S 44AB OF THE ACT, THE ASSESSEE CAN CLAIM LOWER AMOUNT OF PROFIT THAN THE PROFIT AT 10% AS SPECIFIED IN SUB-SECTION (1) OF S.44BBB OF THE ACT. LD. AO REJECTED BOOKS OF ACCOUNTS ALLEGING THAT THE ASSESSEES METHOD DID NO T REFLECT CORRECT PROFITS AND WITHOUT JUSTIFICATION APPLIED SUMMARY PROVISION S OF SEC. 44BBB(1) R.W.S. 145 OF THE ACT. CIT V. HYUNDAI HEAVY INDUSTRIES CO. LTD. [2007] 291 ITR 482 WHEREIN AT PAGES 489 AND 494 HELD AS UNDER : 'A SHORT QUESTION WHICH NEEDS TO BE ANSWERED IN THE PRESENT CASE IS WHAT ARE THE PROFITS REASONABLY ATTRIBUTABLE TO THE ASSESSEE S PERMANENT ESTABLISHMENT IN INDIA. IN ORDER TO ANSWER THE ABOVE QUESTION WE ARE REQUIRED TO ANALYZE THE SCHEME OF THE ACT. UNDER SECTION 4 OF THE ACT IT IS THE TOTAL INCOME OF EVERY 'PERSON' WHICH IS TAXABLE. A FOREIGN COMPANY WHICH IS NOT WHOLLY CONTROLLED OR MANAGED IN INDIA IS A NON-RESIDENT SO FAR AS ITS RESIDENTIAL STATUS IS CONCERNED. SECTION 5(2) OF THE ACT LAYS DOWN THAT A S FAR AS A NON-RESIDENT ASSESSEE IS CONCERNED THE SCOPE OF TOTAL INCOME OF SUCH AN ASSESSEE IS CONFINED TO INCOME WHICH ACCRUES OR ARISES IN INDIA OR IS DE EMED TO ACCRUE OR ARISE IN INDIA AND WHICH INCOME IS RECEIVED OR DEEMED TO BE RECEIVED BY SUCH FOREIGN COMPANY.' 'THIRDLY, IT IS IMPORTANT TO NOTE THAT CHAPTER IV O F THE ACT CONTAINS PROVISIONS FOR PRESUMPTIVE TAXATION OF BUSINESS INC OME IN CERTAIN CASES AS PRESCRIBED IN SECTIONS 44B, 44BB, 44BBA AND 44BBB OF THE ACT. IN THE SCHEME OF PRESUMPTIVE TAXATION, THE ASSESSEE IS PRE SUMED TO HAVE EARNED INCOME AT THE RATE OF A CERTAIN PERCENTAGE OF HIS T OTAL TURNOVER OR GROSS RECEIPTS. IF THE ASSESSEE AGREES TO BE TAXED ON PRE SUMED INCOME, HE IS NOT REQUIRED TO MAINTAIN BOOKS OF ACCOUNT. IF, HOWEVER, HE CLAIMS THAT HIS INCOME IS LESS THAN THE PRESUMED FIGURE, HE IS REQUIRED TO SUPPORT HIS CLAIM BY PRODUCING BOOKS OF ACCOUNT.' ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 29 5.28 PROVISIONS OF SUB-SECTION (2) TO S.44BBB OF TH E ACT WERE INSERTED AS BENEFICIAL PROVISION BY THE FINANCE ACT, 2003. THE PURPOSE FOR INSERTING SUCH PROVISION HAS BEEN EXPLAINED IN CBDT CIRCULAR NO.7/2003, DATED 5-9-2003 ; 263 ITR (ST.) 61 , RELEVANT PARA IS AS UNDER : 36.4 THE ACT HAS ALSO AMENDED SECTIONS 44BB AND 44B BB TO PROVIDE THAT AN ASSESSEE MAY CLAIM LOWER PROFITS AND GAINS THAN THE PROFITS AND GAINS SPECIFIED UNDER SUB-SECTION (1) OF THE SAID SECTION S IF HE KEEPS AND MAINTAINS SUCH BOOKS OF ACCOUNT AND OTHER DOCUMENTS AS REQUIR ED UNDER SUB-SECTION (2) OF SECTION 44AA AND GETS HIS ACCOUNTS AUDITED AND F URNISHES A REPORT OF SUCH AUDIT AS REQUIRED UNDER SECTION 44AB. THE ASSESSING OFFICER SHALL THEN MAKE AN ASSESSMENT OF THE TOTAL INCOME OR LOSS OF THE AS SESSEE UNDER SUB-SECTION (3) OF SECTION 143. 5.29 THUS WHEN ASSESSEE HAS MAINTAINED PROPER BOOKS OF ACCOUNTS AUDITED U/S 44AA AND 44AB OF THE ACT, AS THE ASSESSEE HAS A STATUTORY RECOGNITION OF ACCOUNT BASED LOWER AMOUNT OF PROFITS THE REJECTION OF BOOKS MAY LEAD TO A REASONABLE ESTIMATION OF PROFITS. IT DOES NOT GIVE ANY LEVERAGE TO LD. AO TO AUTOMATICALLY RESORT TO PRESUMPTIVE TAX, WHICH BY W AY OF PROMISSORY ESTOPPELS IS APPLICABLE TO NO ACCOUNT BASED FOREIGN COMPANIES. S.44BBB PROVIDES DEEMING FICTION TO TAX INCOME @ 10% CIVIL CONSTRUCTION RECEIPTS. HOWEVER, COURTS HAVE HELD THAT THIS DEEMING FICTION IS NOT AN ABSOLUTE PROPOSITION AND CANNOT OVERRIDE SECTIONS 28 TO 43A AS ALSO PROVISIONS CONTAINED IN SECTION 4. A HARMONIOUS CONSTRUCTION A ND READING OF SECTIONS 2(45), 4, 5, 44AA, 44AB AND 44BBB OF THE ACT LAY DO WN A CLEAR SCHEME OF THE ACT TO TAX FOREIGN COMPANIES. SECTION 44BBB OF THE ACT IS NOT A CHARGING SECTION BUT ONLY AN OPTIONAL, FICTIONAL AND ALTERNA TIVE MACHINERY PROVISION AND SUBSERVIENT TO SEC. 44AB FOR REGULAR ASSESSMENT . IN CASE ASSESSEE MAINTAINS REGULAR, AUDITED BOOKS, THE TAX IS TO BE LEVIED IN CONFORMITY OF HARMONIOUS READING OF SS. 2(45), 4, 5 RWSS 28 TO 4 3A BY WAY OF A REGULAR ASSESSMENT LIKE ANY OTHER INDIAN COMPANY. IF NO ACC OUNTS ARE MAINTAINED THEN IN TERMS OF SEC. 44BBB. AS PER LEGISLATIVE MAN DATE OF THIS SCHEME THE OPTION IS TO BE EXERCISED BY THE ASSESSEE AND BY TH E LD. AO. THEREFORE, IN ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 30 THESE FACTS AND CIRCUMSTANCES, THE ACTION OF LD. AO IN APPLYING PRESUMPTIVE PROVISIONS OF SEC. 44BBB TO ASSESSEES RECEIPTS IS CONTRARY TO LEGAL PROVISIONS. RELIANCE IS PLACED ON: SAIPEM S.P.A. V. DY. CIT [2004] 88 ITD 213 (DELHI) (TM) DY. CIT V. NAGARJUNA INVESTMENT TRUST LTD. [1998] 6 5 ITD 17 (HYD.) (SB) OTHER PROPOSITIONS CANVASSED BY LD. COUNSEL ARE TO THE EFFECT THAT: (A) PROVISIONS OF S.145 OF THE ACT DO NOT OVERRIDE PROV ISIONS OF S.5 OF THE ACT, AS HELD IN DY. CIT V. NAGARJUNA INVESTMENT TRUST LTD. [1998] 65 ITD 17 (HYD.) (SB); (B) PROVISIONS OF SUB-SECTION (1) TO S.44BBB OF THE ACT CANNOT BE INVOKED IN A CASE WHERE PROPER BOOKS OF ACCOUNTS AR E MAINTAINED IN CONFORMITY WITH CONSISTENT METHOD OF ACCOUNTING, ICAI GUIDELINES, CENTRAL GOVT. REGULATIONS AND COMPANY L AW PROVISIONS. THUS PRESUMPTIVE ADDITIOS @ 10% OF RECE IPTS AGAINST THE OBVIOUS SCHEME OF THE INCOME TAX ACT.; 5.30 PROVISIONS OF SUB-SECTION (1) TO S.44BBB OF TH E ACT ARE NOT CHARGING SECTIONS BUT MACHINERY PROVISIONS ONLY AND CANNOT O VERRIDE CHARGING SECTION. RELIANCE IS PLACED ON THE DELHI BENCH ITAT JUDGMENT IN THE CASE OF ROYAL JORDANIAN AIRLINES VS. DDIT (INT. TAXATION) 2 5 SOT 270, WHICH IS ON THE SAME ISSUE OF AOS REJECTION OF BOOKS AND DISCA RDING THE LOSSES AND ASSESSING THE INCOME BY APPLICATION OF PRESUMPTIVE PROVISIONS U/S 44BBA @ 5% OF RECEIPTS. ITAT DELHI, RELYING ON CATENA OF JUDGMENTS INCLUDING HONBLE SUPREME COURT IN SANYASI RAO QUASHED THE AC TION OF AO BY FOLLOWING OBSERVATIONS : 17. AS AGAINST THE CONTENTION OF THE AR THAT WHERE THE APPELLANT HAS INCURRED LOSSES, SECTION 44BBA OF THE ACT HAS NO AP PLICATION, LEARNED DR SUBMITTED THAT IF SUCH SUBMISSION IS ACCEPTED, WILL RENDER A PRESUMPTIVE TAXATION REPUGNANT AND MEANINGLESS. IN THE CASE OF LLOYD HELICOPTERS INTERNATIONAL (P.) LTD. ( SUPRA ) AT PAGE 182, IT W AS HELD AS UNDER : 'IT CANNOT BE OVERLOOKED THAT THOUGH THE SECTION OU TLINES A STATUTORY BASIS OF ASSESSMENT, WHAT IS BEING ASSESSED AT THE STATUTORY RATE IS THE 'PROFITS OF THE ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 31 BUSINESS', AN EXPRESSION WHICH, AS IS WELL-SETTLED, HAS TO BE UNDERSTOOD IN A COMMERCIAL SENSE. THE OPENING WORDS OF THE SECTION MAKE NO DIFFERENCE TO THIS CONCEPT. IN THE FIRST PLACE, IT IS WELL-SETTLE D THAT IN THE COMPUTATION OF PROFITS, ALL PROPER, OUTGOINGS HAVE TO BE ALLOWED A S A DEDUCTION, IRRESPECTIVE OF WHETHER THE STATUTE CONTAINS A SPECIFIC PROVISIO N IN THIS REGARD OR NOT [ SEECITV. CHITNAVIS [1932] 2 COMP. CAS. 464 ; [193 2] 6 ITC 453 (PC)]. SALARIES PAID TO EMPLOYEESAND INDEED ALL REVENUE E XPENDITURE INCURRED FOR RUNNING A BUSINESS WILL HAVE TO BE TAKEN INTO A CCOUNT IN DETERMINING ITS PROFITS, IRRESPECTIVE OF THE PROVISIONS OF SECTIONS 28 TO 43A. SECONDLY, THE PROVISIONS IN SECTIONS 30 TO 43A ARE PRIMARILY INTE NDED TO RESTRICT OR QUALIFY THE EXTENT OF DEDUCTION IN REGARD TO CERTAIN CATEGO RIES OF EXPENSES THAT WOULD HAVE BEEN NORMALLY ALLOWABLE IN THE COMPUTATION. TH IS IS INDEED CLEAR FROM THE OMNIBUS NATURE OF DEDUCTIONS PERMISSIBLE UNDER SECTION 37. HENCE, IN A COMMERCIAL SENSE, THE CONCEPT OF PROFITS DETERMINED UNDER SECTION 44BB OR 44BBA, THOUGH ARRIVED AT ON A STATUTORY BASIS, CANN OT BE CONSIDERED TO EXCLUDE SUCH EXPENSES AS NON-DEDUCTIBLE MERELY BECA USE THE STATUTE FIXES A PERCENTAGE IN THIS REGARD. THE FIXATION OF A RATE S O LOW AS FIVE PER CENT OF THE GROSS RECEIPTS AS THE NET ASSESSABLE PROFIT INDICAT ES A STATUTORY ATTEMPT AT ESTIMATING THE EXPENSES NORMALLY LIKELY TO BE INCUR RED IN SUCH BUSINESS. SHRI DASTUR GIVES THE INSTANCE OF A CASE WHERE AN ASSESS EE REALLY MAKES A LOSS AND YET IS ASSESSED AT A PROFIT RATE OF FIVE PER CENT A ND ARGUES THAT, SURELY, IN SUCH A CASE, AT LEAST, IT CANNOT BE SAID THAT THE SALARI ES ARE A DEDUCTIBLE ITEM. BUT THIS CONTENTION OVERLOOKS THAT THE INTERPRETATION O F A STATUTE CANNOT BE BASED ON ISOLATED POSSIBILITIES AND EXCEPTIONAL SITUATION S. THE CASE WHERE A PERSON WILL INCUR A LOSS ONLY BY SETTING OFF THE SALARIES PAID BY HIM IS A RARE ONE AND CANNOT FURNISH A BASIS FOR INTERPRETING THE CLAUSE. THE STATUTE BRINGS TO TAX ONLY FIVE PER CENT, (OR TEN PER CENT) AND ENVISAGES AN ALLOWANCE OF 95 PER CENT (OR 90 PER CENT) OF THE EXPENSES IN COMPUTING THE T AXABLE PROFITS UNDER THESE SECTIONS AND IT IS DIFFICULT TO AGREE THAT THIS INV OLVES NO ELEMENT OF DEDUCTIBILITY OF REVENUE EXPENSES SUCH AS SALARIES AND THE LIKE.' FROM THE AFORESAID, IT WILL BE SEEN THAT, COMMERCIA L PRINCIPLES HAVE NOT BEEN OVERLOOKED. IT HAS BEEN HELD BY THE AUTHORITY FOR A DVANCE RULING IN THE CASE ABOVE THAT, OPENING WORD OF SECTION PROVIDES PROFIT S OF BUSINESS AS UNDERSTOOD IN COMMERCIAL SENSE HAS NOT BEEN DONE AW AY. IT HAS BEEN HELD THAT, IN THE COMPUTATION OF PROFITS HAS TO BE ALLOW ED AS DEDUCTION IRRESPECTIVE OF WHETHER STATUTE CONTAINED NO SPECIFIC PROVISIONS . WHEN THERE ARE LOSSES INCURRED BY THE APPELLANT, THE PRESUMPTIVE SECTIONS CANNOT BRING TO CHANGE WHAT IS OTHERWISE NOT CHARGEABLE TO TAX. THEREFORE, RELIANCE PLACED UPON THE DECISION OF THE AUTHORITIES FOR ADVANCE RULING (AAR ) ON THE CASES OF LLOYD HELICOPTER INTERNATIONAL (P.) LTD. ( SUPRA ) AND DH V CONSULTANTS B.V. ( SUPRA ) TO CONTEND THAT, IN THE CASE OF PRES UMPTIVE TAXATION, INCOME ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 32 HAS TO BE COMPUTED AS PER PROVISIONS AND ALL EXPENS ES INCURRED FOR EARNING THE INCOME HAVE DEEMED TO BE ALLOWED, HAS NO APPLIC ATION TO THE FACTS OF THE APPELLANT. 18. SECTION 44C IMPOSES A LIMIT ON THE ALLOWABILITY OF HEAD OFFICE EXPENDITURE IN THE CASE OF NON-RESIDENT OF THE ASSESSEE. IT PRO VIDES THAT NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTIONS 28 T O 43A, WHERE AN ASSESSEE IS A NON-RESIDENT, NO ALLOWANCE SHALL BE MADE IN CO MPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'BUSINESS INCOME', IN RES PECT OF HEAD OFFICE EXPENDITURE TO THE EXTENT IT IS IN EXCESS OF 5 PER CENT OF ADJUSTED TOTAL INCOME OR THE AMOUNT OF EXPENDITURE IN THE NATURE OF HEAD OFFICE EXPENDITURE INCURRED BY THE ASSESSEE AS IS ATTRIBUTABLE TO THE BUSINESS OF ASSESSEE IN INDIA, WHICHEVER IS LESS. THOUGH SECTION 44C CONTAINS ANON OBSTENTE CLAUSE AND OVER RIDES THE PROVISIONS CONTAINED IN SECTIONS 28 TO 43A REGARDING COMPUTATION OF INCOME, YET VARIOUS COURTS HAVE HELD THAT WHERE ENTIRE BUSINESS OPERATION IS CARRIED OUT IN INDIA, ENTIRE HEAD OFFICE EXPENDITURE INCURRED IS ALLOWABLE WHILE COMPUTING INCOME FROM I NDIA. THE LIMIT CONTAINED IN SECTION 44C WILL NOT APPLY IN SUCH A S ITUATION. THIS IS SO HELD IN THE CASE OF RUPENJULI TEA CO. LTD. V. CIT [1990] 18 6 ITR 301 1 (CAL.) AND BY BOMBAY HIGH COURT IN THE CASE OF CIT V. EMIRATES CO MMERCIAL BANK LTD. [2003] 262 ITR 55 . EXTENDING THE ANALOGY IT CAN BE SAID THAT WHERE THERE IS NO INCOME BY WAY OF BUSINESS INCOME, SECTI ON 44BBA CANNOT BRING TO CHARGE 5 PER CENT OF THE SPECIFIED SUM AS PROFIT S AND GAINS OF THE BUSINESS OF OPERATION OF AIRCRAFTS. SECTION 44BBA CANNOT BE PRESSED INTO SERVICE IN SUCH CASES. WE, THEREFORE, HOLD THAT THE INCOME COU LD NOT HAVE BEEN ARTIFICIALLY COMPUTED BY INVOKING PROVISIONS OF SEC TION 44BBA PARTICULARLY WHEN THE ASSESSEE HAS SHOWN HIS BOOK RESULTS SHOWIN G LOSS. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO COMPUTE INCOME ON T HE BASIS OF BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE. 5.31 IT IS VEHEMENTLY CONTENDED THAT LD. CIT(A) HAS CONSIDERED ALL THE ISSUES IN DETAILS, AND JUSTIFIABLY REVERSED THE ACT ION OF LD. AO IN REJECTING THE BOOKS OF ACCOUNT AND ARBITRARILY APPLYING PRESUMPTI VE PROVISION FOR CALCULATING INCOME SEC. 44BBB. THERE BEING NO INFIR MITY IN THE ORDER OF LD. CIT(A) HIS ORDER DESERVES TO BE UPHELD. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE PROCEED TO DECIDE THE ISSUE S AS UNDER: ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 33 I. SECTION 44BBB(2) WHICH NEITHER DISCOUNTS A REGULAR ASSESSMENT NOR DENIES THE RIGHT OF ASSESSEE TO BE ASSESSED BY WAY OF REGULAR PROVISIONS FROM SEC 28 TO 43A READ AS UNDER:- NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SECTION (1), AN ASSESSEE MAY CLAIM LOWER PROFITS AND GAINS THAN THE PROFITS AND GAINS SPECIFIED IN THAT SUB-SECTION, IF HE KEEPS AND MAINTAINS SUCH BO OKS OF ACCOUNT AND OTHER DOCUMENTS AS REQUIRED UNDER SUB-SECTION (2) O F SECTION 44AA AND GETS HIS ACCOUNTS AUDITED AND FURNISHES A REPORT OF SUCH AUDIT AS REQUIRED UNDER SECTION 44AB, AND THEREUPON THE ASSESSING OFF ICER SHALL PROCEED TO MAKE AN ASSESSMENT OF THE TOTAL INCOME OR LOSS OF T HE ASSESSEE UNDER SUB- SECTION (3) OF SECTION 143 AND DETERMINE THE SUM PA YABLE BY, OR REFUNDABLE TO, THE ASSESSEE A PLAIN PROVIDES AN OPTION TO AN ASSESSEE BEING A F OREIGN COMPANY ENGAGED IN THE BUSINESS OF CIVIL CONSTRUCTION SHALL BE ASSESSED UNDER REGULAR PROVISIONS OF THE ACT ON FULFILLMENT OF FOL LOWING CONDITIONS: (1) THE APPELLANT SHALL KEEP AND MAINTAIN SUCH BOOK S OF ACCOUNT AND OTHER DOCUMENTS AS REQUIRED UNDER SUB-SECTION(2 ) OF SECTION 44AA OF THE IT ACT. (2) THE APPELLANT SHALL GET HIS ACCOUNTS AUDITED AN D FURNISHES A REPORT OF SUCH AUDIT AS REQUIRED UNDER SECTION 44AB OF THE IT ACT. IT IS NOT DISPUTED THAT ASSESSEE HAS MAINTAINED PRO PER BOOKS OF ACCOUNT AND GOT THEM AUDITED AND RETURN WAS FILED A CCORDINGLY. THE FINANCIAL STATEMENTS AND AUDIT REPORT COMPLY WITH R ULES COMPANIES (AUDITOR'S REPORT), 2003 IN TERMS OF SECTION 227(4A ) OF THE COMPANIES ACT. BESIDES NO OTHER SPECIFIC BOOKS OF ACCOUNTS AR E PRESCRIBED U/S 44AA. THUS ASSESSEES BOOKS, AUDIT, FINANCIAL STATE MENTS, BALANCE SHEET, P&L A/C ETC. ARE FULLY COMPLIANT TO RELEVANT PROVISIONS OF INCOME TAX AND COMPANIES ACTS. II. LD. AO HELD THAT AS7 IS NOT APPLICABLE TO THE ASSES SEE COMPANY IGNORING THE VITAL LEGAL PROPOSITIONS OF SECTION 59 4 OF THE COMPANIES ACT, 1956 LAYING DOWN A STATUTORY MANDATE THAT A CO MPANY, WHICH IS ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 34 INCORPORATED OUTSIDE INDIA AND HAS ESTABLISHED PLAC E OF A BUSINESS IN INDIA, IS REQUIRED TO PREPARE ITS BALANCE SHEET AND PROFIT & LOSS ACCOUNT AS PER THE VARIOUS PROVISIONS OF THE COMPAN IES ACT, AS IF IT IS A INDIAN COMPANY WITH THE MEANING OF THE COMPANIES ACT. CONSEQUENTLY, LD. CIT(A) RIGHTLY HELD THAT THE ACCO UNTING STANDARD AS-7 IS APPLICABLE TO IT. WE FIND NO INFIRMITY IN T HIS ASPECT OF HIS ORDER. FOLLOWING AS 7, ASSESSEE HAS RECOGNIZED REVE NUE AND COST FOLLOWING THE PERCENTAGE COMPLETION METHOD ON THE B ASIS OF PROPORTION OF CONTRACT COSTS INCURRED FOR WORK PERF ORMED TILL THE REPORTING DATE TO THE ESTIMATED TOTAL CONTRACT COST S. UNDISPUTEDLY IN THE NOTES TO THE FINANCIAL STATEMENT, THE METHOD RE COGNIZED TO ACCOUNT FOR REVENUE AND EXPENDITURE HAS BEEN SPECIFIED BY A SSESSEE IN SCHEDULE - 11 OF SIGNIFICANT ACCOUNTING POLICIES AN D NOTES TO THE ACCOUNTS AS UNDER: NOTE(S) 'SHANDONG TIEJUN ELECTRIC POWER ENG CO. LTD IS FOLL OWING THE 'PERCENTAGE OF COMPLETION METHOD' OF ACCOUNTING FOR THE PROJECT AS PER ACCOUNTING STANDARD 7(REVISED) CONSTRUCTION CON TRACTS. ACCORDINGLY PROJECT REVENUE IS RECOGNIZED AS UNDER: THE COMPANY HAS FIXED PRICE CONSTRUCTION CONTRACT W ITH ADANI POWER LIMITED AND JHAJJAR POWER LIMITED. THE COMPANY STAR TED RECOGNIZING REVENUE IN THE FINANCIAL YEAR 2007-2008 AS THE OUTC OME OF THE CONTRACT CAN BE ESTIMATED RELIABLY. CONTRACT REVENUE AND EXP ENSES ARE RECOGNIZED AS REVENUE AND EXPENSES ARE RECOGNIZED A S REVENUE AND EXPENSES UP TO THE STAGE OF COMPLETION AS ON 31.03. 2009. THE MANAGEMENT HAS ESTIMATED COST FOR THE ENTIRE CO NTRACT AND WORKED OUT PERCENTAGE OF COMPLETION FOR EACH YEAR O N THE BASIS OF COST INCURRED AS PER AUDITED ACCOUNTS. ACCORDI NGLY, REVENUE IS RECOGNIZED ON THE BASIS OF CORRESPONDING PE RCENTAGE TO COST ESTIMATES GIVEN BY THE MANAGEMENT FOR THE ENTIRE PR OJECT PERIOD TILL DATE I.E. 31.03.2009 AS PER AUDITED ACCOUNTS. DE TERMINATION OF REVENUES UNDER THE PERCENTAGE OF COMPLETION METHOD AND PROVISION FOR LOSS NECESSARILY INVOLVES MAKING ESTIMATES OF C OSTS TO BE INCURRED BY THE MANAGEMENT, WHICH IS BEING OF TECHNICAL NATU RE, HAVE BEEN RELIED UPON BY THE AUDITORS. THE DIFFERENCE BETWEEN BILLED REVENUE AND WORKING BELOW IS ACCOUNTED AS UNBILLED CONTRACT REVENUE DUE'. ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 35 III. ASSESSEE MUCH PRIOR, WHILE OBTAINING ORDER U/S 19 7 OF THE ACT, THE SUBMITTED THE DETAILS OF BUDGETED COST TO THE TAX O FFICE, WHICH ALSO STAND ACCEPTED BY THE DEPARTMENT. DURING THE COURSE ASSESSMENT ASSESSEE FURNISHED DETAILED BREAK-UP OF THE ESTIMAT ED PROFIT & LOSS ACCOUNT FOR ENTIRE PROJECT FOR FIVE FINANCIAL YEARS 2007-08 TO 2011-12, AUDITED FINANCIAL STATEMENTS FOR F.YS.2009-10 AND 2010-11 DEMONSTRATING THAT IT HAS ACTUALLY INCURRED THE COS T NEARLY AS ESTIMATED. IV. LD. AO THEN TOOK ANOTHER LINE OF ACTION BY OBJECTIN G THAT ASSESSEE OUGHT TO HAVE FOLLOWED ANOTHER METHOD OF STAGE OF COMPLETION OF THE PROJECT I.E. (C) COMPLETION OF A PHYSICAL PROPORTI ON OF THE CONTRACT WORK. THE PAYMENTS OF CONTRACTS SHOULD BE RELEASED ON THE BASIS OF MILESTONES PRESCRIBED IN ANNEXURE 3. TILL THE REP ORTING DATE, THE APPELLANT HAS RAISED INVOICES OF RS. 130,86, 91 ,42 9/-, WHICH INDICATED PHYSICAL WORK OF THE CONTRACT WAS COMPLETED TO THAT EXTENT ONLY, THEREFORE, METHOD (C) I.E. COMPLETION A PHYSICAL PROPORTION OF THE CONTRACT WORK AS PRESCRIBED IN PARA 29 OF AS-7 WAS APPLICABLE. LD. AO HAS FAILED TO APPRECIATE THAT METHOD FOLLOWED BY ASSESSEE WAS CORRECT AND COULD NOT BE DISTURBED ON HIS PERCEPTIO N. BESIDES IT HAS NOT BE CONTROVERTED THAT AOS PROPOSITION WOULD HAVE LEAD TO LESSER REVENUE BEING RECOGNIZED DURING THE IMPUGNED YEAR. THUS EVEN THE REASON OF LOSS OF REVENUE IS NOT ASCRIBABLE TO ASSE SSEES METHOD OF ACCOUNTING. IN VIEW OF THESE FACTS AND CIRCUMSTANCE S WE SEE NO INCONSISTENCY IN THE ORDER OF LD. CIT(A) WHICH IS J USTIFIED AND WITHIN THE PARAMETERS OF LAW. V. NO WORTHWHILE DEFECT HAS BEEN POINTED OUT BY LD. AO QUA THE BOOKS OF ACCOUNTS, AUDIT AND P & L A/C. IT HAS BEEN DEMON STRATED THAT ESTIMATED COST AND PROFIT PERCENTAGE DECLARED FROM YEAR TO YEAR ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 36 NEARLY MATCH, CONSEQUENTLY WE SEE NO REASON TO SUSP ECT THAT THE FIGURES OF ESTIMATED COST WERE DISTORTED. THE PROJE CT HAS BEEN COMPLETED IN 2012 ITSELF AND IT IS NOT THE CASE THA T IT IS A LONG DRAWN PROJECT WHERE UNDUE DEFERMENT OF TAX WAS THE MOTIVE . THE AO'S REMARK THAT STAGE OF COMPLETION IS A BETTER METHOD IS NOT SUBSTANTIATED EITHER ON MERITS OR JUSTIFIABLE TAX R EVENUE GAIN. THE MILESTONE METHOD MAY BE VERY INAPPROPRIATE IF THE C ONTRACTOR AND THE CONTRACTEE AGREE FOR TERMS OF PAYMENT MUCH DIFFEREN T FROM THE ACTUAL STAGE OF WORK. IT BECOMES CONTINGENT ON MANY UNCERT AINTIES IF THE MILE STONE COVENANTS ARE NOT ADHERED TO BY CONTRACTOR. T HE CONTRACTOR MAY HAVE EXIGENCIES LIKE CAPITAL DEFICIENCY, REQUIREMEN T OF HEAVY MACHINERY, BARGAIN FOR UPFRONT HEAVY PAYMENTS AT IN ITIAL STAGES. VIEWING ALL THESE FACTORS RECOGNIZING REVENUE ON CO MPLETION OF STAGES ACCORDING TO PAYMENT TERMS/RAISING OF BILLS CANNOT BE THE BEST AND ONLY METHOD. THUS WE SEE NO WRONG IN THE METHOD ADO PTED BY THE APPELLANT AS OBSERVED BY LD. CIT(A) ALSO. VI. THE REJECTION OF BOOKS OF ACCOUNTS U/S 145(3) BY LD . AO WAS RIGHTLY HELD BY LD. CIT(A) TO BE NOT JUSTIFIED IN GIVEN FAC TS AND CIRCUMSTANCES. HONBLE GUJARAT HIGH COURT DECISION IN THE CASE OF CIT VS. ADVANCED CONSTRUCTION CO. (P) LTD REPORTED IN 275 ITR 30, HA S HELD THAT 'THE PROVISION, THEREFORE, SPECIFICALLY PROVIDES THAT TH E CHOICE OF METHOD OF ACCOUNTING LIES WITH THE ASSESSEE, THE ONLY CAVEAT BEING THAT IT HAS TO SHOW THAT THE CHOSEN METHOD HAS BEEN REGULARLY FOLL OWED. THE SECTION IS COUCHED IN MANDATORY TERMS AND THE DEPAR TMENT IS BOUND TO ACCEPT THE ASSESSEE'S CHOICE OF METHOD AND REGUL ARLY EMPLOYED, EXCEPT FOR THE SITUATION, WHEREIN THE ASSESSING OFF ICER IS PERMITTED TO INTERVENE, IN CASE IT IS FOUND THAT TRUE INCOME, PR OFITS AND GAINS CANNOT BE ARRIVED AT BY THE METHOD EMPLOYED BY THE ASSESSEE. IN THE PRESENT CASE, THE TRIBUNAL HAS CATEGORICALLY FOUND THAT 'THE ASSESSEE ITA NO.1707/AHD/2013 ACIT VS. SHANDONG TIEJUN ELECTRIC POWER ENGG CO LTD AY : 2009-10 37 HAS FOLLOWED THE STANDARD ACCOUNTING METHOD AS THIS BEING THE FIRST YEAR OF THE BUSINESS IT WAS THE SOLE CHOICE OF THE ASSESSEE TO ADOPT A PARTICULAR METHOD OF ACCOUNTING CONTEMPLATED UNDER SECT/ON 145 OF THE ACT'. IN VIEW OF FOREGOING, WE, THEREFORE, UPHOLD THE FIN DINGS OF LD. CIT(A) THAT THE ASSESSEE FULFILLED ALL CONDITIONS PRESCRIB ED U/S 44BBB(2) OF THE IT ACT AND ALSO HAS FOLLOWED ONE OF THE RECOGNIZED MET HODS PRESCRIBED FOR DETERMINATION OF STAGE OF COMPLETION OF CONTRACT AS PRESCRIBED IN PARA 29 OF THE ACCOUNTING STANDARD-7 'CONSTRUCTION CONTRACTS' AS RECOGNIZED BY THE ICAI AND THE CENTRAL GOVERNMENT. ASSESSEE HAS FOLLO WED CORRECT METHOD OF ACCOUNTING IN TERMS OF SECTION 44BBB(2) READ WITH S ECTION 145(1) & (2) OF THE IT ACT. CONSEQUENTLY WE HOLD THAT THE LD. AO'S ACTI ON OF REJECTING BOOKS OF ACCOUNTS IN TERMS OF SECTION 145(3) OF THE IT ACT A ND ASSESSING INCOME U/S 44BBB(1) OF THE IT ACT ON PRESUMPTIVE BASIS IS NOT JUSTIFIED, THE ORDER OF LD. CIT(A) IS UPHELD. OUR VIEW IS FORTIFIED BY DELHI IT AT JUDGMENT IN THE CASE OF ROYAL JORDANIAN AIRLINES (SUPRA) WHICH AFTER DWE LLING OVER ALL RELEVANT ASPECTS OF CHARGING AND MECHANICAL PROVISIONS, STAT UTORY MANDATE, AND JURISPRUDENCE OF REGULAR ASSESSMENT VIS-A-VIS PRESU MPTIVE ASSESSMENT AND CATENA OF JUDICIAL PRECEDENTS AS DETAILED IN THIS O RDER. 7. IN THE RESULT, REVENUES APPEAL IS DISMISSED. SD/- SD/- (AMARJIT SINGH) ACCOUNTANT MEMBER (R.P. TOLANI) JUDICIAL MEMBER AHMEDABAD; DATED 18/01/2017 *BIJU T., SR PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A) 5. , , / DR, ITAT, AHMEDABAD 6. / GUARD FILE . / BY ORDER, TRUE COPY / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD