S.Subrahmanyan Construction Co Pvt Limited, CHENNAI V. Addl. CIT, CHENNAI

ITA 1886/CHNY/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0946 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 25-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T N BETGIRI
• Assessee Lawyers: T N SEETHARAMAN
• Keywords: Question of law
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NO. 1886/MDS/2012 (ASSESSMENT YEAR : 2007-08) M/S S. SUBRAHMANYAN CONSTRUCTION CO. PVT. LTD., C/O SHRI T.N. SEETHARAMAN, ADVOCATE, # 384 (OLD NO.196) LLOYDS RD., CHENNAI - 600 086. PAN : AAFCS 3911 A (APPELLANT) V. THE ADDITIONAL COMMISSIONER OF INCOME TAX, COMPANY RANGE VI, CHENNAI - 600 034. (RESPONDENT) APPELLANT BY : SHRI T.N. SEETHARAMAN, ADVOCATE RESPONDENT BY : SHRI T.N. BETGIRI, JCI T DATE OF HEARING : 22.01.2013 DATE OF PRONOUNCEMENT : 22.01.2013 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE, ITS GRIEVAN CE IS THAT CIT(APPEALS) UPHELD REJECTION OF COMPLETED PROJECT METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE AND SUBSTITUTED IT BY PERCENTAGE COMPLETION METHOD. I.T.A. NO. 1886/MDS/12 2 2. FACTS APROPOS ARE THAT ASSESSEE, ENGAGED IN THE BUSINESS OF CIVIL CONSTRUCTION, HAD FILED RETURN FOR IMPUGNED A SSESSMENT YEAR DECLARING AN INCOME OF ` 2,18,85,024/-. ASSESSEE WAS BUILDING FACTORIES FOR VARIOUS CLIENTS. SOME OF THE PROJECT S OF THE ASSESSEE WERE COMPLETED DURING THE RELEVANT PREVIOUS YEAR, W HEREAS, SOME OF THE PROJECTS WERE IN PROGRESS. ASSESSEE HAD FOLLOW ED COMPLETED PROJECT METHOD FOR ACCOUNTING LOSS ON EACH PROJECT. IN OTHER WORDS, IT DECLARED INCOME FROM A PROJECT WHEN THE PROJECT WAS COMPLETED. ASSESSING OFFICER WAS OF THE OPINION THAT BY FOLLOW ING SUCH METHOD, ASSESSEE IGNORED THE PROFITS ARISING OUT OF PROJECT S WHICH WERE IN AN INCOMPLETE STAGE. AS PER ASSESSING OFFICER, IT WAS REQUIRED TO COMPUTE INCOME FROM INCOMPLETE PROJECTS ALSO. ASSE SSEE WAS PUT ON NOTICE IN THIS REGARD. REPLY OF THE ASSESSEE WA S THAT FROM ASSESSMENT YEAR 1997-98, IT WAS FOLLOWING COMPLETED PROJECT METHOD AND THIS WAS ALL ALONG ACCEPTED BY THE DEPARTMENT. AS PER THE ASSESSEE, ASSESSMENTS FOR ASSESSMENT YEARS 1997-98 AND 1998-99 WERE COMPLETED UNDER SECTION 143(3) OF THE ACT. FO R ASSESSMENT YEARS 2003-04, 2004-05 AND 2005-06, ALSO THE METHOD FOLLOWED BY THE ASSESSEE WAS DISTURBED BY THE ASSESSING OFFICER AND, FOR ALL THESE THREE YEARS, THE MATTER WAS TAKEN UP BY THE A SSESSEE BEFORE I.T.A. NO. 1886/MDS/12 3 CIT(APPEALS). IT WAS HELD, IN ALL THESE THREE YEAR S, BY THE CIT(APPEALS) THAT METHOD CONSISTENTLY FOLLOWED BY T HE ASSESSEE COULD NOT BE DISTURBED. IN FURTHER APPEALS FILED B Y THE REVENUE BEFORE THE TRIBUNAL, IT DID NOT MEET WITH ANY SUCCE SS. IN SUCH CIRCUMSTANCES, AS PER THE ASSESSEE, FOR THE IMPUGNE D ASSESSMENT YEAR ALSO, THE CONSISTENT METHOD FOLLOWED BY IT COU LD NOT BE DISTURBED. HOWEVER, THE ASSESSING OFFICER WAS NOT IMPRESSED. ACCORDING TO HIM, ASSESSEE HAD NOT CONSIDERED PROFITS ARISING OU T OF INCOMPLETE PROJECTS. ACCOUNTS OF THE ASSESSEE IGNORED THE PRO JECT INCOMPLETE METHODS. COMPLETED CONTRACT METHOD FOLLOWED BY THE ASSESSEE WAS AGAINST SECTION 5 OF THE ACT, SINCE IT RESULTED POS TPONEMENT OF THE TAXING EVENT. RELIANCE WAS PLACED ON THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. N.M . ASSOCIATES (256 ITR 141). ASSESSING OFFICER CONSIDERED 3.09% OF TH E WORK-IN- PROGRESS AS PROFIT ARISING ON INCOMPLETE PROJECTS A ND MADE AN ADDITION OF ` 2,26,56,001/-. 3. IN ITS APPEAL BEFORE CIT(APPEALS), ARGUMENT OF T HE ASSESSEE WAS THAT METHOD OF ACCOUNTING FOLLOWED CONSISTENTLY COULD NOT BE DISTURBED. ASSESSEE ALSO POINTED OUT THAT THE METH OD OF COMPLETED I.T.A. NO. 1886/MDS/12 4 CONTRACT FOLLOWED BY IT WAS GIVEN APPROVAL BY THIS TRIBUNAL IN REVENUES APPEALS FOR ASSESSMENT YEARS 2005-06 AND 2006-07. 4. CIT(APPEALS) WAS, HOWEVER, NOT IMPRESSED BY THE CONTENTIONS OF ASSESSEE. ACCORDING TO HIM, INSTITUTE OF CHARTE RED ACCOUNTANTS OF INDIA (ICAI) HAD MADE PERCENTAGE COMPLETION METHOD MANDATORY FOR CONSTRUCTION CONTRACTS. CIT(APPEALS) POINTED OUT T HAT ACCOUNTING STANDARD (AS) 7 IN RELATION TO CONSTRUCTION CONTRAC TS, HAD TO BE APPLIED FOR ALL CONTRACTS FROM ACCOUNTING YEARS COM MENCING ON OR AFTER 1.4.2003. THERE WAS ONLY ONE METHOD PRESCRIBE D BY REVISED AS 7 WHICH WAS PERCENTAGE COMPLETION METHOD. THE SAID AS 7 WAS NOTIFIED IN OFFICIAL GAZETTE WITH EFFECT FROM 7.12. 2006. AS RELEVANT ASSESSMENT YEAR WAS 2007-08, AS PER THE LD. CIT(APP EALS), THE REVISED AS 7 APPLIED SQUARELY TO THE ASSESSEE. ACC ORDING TO LD. CIT(APPEALS), ACCOUNTING STANDARDS PRESCRIBED BY CE NTRAL GOVERNMENT WERE MANDATORY. FURTHER, ACCORDING TO H IM, DECISION OF TRIBUNAL IN ASSESSEE'S OWN CASE FOR EARLIER YEARS W AS NOT RELEVANT SINCE REVISED AS 7 WAS NOT MANDATORY FOR SUCH YEARS . IN THIS VIEW OF THE MATTER, HE CONFIRMED THE ADDITION MADE BY THE A SSESSING OFFICER. 5. NOW BEFORE US, LEARNED A.R., STRONGLY ASSAILING THE ORDERS OF AUTHORITIES BELOW, SUBMITTED THAT ACCOUNTING STANDA RDS 1 TO 7 AND 9 I.T.A. NO. 1886/MDS/12 5 TO 29 RECOMMENDED BY ICAI WERE MADE MANDATORY FOR C OMPANIES INCORPORATED UNDER COMPANIES ACT, 1956 BY VIRTUE OF NOTIFICATION DATED 7 TH DECEMBER, 2006 (PAPER-BOOK PAGES 24 TO 25). ACCO RDING TO HIM, IT WAS CLEARLY STATED THAT THE SAID ACCOUNT ING STANDARDS WOULD COME INTO EFFECT IN RESPECT OF ACCOUNTING PERIODS C OMMENCING ON OR AFTER PUBLICATION OF THESE ACCOUNTING STANDARDS. T HE NOTIFICATION HAVING BEEN PUBLISHED ON 7 TH DECEMBER, 2006, WOULD NOT APPLY TO A PREVIOUS YEAR ENDING 31.3.2007, SUCH PREVIOUS YEAR HAVING COMMENCED ON 1 ST APRIL, 2006, WHICH WAS ANTERIOR TO THE DATE OF NOTIFICATION. ACCORDING TO HIM, LOWER AUTHORITIES HAD NOT FOLLOWED THE DECISION OF THE TRIBUNAL IN ASSESSEE'S OWN CASE FOR EARLIER YEARS. 6. PER CONTRA, LEARNED D.R., STRONGLY SUPPORTING TH E ORDER OF CIT(APPEALS), SUBMITTED THAT THE REVISED AS 7 PRESC RIBED ONLY ONE METHOD WHICH WAS PERCENTAGE COMPLETION METHOD. ASS ESSEE WAS TRYING TO DEFLATE ITS PROFIT BY EXCLUDING THE PROFI T ON WORK-IN-PROGRESS IN COMPUTING ITS INCOME. 7. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THERE IS NO DISPUTE THAT ASSESSEE WAS FOLLOWING COM PLETED CONTRACT METHOD FOR ACCOUNTING ITS INCOME FROM CONTRACT BUSI NESS CONSISTENTLY UPTO AND INCLUDING THE IMPUGNED ASSESSMENT YEAR. T HE ISSUE I.T.A. NO. 1886/MDS/12 6 WHETHER ASSESSING OFFICER COULD SUBSTITUTE SUCH MET HOD WITH PERCENTAGE COMPLETION METHOD HAD COME UP BEFORE THE HON'BLE JURISDICTIONAL HIGH COURT IN ASSESSEE'S OWN CASE FO R ASSESSMENT YEAR 2003-04. IT WAS HELD BY THEIR LORDSHIPS IN TC(A) N O.165 OF 2010 DATED 22.2.2010 (PAPER-BOOK PAGES 17 TO 19) AS UNDE R:- THIS APPEAL IS AT THE INSTANCE OF THE REVENUE. THE RESPONDENT- COMPANY IS ENGAGED IN THE CONTRACT BUSINESS OF CIVI L CONSTRUCTION. FOR THE ASSESSMENT YEAR 2003-2004, THE ASSESSEE FILED I TS RETURN OF INCOME AND THE ASSESSMENT WAS COMPLETED UNDER SECTI ON 143(3) OF THE INCOME TAX ACT. WHILE COMPLETING THE ASSESSMENT, TH E ASSESSING OFFICER ADOPTED THE INCOMPLETE PROJECT METHOD OF AC COUNTING AND THEREBY ESTIMATED AN ADDITIONAL INCOME WITH REGARD TO THE ASSESSEE'S INCOMPLETE PROJECT SHOWN AS WORK-IN-PROGRESS. THAT ORDER WAS QUESTIONED BY THE ASSESSEE BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS) AND THE SAME WAS ALLOWED. QUESTIONING TH E SAME, THE REVENUE PREFERRED AN APPEAL BEFORE THE TRIBUNAL, WHICH WAS REJECTED. HENCE THE REVENUE HAS FILED THE PRESENT TAX CASE APPEAL R AISING THE FOLLOWING SUBSTANTIAL QUESTION OF LAW:- 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE INCOME TAX APPELLATE TRIBUNAL WAS RIGHT IN HOLDING THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN COMPUTING THE PROFITS FROM THE ASSESSEE'S BUSINESS OF CONSTRUCTION CONTRACTS INCLUDING THE PR OFITS ACCRUED ON THE INCOMPLETE PROJECTS?' 2. WE HAVE HEARD MR.K.SUBRAMANIAM, LEARNED STANDI NG COUNSEL FOR THE REVENUE. 3. BOTH THE TRIBUNAL AS WELL AS THE COMMISSIONER OF INCOME TAX (APPEALS) HAVE CONCURRENTLY HELD THAT THE REVENUE H AD NOT DISPUTED THE FACT THAT THE ASSESSEE HAD BEEN FOLLOWING THE COMPL ETED CONTRACT METHOD OF ACCOUNTING SINCE THE YEAR 1996-97 AND HAD BEEN FILING THE RETURNS OF INCOME ACCORDING TO THE SAID METHOD OF A CCOUNTING WHICH WERE BEING ACCEPTED BY THE REVENUE TILL THE ASSESSM ENT YEAR IN QUESTION. IN FACT THE TRIBUNAL ALSO FOUND THAT THE REVENUE HAD NOT POINTED OUT ANY DEFECT OR INCONSISTENCY IN THE ACCO UNTING METHOD I.T.A. NO. 1886/MDS/12 7 ADOPTED BY THE ASSESSEE. THE ASSESSEE HAS ALSO SHO WN THE INCOMPLETE PROJECT IN THE FORM OF WORK-IN-PROGRESS IN THE BOOK S OF ACCOUNTS UPON WHICH THE ASSESSING OFFICER ESTIMATED THE INCOME AT THE RATE OF 10% AND ADDED TO THE INCOME OF THE ASSESSEE AT THE TIME OF FRAMING THE ASSESSMENT BY ADOPTING THE METHOD OF INCOMPLETE PRO JECT. 4. IT IS BY NOW WELL SETTLED THAT THE ASSESSEE IS FREE TO FOLLOW DIFFERENT METHOD OF ACCOUNTING FOR INCOME FROM DIFF ERENT SOURCES AND THAT THE TAXING AUTHORITIES CANNOT COMPEL THE ASSES SEE TO ADOPT THE MERCANTILE SYSTEM OF ACCOUNTING, AS HAS BEEN HELD B Y THE SUPREME COURT IN CIT V. MCMILLAN & CO., (1958) 33 ITR 182. IF THE METHOD ADOPTED BY THE ASSESSEE IS CONSISTENT AND REGULAR, THE REVENUE SHOULD NOT HAVE INSISTED THE ASSESSEE TO ADOPT A PARTICULA R METHOD OF ACCOUNTING OR VALUATION. 5. MR.K.SUBRAMANIAM, LEARNED STANDING COUNSEL FOR THE REVENUE, HOWEVER, WOULD SUBMIT THAT UNDER SIMILAR CIRCUMSTAN CES, THIS COURT HAD TAKEN A STAND IN SUPPORT OF THE REVENUE IN THE DECI SION IN CIT V. N.M.ASSOCIATES, (2002) 256 ITR 141. IN OUR CONSIDER ED VIEW, THAT JUDGMENT CAN BE DISTINGUISHED ON FACTS. THE ISSUE WAS ANSWERED IN FAVOUR OF THE REVENUE IN THAT JUDGMENT TAKING INTO CONSIDERATION OF THE FACT THAT THE ASSESSEE IN THAT CASE HAD NO PROPER C ONTRACT ACCOUNTS WHATSOEVER AND ONLY IN THAT CONTEXT, THIS COURT HAD REJECTED THE CONTENTION OF THE ASSESSEE FOR ADOPTING THE COMPLET ED CONTRACT METHOD OF ACCOUNTING. HOWEVER, ON THE FACTS AND CI RCUMSTANCES OF THIS CASE, THE TRIBUNAL AND THE COMMISSIONER OF INCOME T AX (APPEALS) HAVE CONCURRENTLY HELD THAT FROM THE INCEPTION THE ASSES SEE HAD BEEN FOLLOWING THE COMPLETED CONTRACT METHOD OF ACCOUNTI NG AND THE RETURNS WERE FILED ONLY ADOPTING THE SAID METHOD OF ACCOUNT ING TILL THE ASSESSMENT YEAR IN QUESTION AND THERE WAS NO DEFECT OR INCONSISTENCY IN THE SAID ACCOUNTING METHOD ADOPTED BY THE ASSESSEE. AS POINTED OUT BY THE REVENUE, THE ASSESSEE HAS ALSO SHOWN THE INCOMP LETE PROJECT IN THE FORM OF WORK-IN-PROGRESS IN THE BOOKS OF ACCOUNTS U PON WHICH THE ASSESSING OFFICER ESTIMATED THE INCOME AT THE RATE OF 10%. IN THAT VIEW OF THE MATTER, WE ARE NOT INCLINED TO ACCEPT T HE SUBMISSION OF THE LEARNED STANDING COUNSEL FOR THE REVENUE. IN VIEW OF THE JUDGMENT OF THE SUPREME COURT IN MCMILAN & CO., CASE (SUPRA), T HE ASSESSEE HAS ADOPTED THE COMPLETED CONTRACT METHOD OF ACCOUNTING CONSISTENTLY AND THERE IS NO DEFECT IN THE SAID METHOD AND IN FACT I N THE BUSINESS OF CIVIL I.T.A. NO. 1886/MDS/12 8 CONSTRUCTION WHEREIN THE PROFIT CANNOT BE ACCURATEL Y ASCERTAINED BY FOLLOWING THE INCOMPLETE ACCOUNTING METHOD, WE ARE NOT INCLINED TO INTERFERE WITH THE ORDER OF THE TRIBUNAL. ACCORDIN GLY, THE TAX CASE APPEAL IS DISMISSED. 8. IT IS IMPORTANT TO NOTE THAT HON'BLE JURISDICTIO NAL HIGH COURT HAD ACCEPTED THE CLAIM OF THE ASSESSEE THAT ITS CASE WA S DISTINGUISHABLE FROM THAT OF N.M. ASSOCIATES (SUPRA) ON WHICH RELIA NCE WAS PLACED BY THE ASSESSING OFFICER. THIS LEAVES WITH US ONLY ON E QUESTION I.E. WHETHER REVISED AS 7, WHICH WAS NOTIFIED ON 7.12.20 06, WILL MAKE THE ABOVE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT (SUPRA) AND EARLIER DECISIONS OF THIS TRIBUNAL IN ASSESSEE'S OW N CASE, REDUNDANT. THERE IS NO DISPUTE THAT THE GAZETTE PUBLICATION MA KING ACCOUNTING STANDARDS 1 TO 7 AND 9 TO 29 OF ICAI MANDATORY WAS EFFECTIVE FROM 7 TH DECEMBER, 2006. RELEVANT CLAUSE (3) OF THE ABOVE N OTIFICATION IS REPRODUCED HEREUNDER:- 3. ACCOUNTING STANDARDS. - (1) THE CENTRAL GOVERN MENT HEREBY PRESCRIBES ACCOUNTING STANDARDS 1 TO 7 AND 9 TO 29 AS RECOMMENDED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, WHICH ARE SPECIFIED IN THE ANNEXURE TO THESE RULES. (2) THE ACCOUNTING STANDARDS SHALL COME INTO EFFECT IN RESPECT OF ACCOUNTING PERIODS COMMENCING ON OR AFTER THE PUBLI CATION OF THESE ACCOUNTING STANDARDS. 9. PUBLICATION OF THE ACCOUNTING STANDARDS CAN ONLY MEAN THE PUBLICATION THEREOF AS ANNEXURE TO THE NOTIFICATION DATED 7 TH I.T.A. NO. 1886/MDS/12 9 DECEMBER, 2006. THUS, SUCH ACCOUNTING STANDARDS WE RE TO BE MANDATORILY FOLLOWED FOR ACCOUNTING PERIODS COMMENC ING ON OR AFTER PUBLICATION OF ACCOUNTING STANDARDS. SUCH PUBLICAT ION AS MENTIONED BY US HAS TO BE CONSTRUED AS DATE OF NOTIFICATION, WHICH IN THE INSTANT CASE IS 7 TH DECEMBER, 2006. RELEVANT PREVIOUS YEAR FOR IMPUGN ED ASSESSMENT YEAR WAS 1.4.2006 TO 31.3.2007. THUS, T HE ACCOUNTING PERIOD HAD COMMENCED PRIOR TO 7 TH DECEMBER, 2006. OBVIOUSLY, THE MENTIONED NOTIFICATION WOULD NOT APPLY. IN OTHER W ORDS, FOR RELEVANT PREVIOUS YEAR, ASSESSEE WAS NOT MANDATORILY REQUIRE D TO FOLLOW PERCENTAGE COMPLETION METHOD. IT HAD THE FREEDOM T O FOLLOW COMPLETED CONTRACT METHOD. SUCH METHOD WHICH WAS C ONSISTENTLY FOLLOWED BY THE ASSESSEE OUGHT NOT HAVE BEEN DISTUR BED BY THE ASSESSING OFFICER. MAY BE, FOR PREVIOUS YEAR COMME NCING AFTER 7 TH DECEMBER, 2006, AS 7 COULD BE MANDATORY AND ASSESSE E HAS TO FOLLOW PERCENTAGE COMPLETION METHOD, BUT NOT BEFORE THAT. IN OUR OPINION, LOWER AUTHORITIES FELL IN ERROR WHEN THEY SUBSTITUTED THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE WITH PERCENTAGE COMPLETION METHOD. THESE ORDERS ARE SET ASIDE. 10. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED. I.T.A. NO. 1886/MDS/12 10 THE ORDER WAS PRONOUNCED IN THE COURT ON TUESDAY, T HE 22 ND OF JANUARY, 2013, AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 22 ND JANUARY, 2013. KRI. COPY TO: APPELLANT/RESPONDENT/CIT(A)-V, CHENNAI-34 / CIT, CHENNAI-III, CHENNAI/D.R./GUARD FILE