…. M/S. Indian Metals & Ferro Alloys Ltd. Appellants And Another v. …. Joint Commissioner Of Income Tax, Respondent Bhubaneswar

IN THE HIGH COURT OF ORISSA AT CUTTACK I.T.A. Nos.4, 5 and 6 of 2005 …. M/s. Indian Metals & Ferro Alloys Ltd. Appellants and another -versus- …. Joint Commissioner of Income Tax, Respondent Bhubaneswar Appeared in this case: For Appellants :Mr. S. K. Jena, AdvocateFor Respondent :Mr. T. K. Satpathy, Senior Standing CounselCORAM: THE CHIEF JUSTICE JUSTICE A. K. MOHAPATRA JUDGMENT17.11.2021 Dr. S. Muralidhar, CJ. 1. All these appeals arise out of a common set of facts and considering similar questions of law and are accordingly disposed of by this common judgment. 2. I.T.A. No.4 of 2005 is an appeal under Section 260A of the Income Tax Act, 1961 (the Act) arising out of ITA No.60 (CTK) of 2001, disposed of by the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack (ITAT) on 25[th] August, 2004 for the Assessment Year (AY) 1987-88. I.T.A. No.5 of 2005 is an appeal arising out of the same impugned order of the ITAT pertaining to AY 1988-89 and I.T.A. No.6 of 2005 is also an appeal arising out of the same impugned order of the ITAT pertaining to AY 1989- 90. 3. Admit. The following question of law is framed for consideration: “Whether the Department was correct in rejecting the method of accounting adopted by the Appellant-Assessee for the AYs in question while the Assessee’s method of accounting for the immediate two succeeding AYs i.e. 1990-91 and 1991-92 was accepted?” 4. The background facts are that the Appellant-Assessee (earlier known as Indian Charge Chrome Ltd.) decided to establish a Charge Chrome Plant along with a Captive Power Plant, some parts of which were to be procured by import, or by intrastate or interstate acquisition. Some parts were to be fabricated and erected on site. 5. M/s. A. B. Electro Invest (the Contractor) entered into a turnkey contract with the Assessee on 28[th] September, 1984 for the performance of certain works and services by the Contractor for the construction of a coal fired steam power plant in Choudwar, Orissa. The Contractor was to be paid in Swedishkronaand Indian currency. The work had to be completed within 33 months. The effective date of the contract was agreed to be 16[th]July, 1985. 6. The Contractor with the approval of the Assessee and other statutory authorities engaged sub-contractors, who received payments directly from the Contractor from time to time as reflected in the accounts of the Contractor as debits and the accounts of the sub-contractor as receipts. The payments made to the Contractor were also reflected in the accounts of the Assessee. 7. The contract was executed across 5 AYs commencing from 1987-88 and concluded in AY 1991-92. For the AY 1986-87, no job was executed. The Contractor had no income and only advance of Rs.124.38 lakhs was paid by the Assessee. This amount was in any event were to be excluded from computation of income for the AY 1987-88. 8. The Assessee contended that the Contractor could not keep track of the supply, erection and profits because of the arrangements of payments by the Contractor either directly or through sub-contractors. To deduce profit, as per the accounting standard the Contractor had to follow either (a) completed contract method or (b) the percentage of completion method. 9. The Assessee adopted the “completed contract method” and the assessed the entire contract period of 5 years as one unit of assessment and apportioned them to 5 years. For 2 years i.e. 1987-88 and 1988-89, the accounting years ended on 30[th] September, from 1989-90 onwards, ended on 31[st] March and for AY 1989-90, the period from 1[st] October, 1987 to 31[st] March, 1989 i.e. 18 months. 8. The Assessee contended that the Contractor could not keep track of the supply, erection and profits because of the arrangements of payments by the Contractor either directly or through sub-contractors. To deduce profit, as per the accounting standard the Contractor had to follow either (a) completed contract method or (b) the percentage of completion method. 9. The Assessee adopted the “completed contract method” and the assessed the entire contract period of 5 years as one unit of assessment and apportioned them to 5 years. For 2 years i.e. 1987-88 and 1988-89, the accounting years ended on 30[th] September, from 1989-90 onwards, ended on 31[st] March and for AY 1989-90, the period from 1[st] October, 1987 to 31[st] March, 1989 i.e. 18 months. 10. In the assessment order dated 18[th] February, 1992 under Section 143(3) read with Section 251 of the Act for AYs 1987-88 to 1990-91 the AO proceeded on the basis that the 25% of the contract work had been carried out during the year ending 30[th]September, 1986 and that the entire contract work had been completed on 31[st] March, 1991. The Contractor had filed a return in which the profit on the entire contract was valued at Rs.8,00,542/-. Accepting that figure of profit, 25% was taken as profit for. AY 1987-88 at Rs.2,00,135/-. The taxable income was determined as Rs.3.03,740/-. 11. The Commissioner of Income Tax (CIT) passed an order dated 15[th] February, 1994 exercising jurisdiction under Section 263 of the Act and set aside the assessment for the aforementioned AYs i.e. 1987-88 to 1989-90 and restored them to the file of the AO. 12. For the second time, by an order dated 29[th] March, 1996, the AO was of the view that the percentage completion method would be the best way to estimate the profit. It was considered fair and reasonable to estimate the net profit at 10% of the gross receipts, which worked out to Rs.35,70,778/-. 13. The Assessee then went an appeal before the Commissioner of Income Tax (Appeals), Cuttack [CIT (A)]. By an order dated 21[st]February, 1997, the CIT (A) held that the AO had not examined the matter as required by him under the directions of the CIT under Section 263 of the Act. Accordingly, the AO’s assessment orders for the years 1987-88, 1988-89 and 1989-90 were set aside and remanded to the AO. 14. For the third time, the AO passed an assessment order on 22[nd]March, 1999. Again the net profit rate of 10% was applied and the taxable income was again worked out to Rs.35,70,777/-. 15. For the second time, appeals were filed by the Assessee before the CIT (A). By an order dated 1[st] November, 2000, the CITA confirmed the assessment order and dismissed the appeals. 16. Thereafter, the Assessee went before the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack (ITAT), which by the impugned order dated 25[th] August, 2004 dismissed the appeals. 17. The ITAT appears to have accepted the findings of the AO that the Assessee had been maintaining its books of accounts “in such a manner” that the “true profit cannot be deduced at all.” It was argued by the Assessee before the ITAT that the Assessee had been consistently maintaining the accounts by using a particular method of accounting, which could not be brushed aside. It was the submission of the Assessee that the completed contract method followed by the Assessee was required to be respected by the AO and the matter should be remanded to the AO. However, the ITAT was not inclined to do so since it would unnecessarily prolong the litigation particularly when the Assessee had failed to substantiate the expenditure incurred even after two rounds of assessment. It was held that the estimation of profit at 10% “quite legal and justified in view of the fact that generally in all other contract work, the profit percentage adopted is normally 12.5%.” 18. This Court has heard the submissions of Mr. S. K. Jena, learned counsel for the Appellant-Assessee and Mr. T. K. Satpathy, learned Senior Standing Counsel for the Revenue Department. 18. This Court has heard the submissions of Mr. S. K. Jena, learned counsel for the Appellant-Assessee and Mr. T. K. Satpathy, learned Senior Standing Counsel for the Revenue Department. 19. Mr. Jena pointed out that the Contract was spread over for 5 AYs while the Department had accepted the completed contract method adopted by the Assessee for AYs 1990-91 and 1991-92. It was only for the assessment years i.e. AYs 1987-88, 1988-89 and 1989-90 that the Assessee’s books of accounts were rejected and a profit was estimated at 10%. 20. Mr. Satapathy had no answer to the plea of the learned counsel for the Assessee that the plea of consistency in the approach to the acceptance of the Appellants-Assessee’s accounts required to be followed. If the Assessee’s accounts for AYs 1990-91 and 1991-92 had in fact been accepted by the Department, there is reason why the accounts for the earlier AYs ought to have been rejected particularly since the Contract in question is spread over all 5 years and this pertain to the profit arising from such Contract. 21. The submission of the Assessee as regards the principle of consistency finds support in the decision of the Supreme Court in Commissioner of Income Tax v. Excel Wear (2013) 358 ITR 295 (SC) where the legal position in this regard was explained as under: “29. In RadhasoamiSatsang Saomi Bagh v.Commissioner of Income Tax, [1992] 193 ITR 321 (SC) this Court did not think it appropriate to allow the reconsideration of an issue for a subsequent assessment year if the same “fundamental aspect” permeates in different assessment years. In arriving at this conclusion, this Court referred to an interesting passage from Hoystead v. Commissioner of Taxation, 1926 AC 155 (PC) wherein it was said: “Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken.” 30. Reference was also made to Parashuram Pottery Works Ltd. v. Income Tax Officer, [1977] 106 ITR 1 (SC) and then it was held: “We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. “On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter — and if there was no change it was in support of the assessee — we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income Tax in the earlier proceedings, a different and contradictory stand should have been taken.” “On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter — and if there was no change it was in support of the assessee — we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income Tax in the earlier proceedings, a different and contradictory stand should have been taken.” 31. It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers’ money in pursuing litigation for the sake of it.” 22. In the present case, with the Revenue having accepted the Assessee’s method of accounting for AYs 1990-91 and 1991-92, there is no reason for it to reject it for the earlier three AYs particularly considering that it is the same contract spread over the five AYs. 23. For the aforementioned reasons, the impugned order of the ITAT on the above issue is unsustainable in law and is hereby set aside. The corresponding orders of the CIT (A) and the AO on the same issue are set aside as well. 24. The question framed is answered in favour of the Assessee and against the Department by holding that the Department is not right in rejecting the accounting method followed by the Assessee for the AYs in question. 25. The appeals are accordingly allowed, but in the circumstances, with no order as to costs. (S. Muralidhar) Chief Justice (A.K. Mohapatra) Judge M. Panda