M/S.durr India Private Limited v. The Assistant Commissioner Of Income Tax (Osd) Corporate Range

M/s.Durr India Private Limited,Represented by its DirectorMr.Michael Berger,No.471, 2[nd] Floor, Prestige Polygon,Anna Salai, Nandanam,Chennai – 600 035.... Petitioner in both W.Ps.Vs. 1.The Assistant Commissioner of Income Tax (OSD) Corporate Range 1, 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034. 2.The Principal Commissioner of Income Tax 1, 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034. ... Respondents in both W.Ps. Writ Petitions filed under Article 226 of theConstitution of India, to issue a Writ of Certiorari, tocall for the records on the files of the First Respondentand quash the impugned order in PAN: in orderNo. ACIT (OSD) 2018-2019 both dated 26.11.2018 along withnotice in PAN: in Notice NumbersITBA/AST/S/148/2017-18/1009498923(1)andITBA/AST/S/148/2017-18/ 1009424843 (1) dated 28.03.2018and 26.03.2018 respectively issued under Section 148 ofthe Income Tax Act for the respective assessment years2011-12 and 2013-2014. For Petitioner: Mr.N.V.Balaji in both W.Ps.For Respondents: Mr.Prabhu Mukunth Arunkumar for M/s.Hema Muralikrishnan Senior Standing Counsel in both W.Ps. https://hcservices.ecourts.gov.in/hcservices/ C O M M O N O R D E R By this common order, both the Writ Petitions arebeing disposed of. 2. In W.P.No.32797 of 2018, the petitioner haschallenged the impugned notice dated 28.03.2018 issuedunder Section 148 of the Income Tax Act, 1961 and theconsequential communication dated 26.11.2018 of the firstrespondent overruling the objection of the petitioner forreopening the assessment for the Assessment Year 2011-12. 3. In W.P.No.32801 of 2018, the petitioner haschallenged impugned notice dated 26.03.2018 issued underSection 148 of the Income Tax Act, 1961 and theconsequential communication dated 26.11.2018 of the firstrespondent overruling the objection of the petitioner forreopening the assessment for the aforesaid AssessmentYear 2013-14. 4. The reasons furnished by the first respondent forreopening of the assessment for the respective AssessmentYears are identical. It has been stated that thepetitioner follows a mercantile system of accounting andtherefore the income accrues the moment bills are raisedby the petitioner. 5. Since the petitioner was reducing a part of thebill amount from its Profit and Loss Account as excessbilling, it is submitted that such adjustment on theliability side of the balance sheet will not affect theincome already accrued as the accounting entries do notchange or alter the income which had accrued to it. 6. Under these circumstances, the petitioner wascalled upon to show cause why a sum of Rs.7,74,20,000/-for the Assessment Year 2011-12 and Rs.58,45,26,000/- forthe Assessment Year 2013-14 shown as billing in excess ofrevenue under the current liabilities to the total incomeshould not be added to the income. 7. It is the case of the petitioner that it wasadopting and arriving at the correct income for thepurpose of payment of income tax by adopting percentagemethod of completion work irrespective of the amountbilled to the client or the amount received by thepetitioner. 8. The learned counsel for the petitioner submittedthat the Institute of Chartered Accountant of India hadissued Accounting Standard A.S-7 as early as 1983 whichcame to be revised in 2002. It is submitted that as perthe aforesaid Accounting Standard, a company engaged inconstruction contract is required to recognise incomebased on the reliable estimation, contract revenue andhttps://hcservices.ecourts.gov.in/hcservices/contract cost associated with the construction contract with reference to the stage of completion of contractactivity at the reporting date. 8. The learned counsel for the petitioner submittedthat the Institute of Chartered Accountant of India hadissued Accounting Standard A.S-7 as early as 1983 whichcame to be revised in 2002. It is submitted that as perthe aforesaid Accounting Standard, a company engaged inconstruction contract is required to recognise incomebased on the reliable estimation, contract revenue andhttps://hcservices.ecourts.gov.in/hcservices/contract cost associated with the construction contract with reference to the stage of completion of contractactivity at the reporting date. 9. The learned counsel for the petitioner submittedthat under Section 5 and Section 145 of the Income TaxAct, 1961, both accrual/mercantile and the cash receiptmethod are recognised. The petitioner has beenconsistently following accrual method of accountingalbeit percentage of work completed. 10. The learned counsel for the petitioner furthersubmitted that the method followed by the petitioner hasnow been statutorily recognised by the Income TaxDepartment vide S.O.3079 (E) issued under Section 145(2)of the Income Tax Act, 1961 for the Assessment Year 2017-18 onwards. 11. The learned counsel for the petitioner furthersubmits that a similar dispute for the Assessment Year2009-10 is also pending before this Court in W.P.No.41845of 2016. At the same time, the above method of accountingadopted by the petitioner for the Assessment Year 2010-11, Assessment Year 2012-13 and Assessment Year 2014-15has been accepted by the Income Tax Department. Hetherefore submits that once there is a particular methodof accounting is being followed, there is nojustification for reopening the assessments. 12. The learned counsel for the petitioner furthersubmits that the respondent has invoked Section 148 ofthe Income Tax Act 1961 for the Assessment Year 2011-2012just three days prior to expiry of limitation under theproviso to Section 147 of the Income Tax Act, 1961 andfor the Assessment Year 2013-2014 two days prior to theexpiry of normal period of limitation under proviso toSection 147 of the Income Tax Act, 1961. He submits thatthe entire exercise was arbitrary and smacks of revenuebias. 13. The learned counsel for the petitioner furthersubmits that prior to 29.09.2016, under Section 145(2) ofthe Income Tax Act, 1961, Accounting Standards was inforce from 1996, as per which, if the fundamentalaccounting assumption relating to Going Concern,Consistency and Accrual are followed in financialstatements, specific disclosure in respect of suchassumptions are not required. Only when fundamentalaccounting assumption is not followed, such fact shall bedisclosed. 14. He further submitted that as per the abovenotification, accrual refers to the assumption thatrevenue and cost are accrued, that is, recognised as theyare earned or incurred (and not as money is received orpaid) and recorded in the financial statements of thehttps://hcservices.ecourts.gov.in/hcservices/period to which they relate. 15. He further submitted that as per AS-7 of theInstitute of Chartered Accountants of India revised in2002, if the outcome of the construction contract can beestimated reliably, contract revenue and contract costassociated with construction contract should berecognised as revenue and expenses respectively byreference to the stage of completion of the contractactivity at the reporting date. 16. The learned counsel for the petitioner reliedupon the following decisions of the courts:- 15. He further submitted that as per AS-7 of theInstitute of Chartered Accountants of India revised in2002, if the outcome of the construction contract can beestimated reliably, contract revenue and contract costassociated with construction contract should berecognised as revenue and expenses respectively byreference to the stage of completion of the contractactivity at the reporting date. 16. The learned counsel for the petitioner reliedupon the following decisions of the courts:- i. Commissioner of Income-tax, Delhi Vs.Woodward Governor India (P.) Ltd., [2009]312 ITR 254 (SC) : [2009] 179 Taxman 326(SC).ii.Commissioner of Income-tax Vs. BilahariInvestment (P.) Ltd., [2008] 299 ITR 1 (SC): [2008] 168 Taxman 95 (SC).iii.MKB (Asia) (P.) Ltd. Vs. Commissioner ofIncome-tax, [2007] 294 ITR 655 (Gauhati) :[2008] 167 Taxman 256 (Gauhati).iv.Commissioner of Income-tax Vs. SyndicateBank, [2003] 261 ITR 528 (Karnataka) :[2003] 127 TAXMAN 287 (KAR.).v. Commissioner of Income-tax Vs. MargadarsiChi Funds (P.) Ltd., [1985] 155 ITR 442 :[1984] 19 Taxman 73 (Andhra Pradesh). 17. The learned counsel for the petitioner furthersubmitted that the Hon’ble Supreme Court has frowned uponreopening of the assessment based on change of opinionand in absence of any failure to truly and fully disclosematerial that were required for assessment. Invocation ofSection 148 and the proviso to Section 147 cannot bejustified. In this connection, the learned counsel forthe petitioner, relied upon the following decisions:- i. Commissioner of Income-tax, Delhi Vs.Kelvinator of India Ltd., [2010] 187 Taxman312 (SC).ii.Income Tax Officer, Ward No.16(2) Vs.TechSpan India (P.) Ltd., [2018] 404 ITR 10(SC) : [2018] 92 taxmann.com 361 (SC).iii.TANMAC India Vs. Deputy Commissioner ofIncome-tax, Circle I, Pondicherry, [2017]78 taxmann.com 155 (Madras).iv.Commissioner of Income-tax, Chennai Vs.Schwing Stetter India (P.) Ltd., [2015] 378ITR 380 (Madras) : [2015] 61 taxmann.com 19(Madras).v. M/s.S.P.Mani and Mohan Diary Vs. Thehttps://hcservices.ecourts.gov.in/hcservices/Assistant Commissioner of Income tax, order dated 26.09.2019, passed by this Court inW.P.No.3648 of 2018.vi.M/s.Asianet Star Communications PrivateLimited Vs. Assistant Commissioner ofIncome Tax, order dated 16.04.2019, passedby this Court in W.P.No.25328 of 2018 andbatch. 18. These decisions were cited to state that onceaccounts were maintained in the course of business, theyare to be taken as correct unless there are strong andsufficient reasons to indicate that they are unreliable.The learned counsel for the petitioner further submittedthat in absence of any finding questioning thecorrectness or completeness of the accounts of theassessee, the accounts cannot be reopened. 19. He has further submitted that the respondentshave not demonstrated any distortion in the accountsmaintained by the petitioner for the purpose ofcomputation of income. He submitted that even in thecontext of chit fund, the Hon’ble Supreme Court hasrecognised in Bilahari Investments Private Limited casereferred to supra the revenue method of accounting in thecase of chit fund business. 20. He submitted that there the Hon’ble SupremeCourthascategoricallyheldthatrecognition/identification of income under the Income TaxAct, 1961 is attainable by several methods of accounting.It could be attained by one or more method. Completedcontract method is one of such methods and similarly,percentage of completion method is another method. 19. He has further submitted that the respondentshave not demonstrated any distortion in the accountsmaintained by the petitioner for the purpose ofcomputation of income. He submitted that even in thecontext of chit fund, the Hon’ble Supreme Court hasrecognised in Bilahari Investments Private Limited casereferred to supra the revenue method of accounting in thecase of chit fund business. 20. He submitted that there the Hon’ble SupremeCourthascategoricallyheldthatrecognition/identification of income under the Income TaxAct, 1961 is attainable by several methods of accounting.It could be attained by one or more method. Completedcontract method is one of such methods and similarly,percentage of completion method is another method. 21. He therefore prays for quashing of the impugnednotices issued under section 148 of the Income Tax Act,1961 for the respective Assessment Years and therespective communications overruling the objection of thepetitioner for reopening of the completed assessment forthe contentious Assessment Years.22. Defending the impugned order, the learnedcounsel for the respondents submitted that the petitionerhas not filed any documents to substantiate thepercentage of completion of the work at the time ofrespective assessments and therefore the respondents werejustified in reopening the respective assessments. 23. He submitted that though in the audited balancesheet the petitioner had stated that it recognised therevenue from projects sales under the percentage ofcompletion method, the petitioner had not filed anydocuments before the original Authority to substantiatethe extent of percentage of completed work at the time ofrespective assessments and therefore the Department washttps://hcservices.ecourts.gov.in/hcservices/justified in reopening the assessment. 24. I have considered the arguments advanced by thelearned counsel for the petitioner and the respondent. Ihave also considered the decisions cited by the learnedcounsel for the petitioner. 25. Facts are not in dispute. The petitioner isengaged in supply and installation of paint booth forautomobile companies. The petitioner has adoptedmercantile method of accounting which is one of therecognized method for the purpose of recognition ofincome under the Income Tax Act, 1961. 26. The law on the subject is also clear. Everyassessee is entitled to arrange its affair and follow themethod of accounting which the department has earlieraccepted. According to the petitioner, the method adoptedby the petitioner has been accepted for the AssessmentYears 2010-11, 2012-13, 2014-15 and thereafter. 27. As per the decision of the Supreme Court, it isonly in those cases where the Department records afinding that the method adopted by the assessee resultsin distortion of profits, the Department can insist onsubstitution of the existing method. In this case, it isthe contention of the Income Tax Department that themethod followed by the petitioner has not disallowed thecorrect income. 28. The case laws also indicate that an ITO hasliberty to examine the system of accounting regularlyemployed by the assessee to determine whether the systemof accounting is defective and whether by following suchsystem of accounting, correct profits can be deduced fromthe accounts book maintained by the assessee. 29. If on such scrutiny, an Income Tax Officer comesto a conclusion that with reference to the method ofaccounting followed by the assessee, correct profitscannot be deduced, it is open to him to apply to theprovisions of Section 145 and make the assessment in anappropriate manner. 28. The case laws also indicate that an ITO hasliberty to examine the system of accounting regularlyemployed by the assessee to determine whether the systemof accounting is defective and whether by following suchsystem of accounting, correct profits can be deduced fromthe accounts book maintained by the assessee. 29. If on such scrutiny, an Income Tax Officer comesto a conclusion that with reference to the method ofaccounting followed by the assessee, correct profitscannot be deduced, it is open to him to apply to theprovisions of Section 145 and make the assessment in anappropriate manner. 30. Even where advances are received (pre-paidamounts), if the assessee fails to perform the service aspromised, it would be obliged to refund the advancepayment received under the ordinary law of contract orspecial enactments, like the Consumer Protection Act. 31. Though in the context of construction contracts,the Central Government vide S.O.3079 (E) dated 29.9.2016has officially recognized the Percentage of CompletionMethod for the Assessment Years 2017-18 onwards, thehttps://hcservices.ecourts.gov.in/hcservices/Supreme Court has given the seal of approval to the said method in Commissioner of Income Tax Vs. BilahariInvestments Private Limited referred to supra. 32. This method was also recognised by the Instituteof Chartered Accountants of India in AS-7 which wasoriginally issued in the year 1983 and later revised inthe year 2002. As per the aforesaid Standard in para 21when the outcome of a construction contract can beestimated reliably, contract revenue and contract costassociated with the construction contract should berecognised as revenue and expenses respectively byreference to the stage of completion of the contractactivity at the reporting date. 33. Thus, it cannot be said that the petitioner wasnot entitled to adopt percentage method of recognition ofincome for computation of income tax under accrual methodof accounting. However, mere qualification in the AnnualReport of the company containing the balance sheet andthe profit and loss by itself is not sufficient toconclude that the petitioner has disclosed the percentageof the work completed during previous year relevant forthe Assessment Year. 34. Further, the petitioner may have entered intoseveral contracts with different clients with variedterms and conditions. These documents are required to beproduced before the Assessing Officer at the time ofassessments. The purpose of accounting under the IncomeTax Act, 1961 is to ascertain the taxable income and todetermine the tax payable by an assessee. Therefore,these documents and other ancillary documents arerequired to be produced before an Assessing Officer orIncome Tax Officer during the assessment. 35. Further, a Proper Certification whether by anIn-House Department of the Assessee or by an IndependentChartered Engineer certifying the percentage of workcompleted under the contract was required to be producedby the assessee before the Income Tax Officer for thepurpose of assessment. 36. What was the term of the contract under whichthe revenue was generated or the bill raised on a clientor a customer cannot be certified in the Audited Profitand Loss Account and the Balance Sheet. At best, they cancorroborate what is there in the contract. Therefore,unless those supporting documents are produced, it cannotbe said that there was full disclosure. 37. The enclosures filed before the AssessingOfficer at the time of Section 143(3) Assessment do notindicate the same. Therefore, it cannot be said thathttps://hcservices.ecourts.gov.in/hcservices/there was true and full disclosure of all materials that 36. What was the term of the contract under whichthe revenue was generated or the bill raised on a clientor a customer cannot be certified in the Audited Profitand Loss Account and the Balance Sheet. At best, they cancorroborate what is there in the contract. Therefore,unless those supporting documents are produced, it cannotbe said that there was full disclosure. 37. The enclosures filed before the AssessingOfficer at the time of Section 143(3) Assessment do notindicate the same. Therefore, it cannot be said thathttps://hcservices.ecourts.gov.in/hcservices/there was true and full disclosure of all materials that were required for assessment before the Assessing Officerby the petitioner. At the same time, it is to be noticedthat the reasons given in the communications dated05.11.2018 for reopening the respective assessment havemerely questioned the method of accounting adopted by thepetitioner and show it was issued in a mechanical manner. 38. It is noticed that as per Explanation 1 toSection 147 of the Income Tax Act, 1961, productionbefore the Assessing Officer of the account books orother evidence from which material evidence could withdue diligence have been discovered by the AssessingOfficer will not necessarily amount to disclosure withinthe meaning of Section 147 of the Act. In fact,Explanation incorporates the reasons given in thedecision of the Hon'ble Supreme Court in CalcuttaDiscount Co. Ltd. Vs. Income Tax Officer, (1961) 41 ITR191 (SC). 39. At the same time, the conclusions arrived in theimpugned communications dated 26.11.2018 overruling theobjections of the petitioner for the reopening of theassessments by the impugned notices are not conclusive.They are only prima facie views of the Assessing Officer.It is for the petitioner to establish that it hascorrectly followed the accounting method by producing thesupporting documents to substantiate the percentage ofwork that was completed for the purpose of properdetermination of taxable turnover for payment of incometax. Mere disclosure in the Profit and Loss Account andBalance Sheet is not sufficient. 40. Therefore, I do not find any justifiable reasonsto interfere at this stage of the re-assessmentproceedings. Therefore, the first respondent is thereforedirected to complete the re-assessment after examiningthe documents to be produced by the petitioner and passre-assessment orders on merits. 41. The petitioner is therefore directed to filedocuments to substantiate its cases before the firstrespondent within a period of thirty days from date ofreceipt of a copy of this order. The first respondentshall pass orders within a period of 60 days thereafter. 42. It is made clear that the orders to be passedshall be confined to the issue relating to percentage ofthe work completed and the recognition of income aloneand no other issues other than the one in respect ofwhich notices under Section 148 have been issued shall beconsidered by the first respondent. https://hcservices.ecourts.gov.in/hcservices/ 43. The Writ Petitions stand disposed of with theabove observations. No cost. Consequently, connectedMiscellaneous Petitions are closed. Sd/- Assistant Registrar(CS VI) //True Copy// Sub Assistant Registrar jenTo1.The Assistant Commissioner of Income Tax (OSD) Corporate Range 1, 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034. 2.The Principal Commissioner of Income Tax 1, 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034.+2ccs to Mr.Balaji , Advocate SR.No.11217,11218+1cc to M/s.Hema Muralikrishnan, Advocate SR.No. 10937W.P.Nos.32797 & 32801 of 2018 andW.M.P.Nos.38008 & 38014 of 2018and 6663 & 6666 of 2019MG COA.SK(18.03.2021) https://hcservices.ecourts.gov.in/hcservices/