The Commissioner Of Income-Tax, Coimbatore v. M/S.n.m.associates, Coonoor

IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated: 19.02.2002 Coram: The Honourable Mr.Justice V.S.SIRPURKAR and The Honourable Mr.Justice K.RAVIRAJA PANDIAN Tax Case No. 459 of 1996 The Commissioner of Income-tax,Coimbatore .. Applicant Vs.M/s.N.M.Associates,Coonoor .. Respondent Reference under Section 256(1) of the Income Tax Act, 1961 againstthe order of the Income Tax Appellate Tribunal, Madras Bench 'B"dated 9-2-1996. ! For Applicant : Mr.T.RavikumarJr.Standing Counsel forIncome-Tax ^ For Respondent: Mr.P.P.S.Janardhana Rajafor M/s.Subbaraya Aiyar : O R D E R (The Order of the Court was made by V.S.Sirpurkar,J) Thequestion referred to us is:- "whether, on the facts and in the circumstances of the case, theAppellate Tribunal is right in law in holding that the profits in respectof hotel contract should be computed on project completion method?". 2. The following facts will highlight the grievance:- Theassessee is in the business of building and construction. It is anunregistered firm. It takes contracts for construction. During theassessment year 1984-85, the assessing authority found that there were noaccounts much less proper accounts maintained by the assessee. In thereturns, initially a loss of Rs.21,557/- was shown and thereafter byanother return, a loss of Rs.24,935/- was shown. The assessee firm usedto take small contracts as well as big contracts. At the relevant time,there were some small contracts which were completed more or less in a year or some times spilled over an year, while there was one big contractworth Rs.30 lakhs for construction of a hotel, which was to continue fromyear to year and was not completed in one year. Before the AssessmentAuthority, the assessee gave in writing that it was not possible for themto complete the account books and that they were trying everything tocomplete the same. The Assessing Authority observed on that that thisletter was written in the month of November and therefore, it was clearthat the assessee had not completed the accounts even upto November 1985,for the Assessment year 1984-85. A deposition was also taken by theassessing authority, who found that there were no day to day maintenanceof accounts and therefore, the assessing authority came to the conclusionthat the profits from the return could not be ascertained. He,therefore, recorded the following finding:- "In the absence of day to day books of accounts and check on consumptionof materials and also taking into consideration that the fact that thecontract business had become competitive and the price of materials hadgone up from day to day, I estimate the profit after allowing thedepreciation at Rs.3,34,345/-" "In the absence of day to day books of accounts and check on consumptionof materials and also taking into consideration that the fact that thecontract business had become competitive and the price of materials hadgone up from day to day, I estimate the profit after allowing thedepreciation at Rs.3,34,345/-" This order was appealed against before the Commissioner of IncomeTax(Appeals). The Commissioner of Income-tax, however, came to theconclusion that the contention raised by the assessee that it is only onthe completion of the contracts that profitability or otherwise of thesame can be judged was not correct. It was also argued before him thatthe assessee can take up any method of accounting and therefore, theassessee was entitled to suggest that the accounting should be done onlyafter the completion of the contracts and it is only on that basis, theprofits earned or otherwise should be determined. The AppellateAuthority, however, came to the conclusion that in so far as the smallercontracts were concerned, the method adopted by the assessee should notbe disturbed in the sense that the profitability of those small contractscould be assessed only after their completion. However, in so far as thebig contract of Rs.30 lakhs was concerned and which contract was spreadout in more than one year, there should be a year to year assessment onthe basis of ad-hoc profits and by calculating the profits on the basisof the percentage of the receipts received in a particular assessmentyear. Accordingly, he directed the ITO not to disturb the appellant'smethod of accounting in so far as various smaller contracts areconcerned. However, regarding the long drawn hotel contract wasconcerned, the assessing officer was directed to assess the profit onad-hoc basis at 5% of the gross receipts, instead of 8% as estimated bythe assessing officer and on completion of the final tally to grant a setoff for the ad-hoc profits assessed from year to year. This wasquestioned by the Revenue before the Tribunal. While, the assessee alsofiled cross objection in so far as the direction regarding the biggercontract of Rs.30 lakhs and the method of computation for the profits asordered by the Appellate Authority. The Tribunal came to the conclusionthat under law, the assessee was entitled to maintain his accounts in anymanner he liked, so long as it was a correct and acknowledged method ofaccounting. The Tribunal came to hold on the basis of a book called"Accounting for construction contracts" and more particularly, thecontents in " Accounting Standard 7" of the Institute of Chartered Accountants of India that it was permissible to assess the profits inrespect of contract only after the said contract was completed. TheTribunal also accepted its decision in case of one M/s.HeeralConstructions Private Limited. Dismissing the said claim and allowingthe assessee's appeal, the Tribunal disapproved of the decision ofC.I.T(Appeals) and directed the assessing officer to determine theprofits only on the year of completion of the project. We have alreadyquoted the question which has been referred to us and it is cleartherefrom that we would not be concerned as to what happened with thesmaller contracts which have been directed to be assessed on the basis oftheir completion. We will be only concerned with the bigger contract ofRs.30 lakhs, in which a direction has been given to assess it on theyearly basis and more particularly on the receipts received every year. 3. Learned counsel appearing on behalf of the Revenue firstlycontended that the Tribunal was completely in error in allowing the crossobjection filed by the assessee. Learned counsel argued that all thatwas possible only if there were any accounts properly maintained by theassessee. Learned counsel pointed out that it was the admitted case thatproper accounts were not maintained at all by the assessee and that therewas no way to know the day to day transaction regarding the receipts orregarding the spendings. Under the circumstances, the contention raisedby the counsel was that there was nothing wrong if the said contract wasdirected to be judged on year to year basis. As regards the findingpertaining to the bigger contract of Rs.30 lakhs and more particularly asregards the direction given by the Tribunal, learned counsel pointed outthat the question was no more res integra and that the Tribunal hadignored the fact that in this case no accounts were available at all.Our attention was invited to the decision reported in TIRATH RAM AHUJA P.LTD Vs. C.I.T DELHI (103 ITR page 15), which is the decision rendered bythe Delhi High Court. The High Court in that case was dealing with theassessee who was engaged in the business of construction contracts. Itfound that, that the contract had remained incomplete and therefore, itcame to hold that in case of contracts, it was not necessary to wait tillthe contract was completed in order to ascertain the income and that itwas open to the revenue to estimate the profit on the basis of thereceipts in each year of construction, although the contract was notcomplete. That was also a case where the contract spilled over one yearto another year and was not completed within the period of 18 months,which was the initial term of the contract. The Delhi High Court alsorelied on a decision reported in SUKHDEODAS JALAN Vs. COMMISSIONER OFINCOME TAX(26 ITR 617) and found that in the aforementioned case amilitary contract extended beyond the accounting period and the accountswere closed only after the completion of the contra ct. The Court hadheld that merely because the contract was completed after the accountingperiod, it could not be presumed that no profits arose or accrued to theassessee in the accounting year and that in the case of an incompletecontract, there is a well established method of calculating profitsaccruing in the accounting year, which was pointed out in Batlliboi'sAdvance Accounting. Learned counsel further pointed out that thisdecision was later on confirmed by the Supreme Court also in TIRATH RAM AHUJA P. LTD Vs. COMMISSIONER OF INCOME-TAX, NEW DELHI (186 ITR page428). Thus, it was obvious that the Apex Court has approved the methodof yearly accounting in case of contracts. 4. The case herein is even worse. There are no proper contractaccounts whatsoever. Therefore, there was no way in knowing as to whatwere the receipts and the spendings on the part of the assessee.Therefore, if the Commissioner of Income-Tax adopted the method of yearlyaccounting in pursuance of his powers under Section 144 of the Act thenthere was nothing wrong. The Tribunal has clearly gone wrong in ignoringthe fact that in this case there was no accounting at all and the methodsuggested by it can stand justified only if there were proper accountsmaintained by the assessee. AHUJA P. LTD Vs. COMMISSIONER OF INCOME-TAX, NEW DELHI (186 ITR page428). Thus, it was obvious that the Apex Court has approved the methodof yearly accounting in case of contracts. 4. The case herein is even worse. There are no proper contractaccounts whatsoever. Therefore, there was no way in knowing as to whatwere the receipts and the spendings on the part of the assessee.Therefore, if the Commissioner of Income-Tax adopted the method of yearlyaccounting in pursuance of his powers under Section 144 of the Act thenthere was nothing wrong. The Tribunal has clearly gone wrong in ignoringthe fact that in this case there was no accounting at all and the methodsuggested by it can stand justified only if there were proper accountsmaintained by the assessee. 5. Learned counsel Mr.P.P.S.Janardhana Raja tried to point outthat while the method of completion of contract was adopted in case ofsmaller contract, same could have been done in the case of biggercontract also. All his criticism could have been justified had therebeen properly maintained accounts. In the absence of that, theauthorities were bound to follow the accepted method of calculating theprofits on yearly basis, which the Appellate Authority had done. In ouropinion, the order of the appellate authority was a correct order and theorder of the Tribunal holding contrary and introducing method ofcalculating profits only after the completion of the contract is notcorrect and justified. We accordingly answer the reference in favour ofthe revenue and against the assessee. Index:Yes/No (V.S.S.J) (K.R.P.J)pv19.02.2002 To1. The Assistant RegistrarIncome-Tax Appellate TribunalIII Floor, Besant Nagar, Chennai 2. The SecretaryCentral Board of RevenueNew Delhi.3. The Income-Tax OfficerCircle-I (1) Ooty4. The Commissioner of Income-Tax(Appeals)CoimbatoreV.S.SIRPURKAR,JandK.RAVIRAJA PANDIAN,J