Commissioner Of Income-Tax v. N.M Associates

V.S Sirpurkar, J.:— The question referred to us is:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the profits in respect of hotel contract should be computed on project completion method?”

2. The following facts will highlight the grievance:

The assessee is in the business of building and construction. It is an unregistered firm. It takes contracts for construction. During the assessment year 1984–85, the assessing authority found that there were no accounts much less proper accounts maintained by the assessee. In the returns, initially a loss of Rs. 21,557 was shown and thereafter by another return, a loss of Rs. 24,935 was shown. The assessee-firm used to 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 sometimes spilled over a year, while there was one big contract worth Rs. 30 lakhs for construction of a hotel, which was to continue from year to year and was not completed in one year. Before the assessing authority, the assessee gave in writing that it was not possible for it to complete the account books and that it was trying everything to complete the same. The assessing authority observed on that that this letter was written in the month of November and, therefore, it was clear that the assessee had not completed the accounts even up to November, 1985, for the assessment year 1984–85. A deposition was also taken by the assessing authority, who found that there were no day-to-day maintenance of accounts and, therefore, the assessing authority came to the conclusion that the profits from the return could not be ascertained. He, therefore, recorded the following finding:

“In the absence of day-to-day books of account and check on consumption of materials and also taking into consideration the fact that the contract business had become competitive and the price of materials had gone up from day-to-day, I estimate the profit after allowing the depreciation at Rs. 3,34,345.”

3. This order was appealed against before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax, however, came to the conclusion that the contention raised by the assessee that it is only on the completion of the contracts that profitability or otherwise of the same can be judged was not correct.

4. It was also argued before him that the assessee can take up any method of accounting and, therefore, the assessee was entitled to suggest that the accounting should be done only after the completion of the contracts and it is only on that basis, the profits earned or otherwise should be determined. The appellate authority, however, came to the conclusion that in so far as the smaller contracts were concerned, the method adopted by the assessee should not be disturbed in the sense that the profitability of those small contracts could be assessed only after their completion. However, in so far as the big contract of Rs. 30 lakhs was concerned and which contract was spread out in more than one year, there should be a year to year assessment on the basis of ad hoc profits and by calculating the profits on the basis of the percentage of the receipts received in a particular assessment year. Accordingly, he directed the Income-tax Officer not to disturb the appellant's method of accounting in so far as various smaller contracts are concerned. However, regarding the long drawn hotel contract, the Assessing Officer was directed to assess the profit on ad hoc basis at 5 per cent, of the gross receipts, instead of 8 per cent, as estimated by the Assessing Officer and on completion of the final tally to grant a set off for the ad hoc profits assessed from year to year. This was questioned by the Revenue before the Tribunal, while the assessee also filed cross-objection in so far as the direction regarding the bigger contract of Rs. 30 lakhs and the method of computation of the profits as ordered by the appellate authority. The Tribunal came to the conclusion that under law, the assessee was entitled to maintain his accounts in any manner he liked, so long as it was a correct and acknowledged method of accounting. The Tribunal came to hold on the basis of a book called Accounting for construction contracts and more particularly, the contents in “Accounting Standard 7” of the Institute of Chartered Accountants of India that it was permissible to assess the profits in respect of the contract only after the said contract was completed. The Tribunal also accepted its decision in the case of one Heeral Constructions Pvt. Ltd. Dismissing the said claim and allowing the assessee's appeal, the Tribunal disapproved of the decision of the Commissioner of Income-tax (Appeals) and directed the Assessing Officer to determine the profits only on the year of completion of the project. We have already quoted the question which has been referred to us and it is clear therefrom that we would not be concerned as to what happened with the smaller contracts which have been directed to be assessed on the basis of their completion. We will be only concerned with the bigger contract of Rs. 30 lakhs, in which a direction has been given to assess it on the yearly basis and more particularly on the receipts received every year.

5. Learned counsel appearing on behalf of the Revenue firstly contended that the Tribunal was completely in error in allowing the cross-objection filed by the assessee. Learned counsel argued that all that was possible only if there were any accounts properly maintained by the assessee. Learned counsel pointed out that it was the admitted case that proper accounts were not maintained at all by the assessee and that there was no way to know the day-to-day transaction regarding the receipts or regarding the spendings. Under the circumstances, the contention raised by counsel was that there was nothing wrong if the said contract was directed to be judged on year to year basis. As regards the finding pertaining to the bigger contract of Rs. 30 lakhs and more particularly as regards the direction given by the Tribunal, learned counsel pointed out that the question was no more res integra and that the Tribunal had ignored the fact that in this case no accounts were available at all. Our attention was invited to the decision in Tirath Ram Abuja P. Ltd. v. CIT, [1976] 103 ITR 15, which is a decision rendered by the Delhi High Court. The High Court in that case was dealing with the assessee who was engaged in the business of construction contracts. It found that the contract had remained incomplete and, therefore, it came to hold that in the case of contracts, it was not necessary to wait till the contract was completed in order to ascertain the income and that it was open to the Revenue to estimate the profit on the basis of the receipts in each year of construction, although the contract was not complete. That was also a case where the contract spilled over from one year to another and was not completed within the period of 18 months, which was the initial term of the contract. The Delhi High Court also relied on a decision in Sukhdeodas Jalan… v. Commr. Of Income-Tax, B. & O.…Opposite Party., [1954] 26 ITR 617 (Patna) and found that in the aforementioned case a military contract extended beyond the accounting period and the accounts were closed only after the completion of the contract. The court had held that merely because the contract was completed after the accounting period, it could not be presumed that no profits arose or accrued to the assessee in the accounting year and that in the case of an incomplete contract, there is a well established method of calculating profits accruing in the accounting year, which was pointed out in Batliboi's Advanced Accounting. Learned counsel further pointed out that this decision was later on confirmed by the Supreme Court also in Tirath Ram Ahuja P. Ltd. v. CIT, [1990] 186 ITR 428. Thus, it was obvious that the apex court has approved the method of yearly accounting in the case of contracts.

6. The case herein is even worse. There are no proper contract accounts whatsoever. Therefore, there was no way in knowing as to what were the receipts and the spending on the part of the assessee. Therefore, if the Commissioner of Income-tax adopted the method of yearly accounting in pursuance of his powers under section 144 of the Act then there was nothing wrong. The Tribunal has clearly gone wrong in ignoring the fact that in this case there was no accounting at all and the method suggested by it can stand justified only if there were proper accounts maintained by the assessee.

7. Learned counsel Mr. P.P.S Janardhana Raja tried to point out that while the method of completion of contract was adopted in the case of smaller contract, the same could have been done in the case of bigger contract also. All his criticism could have been justified had there been properly maintained accounts. In the absence of that, the authorities were bound to follow the accepted method of calculating the profits on yearly basis, which the appellate authority had done. In our opinion, the order of the appellate authority was a correct order and the order of the Tribunal holding to the contrary and introducing a method of calculating the profits only after the completion of the contract is not correct and justified. We accordingly answer the reference in favour of the Revenue and against the assessee.