2004 (11) TMI 49 - HC - Income Tax

(1) Whether, Tribunal is right in law in setting aside the order passed by CIT under section 263 and thereby restoring the order passed by the Income-tax Officer? (2) Whether, Tribunal is right in law in holding that the assessee-company is an industrial company? (3) Whether, the Tribunal has not erred in law in allowing the claim of the assessee with regard to the receipt of Rs. 11,78,950 as being provision for contingencies? (4) When Rs. 11,78,950 is a receipt by the assessee from the contractors in the course of carrying on of the business, whether the Tribunal s order to exclude the same is vitiated in law by irrelevant considerations on the basis of the so called standard accounting matters? - All the four questions are answered in favour of the assessee

Summary

Issues Involved:
1. Legality of the Tribunal's decision to set aside the Commissioner of Income-tax's order under section 263 of the Income-tax Act.
2. Determination of whether the assessee-company qualifies as an "industrial company."
3. Legitimacy of the Tribunal's allowance of the assessee's claim regarding the receipt of Rs. 11,78,950 as a provision for contingencies.
4. Validity of the Tribunal's exclusion of Rs. 11,78,950 from taxable income based on standard accounting practices.

Issue-wise Detailed Analysis:

1. Legality of the Tribunal's Decision to Set Aside the Commissioner of Income-tax's Order under Section 263:
The Tribunal set aside the order of the Commissioner of Income-tax (CIT) under section 263, which had directed the Assessing Officer (AO) to modify the assessment. The CIT had found the assessment order erroneous and prejudicial to the interests of the Revenue because the assessee-company was treated as an "industrial company" and a sum of Rs. 11,78,950 was not included in the taxable income. The Tribunal, however, found no error in the AO's assessment and restored the original order. The court upheld the Tribunal's decision, noting that the CIT's action under section 263 was not justified as there was no error in the assessment order that was prejudicial to the Revenue's interests.

2. Determination of Whether the Assessee-Company Qualifies as an "Industrial Company":
The Tribunal held that the assessee-company was an "industrial company," primarily because the AO had granted investment allowance for the plant and machinery used in the business. The Revenue's counsel argued that the company, involved in construction, did not qualify as an "industrial company" under the definition provided in the Finance Act. The court, however, upheld the Tribunal's finding, emphasizing that the investment allowance granted by the AO had not been challenged or disturbed, and thus, the assessee-company's status as an "industrial company" could not be disputed on the peculiar facts of the case.

3. Legitimacy of the Tribunal's Allowance of the Assessee's Claim Regarding the Receipt of Rs. 11,78,950 as a Provision for Contingencies:
The Tribunal allowed the assessee's claim that Rs. 11,78,950 was a provision for contingencies and not taxable income. The Revenue argued that this amount, being profit from construction activity, should be taxed. The court noted that the assessee had consistently followed the "percentage completion method" of accounting, which is a recognized standard accounting practice. The Tribunal found that the assessee had offered the amount for taxation in subsequent years, and thus, there was no revenue loss. The court upheld the Tribunal's decision, stating that the method of accounting adopted by the assessee was in accordance with section 145 of the Act and accepted commercial practice.

4. Validity of the Tribunal's Exclusion of Rs. 11,78,950 from Taxable Income Based on Standard Accounting Practices:
The Tribunal excluded Rs. 11,78,950 from the taxable income, considering it a provision for contingencies based on standard accounting practices. The Revenue contended that accounting principles should not determine taxability if they contradict statutory provisions. The court, however, found that the assessee's method of accounting was regularly followed and accepted by the Revenue in subsequent years. The court referenced the Supreme Court's decision in Badridas Daga v. CIT, which supports the admissibility of deductions based on accepted commercial practice and trading principles. Consequently, the court upheld the Tribunal's decision, finding no error in excluding the amount from taxable income.

Conclusion:
The court answered all four questions in favor of the assessee and against the Revenue, concluding that the Tribunal's order did not suffer from any infirmity, and the CIT's action under section 263 was unjustified. The reference was disposed of accordingly, with no order as to costs.