1986 (8) TMI 91 - AT - Income Tax

Summary

Issues Involved:

1. Reopening of assessment under Section 263 by the CIT.
2. Determination of the company's status as an industrial company.
3. Rejection of the accounting method followed by the appellant for incomplete contracts.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 263 by the CIT:

The CIT invoked jurisdiction under Section 263 of the IT Act on two primary grounds. Firstly, the CIT contended that the assessee company, engaged mainly in construction work, was erroneously treated as an industrial company by the ITO. Secondly, the CIT observed that a receipt of Rs. 11,78,950 was not included in the certified work account, which was deemed as a provision for contingencies and not a permissible deduction. The assessee argued that the construction of buildings, roads, and dams falls under 'manufacturing and processing of goods,' thus qualifying it as an industrial company. They also contended that the non-inclusion of the receipt was due to following a recognized accounting method for contract businesses, not as a deduction for contingencies.

The Tribunal concluded that there was no error in the ITO's order, thus the jurisdiction under Section 263 was not legally invoked. The Tribunal noted that the ITO had not given any finding regarding the method of accounting, and an inquiry should have been made initially. The Tribunal emphasized that the ITO had allowed an investment allowance of Rs. 87,803, indicating that the assessee was engaged in manufacturing activities, thus satisfying the criteria for being an industrial company.

2. Determination of the Company's Status as an Industrial Company:

The CIT rejected the assessee's claim of being an industrial company, relying on the case of CIT vs. Shan Constructions Co. Ltd., which held that the company was not engaged in manufacturing or processing goods. The assessee argued that it was also involved in manufacturing bricks, steel windows, and doors, thus qualifying as an industrial company. The Tribunal found that the investment allowance granted by the ITO for machinery and plant installed for construction, manufacturing, or production purposes supported the assessee's claim. The Tribunal concluded that the assessee met the criteria for being an industrial company, as the investment allowance test is more stringent than the one for claiming a lower tax rate as an industrial company.

3. Rejection of the Accounting Method Followed by the Appellant for Incomplete Contracts:

The CIT rejected the accounting method followed by the assessee for incomplete contracts, stating that the provision for contingencies was not a permissible deduction. The assessee contended that it followed a recognized method of accounting for contract businesses, supported by standard accounting practices and authorities. The Tribunal agreed with the assessee, stating that the issue was not about claiming a deduction but about the method of accounting. The Tribunal highlighted that the assessee followed the percentage of completion method, a recognized accounting practice for construction contracts. The Tribunal emphasized that the method of accounting was the sole choice of the assessee, as per Section 145 of the IT Act. The Tribunal referred to the accounting standards issued by the Institute of Chartered Accountants of India, which supported the assessee's method.

Conclusion:

The Tribunal set aside the CIT's order under Section 263, concluding that the ITO's original assessment order had no errors. The Tribunal allowed the appeal, affirming that the assessee was correctly treated as an industrial company and that the recognized accounting method for incomplete contracts was appropriately followed.