1988 (9) TMI 78 - AT - Income Tax

Summary

Issues Involved:
1. Method of accounting for contract income (completed contract method vs. year-to-year basis).
2. Estimation of income by the Income Tax Officer (ITO) at a flat rate of 20% of total billing.
3. Applicability of Section 145 of the Income Tax Act.
4. Consideration of overall results of the contract in case of year-to-year assessment.

Detailed Analysis:

1. Method of Accounting for Contract Income:
The core issue revolves around the method of accounting for the income derived from the contract with the Bombay Municipal Corporation. The assessee, a British company, employed the completed contract method, asserting that profits or losses should be accounted for in the year the contract is completed. The Income Tax Officer (ITO), however, rejected this approach, determining that the profits or losses should be assessed on a year-to-year basis. The CIT(A) upheld the ITO's decision, emphasizing that each year is a self-contained and distinct unit for assessment purposes. The CIT(A) relied on the Patna High Court's decision in Sukhdeodas Jalan vs. CIT, which supports the year-to-year assessment approach for contracts.

2. Estimation of Income by the ITO at a Flat Rate of 20%:
The ITO estimated the income from the contract at a flat rate of 20% of the total billing. The assessee contended that this estimation was arbitrary, excessive, and unreasonable, especially since the contract ultimately resulted in a loss upon its completion in the accounting year ending 31st December 1983. The assessee argued that the completed contract method, which they consistently followed, should be accepted as it properly deduces the company's profit. The assessee cited various decisions, including those of the Tribunal in ITO vs. Davy Power Gas Ltd. and Hitashi Shipbuilding and Engineering Company Ltd., Japan, to support their stance.

3. Applicability of Section 145 of the Income Tax Act:
The Revenue authorities applied the provisions of Section 145 of the Income Tax Act, which allows the estimation of income when the method of accounting employed by the assessee does not accurately reflect the income. The CIT(A) and the Department maintained that the year-to-year assessment method is more appropriate for tax purposes, as each year is a distinct unit of time for assessment. The Department's view was supported by decisions from the Patna High Court and the Delhi High Court, which upheld the year-to-year estimation of profits for ongoing contracts.

4. Consideration of Overall Results of the Contract:
The assessee alternatively contended that if the income is to be assessed on a year-to-year basis, the overall results of the contract, which resulted in a loss, should be considered. The Tribunal noted that there was no discussion on this point in the lower authorities' orders, likely because the contract was not completed when the CIT(A) decided the appeals. The Tribunal suggested that a uniform decision should be taken for all the years together by the CIT(A), considering the overall results of the contract.

Conclusion:
The Tribunal concluded that the method of computing the income of the assessee company on the completed contract method cannot be accepted. This conclusion was based on the decisions of the Delhi High Court in Tirath Ram Ahuja P. Ltd., the Patna High Court in Sukhdeodas Jalan, and the Tribunal in Champion Construction Co., which all support the year-to-year estimation of income for contracts. The Tribunal sent the matter back to the CIT(A) to decide afresh on the point of considering the overall results of the contract, after giving the assessee full opportunity of being heard. The appeals were allowed for statistical purposes.