2005 (9) TMI 235 - AT - Income Tax

Issues Involved:
1. Additions made on account of loss in respect of incomplete contracts.
2. Additions made by Assessing Officer on account of MODVAT credit.
3. Computation of relief under section 80HHC of the Act.
4. Addition of Rs. 1,02,95,655 in the intimation sheet issued under section 143(1)(a) for the assessment year 1991-92.

Detailed Analysis:

1. Additions made on account of loss in respect of incomplete contracts:

The main common issue relates to the additions made on account of loss in respect of incomplete contracts. The assessee-company, engaged in long-term contracts for installation of elevators and escalators, follows the completed contract method where sales are recognized only on completion of the contract. The actual profit is determined only on completion of the contract, after ascertaining the actual total cost incurred. In case of an incomplete contract where the actual cost exceeds the contract price, necessary provision is made for the resultant loss, which is charged to the Profit & Loss Account of the year. The provisions for the losses on incomplete contracts are reversed in the year in which the contracts are completed.

The Assessing Officer (AO) disallowed such losses, arguing that no profits or losses could be said to accrue by unilateral transaction such as valuation of closing stock, and that the loss claimed by the assessee was merely a provision in the books since such loss is reversed in the next year. The CIT (Appeals) allowed the loss, reasoning that the incomplete contracts have been executed by way of payment or receipt of goods during the year and the work-in-progress of incomplete contracts cannot be regarded under the Income-tax Act as anything else apart from stock-in-trade. The CIT (Appeals) further observed that the provisions for loss are based on valuation of such stock-in-trade at market price, which is lower than the cost, and such loss is deductible according to accepted accounting practice.

On appeal, the Tribunal upheld the CIT (Appeals) order. It was held that the method of accounting adopted by the assessee in respect of incomplete contracts could not be rejected in law by the AO for the purpose of disallowing the losses declared by the assessee in such incomplete contracts. The Tribunal noted that the system of accounting employed by the assessee was in consonance with the Accounting Standard prescribed in India and also outside India, and did not depict a distorted picture of profits of business carried on by the assessee. The Tribunal also rejected the contention that the loss was contingent due to the escalation clause in the contract, noting that provisions had been made by the assessee in respect of estimated amount realizable under the escalation clause.

2. Additions made by Assessing Officer on account of MODVAT credit:

The next common issue pertains to the additions made by the AO on account of MODVAT credit. Both parties agreed that this issue stands covered in favor of the assessee by the judgment of the Hon'ble Supreme Court in the case of CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275. Respectfully following the same, the issue was decided in favor of the assessee, and the orders of the CIT (Appeals) were upheld on this issue.

3. Computation of relief under section 80HHC of the Act:

The issue relates to the computation of relief under section 80HHC of the Act for the assessment year 1995-96. The AO, while computing such deduction, excluded 90 percent of interest income and export incentive from the business profits but did not exclude these elements from the total turnover. The CIT (Appeals) excluded the same from the turnover, reasoning that the turnover relates to the sales of the goods sold by it either locally or in the course of export, and the interest income has no relation to sales transactions. The Tribunal upheld the CIT (Appeals) order, finding no infirmity in it.

4. Addition of Rs. 1,02,95,655 in the intimation sheet issued under section 143(1)(a) for the assessment year 1991-92:

This adjustment was by way of disallowance under section 43B in respect of unpaid sales tax. The CIT (Appeals) deleted the addition, reasoning that no adjustment was possible unless it was apparent from the record that payment was not made before the due date of the return. In the absence of such detail, the AO was not justified in making such adjustment under section 143(1)(a). The Tribunal upheld the CIT (Appeals) order, finding no infirmity in it.

Conclusion:

In the result, the appeals of the revenue stand dismissed.

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