1997 (7) TMI 191 - AT - Income Tax

Summary

Issues Involved:
1. Method of accounting for turnkey projects.
2. Addition of Rs. 2,87,35,776 in income from turnkey projects.
3. Treatment of know-how fee as income.
4. Double taxation of income.
5. Determination of income from various projects.

Issue-wise Detailed Analysis:

1. Method of Accounting for Turnkey Projects:
The CIT(A) noted that the AO did not adequately discuss the method of accounting followed by the assessee for turnkey projects, which typically span multiple accounting years. The CIT(A) recognized the "completed contract method" as an accepted accounting practice for such long-term projects. This method involves accumulating yearly expenditures as work-in-progress and adjusting them against total receipts upon substantial contract completion. The CIT(A) observed that the assessee adhered to this method for most expenditures but treated certain bought-out machinery items as sales, which the AO incorrectly assessed as entire sales receipts for the year.

2. Addition of Rs. 2,87,35,776 in Income from Turnkey Projects:
The AO made an aggregate addition of Rs. 2,87,35,776 to the income declared by the assessee for turnkey projects. The CIT(A) reexamined this addition and provided relief for certain projects, reducing the confirmed addition to Rs. 1,09,75,985, thus granting relief of Rs. 1,77,59,791. The detailed breakdown of additions and reliefs for various projects was provided, showing discrepancies in the AO's assessment and the CIT(A)'s adjustments.

3. Treatment of Know-How Fee as Income:
The assessee contested the AO's treatment of the entire Rs. 50 lakhs know-how fee from Goetz (India) Ltd. as income without considering related expenses. The CIT(A) confirmed the addition of Rs. 50 lakhs, arguing there was no valid basis for postponing this income, which was accrued and received in the year under consideration. The assessee argued that the expenses related to this fee were included in the trading account for the year ended 31st March 1993, and proportionate expenses were not allowed by the CIT(A).

4. Double Taxation of Income:
The assessee claimed that Rs. 8 lakhs were wrongly credited to the accounts of Atul Agro Oils and Alwar Agro, resulting in double taxation. The CIT(A) and AO found this contention incorrect, as the income from these projects was not disclosed as income for the year ended 31st March 1993. The trading accounts for Atul Food Products and Atul Agro Oils were examined, showing discrepancies in the assessee's claims and the actual receipts and expenses.

5. Determination of Income from Various Projects:
The CIT(A) and AO required the assessee to provide the exact completion dates of projects, which were not adequately communicated. The CIT(A) confirmed additions for various projects based on incomplete information and without thorough examination of the method of accounting followed by the assessee. The Tribunal found that the CIT(A) and AO did not properly examine the method of accounting and the basis for booking sales and income in interim years.

Conclusion:
The Tribunal set aside the orders of the CIT(A) and AO, remanding the matter back to the AO for a fresh assessment. The AO was directed to:
1. Thoroughly examine the method of accounting followed by the assessee.
2. Determine whether the method is recognized and whether income can be properly deduced.
3. Conduct necessary inquiries and investigations, including examining contracts and invoices.
4. Consider relevant accounting standards and judicial precedents.
5. Provide the assessee with an opportunity to present supporting material and submissions.

The appeals were allowed for statistical purposes, emphasizing the need for a detailed and fair reassessment of the assessee's income from turnkey projects.