1993 (4) TMI 112 - AT - Income Tax

Assessing Officer, Business Income, Business Profits, Interest Payments, Rejection Of Accounts

Summary

Issues Involved:
1. Method of Accounting and Profit Recognition
2. Estimate of Profit at 8%
3. Disallowance of Interest under Section 40A(8)
4. Levy of Interest under Sections 139(8) and 217

Issue-wise Detailed Analysis:

1. Method of Accounting and Profit Recognition:
The primary issue was whether profits from a building contract should be recognized annually or only after the project's completion. The assessee argued that profits should be assessed only after the contract's completion, as the project was ongoing. The Assessing Officer (AO) found the assessee's method of accounting defective and incomplete, as the closing work-in-progress was not scientifically valued. The AO applied Section 145 and estimated the business income at 8% of the receipts. The Tribunal upheld the AO's approach, citing judicial precedents and accounting principles that support recognizing profits annually in long-term contracts to prevent abuse by dishonest taxpayers.

2. Estimate of Profit at 8%:
The assessee contested the 8% profit estimate as excessive. The AO had applied this rate based on the incomplete nature of the contract and the need for a reasonable profit estimate. The CIT (Appeals) upheld this estimate, finding it reasonable. The Tribunal agreed, noting no material evidence suggesting the estimate was excessive. The Tribunal emphasized that the 8% estimate was provisional, with final profit or loss adjustments to be made upon project completion.

3. Disallowance of Interest under Section 40A(8):
The AO disallowed a portion of the interest payments under Section 40A(8), which the CIT (Appeals) deleted, reasoning that the estimated profit under Section 145 should include such disallowances. The Revenue appealed, arguing the mandatory nature of Section 40A(8) disallowances. The Tribunal sided with the Revenue, stating that statutory disallowances like Section 40A(8) should be separately added even if the profit is estimated under Section 145, to uphold the legislative intent behind the disallowance provisions.

4. Levy of Interest under Sections 139(8) and 217:
For the assessment year 1981-82, the assessee objected to the levy of interest under Sections 139(8) and 217. The Tribunal ruled in favor of the assessee, noting that the assessment under Section 144 read with Section 147 could not be termed as a regular assessment as defined in Section 2(4). This decision was supported by the jurisdictional High Court's ruling in CIT v. Padma Timber Depot, directing the Revenue to exclude the interest levied under these sections for the said year.

Conclusion:
The Tribunal upheld the annual profit recognition method, confirmed the 8% profit estimate, reinstated the disallowance of interest under Section 40A(8), and ruled out the levy of interest under Sections 139(8) and 217 for the assessment year 1981-82. The appeals of the assessee for assessment years 1982-83 and 1983-84 were dismissed, while the appeal for 1981-82 was partly allowed. The Revenue's appeals for all three years were allowed.