2012 (4) TMI 51 - HC - Income Tax

Method of accounting - works contract denial of project completion method rejection of books of account addition made - assessee have shown running payment and expenses against WIP in Balance sheet and excluded it from P/L A/c - Held that - CIT(A) while confirming addition made contradictory statements on one hand allowed project completion method & on other hand denied it. Accordingly it is clarified that in case assessee had not claimed loss in the P/L A/c the same will not be reduced. In case he had claimed this loss it will be disallowed. Also amounts related to payments received/bills raised and the expenditure incurred will be excluded from P/L A/c. Further Completed contract method is not contrary and can be adopted and applied when an assessee follows mercantile system of accounting. However we remand the matter to the tribunal to examine the other aspects relating to computation of taxable income on the basis of completed contract method Decided partly in favor of assessee.

Summary

Issues:
1. Application of project completion method in accounting under the mercantile system.
2. Compliance with Section 144 of the Income Tax Act for assessment.

Issue 1: Application of Project Completion Method:
The case involved a dispute over the applicability of the project completion method in accounting under the mercantile system for the assessment year 1997-98. The Income Tax Appellate Tribunal (ITAT) found that the assessee had a works contract with NBCC, where payments and expenses were not included in the profit and loss account but shown in the balance sheet under specific heads due to ongoing work. The Assessing Officer enhanced the income of the assessee by applying the average rate of profit on the value of work in progress for the NBCC project. The CIT(Appeals) rejected the plea regarding the project completion method, stating that the amendment to Section 145 required a shift to the mercantile system of accounting. However, the CIT(Appeals) later observed that both billings and expenditures related to the NBCC project should be excluded due to pending arbitration. The tribunal upheld the CIT(Appeals) decision, emphasizing that until the contract is completed or disputes are settled, income or loss cannot be determined. The confusion arose regarding the treatment of the claimed loss, which was clarified by excluding both entries from the profit and loss account.

Issue 2: Compliance with Section 144 of the Income Tax Act:
The second substantial question of law revolved around the compliance with Section 144 of the Income Tax Act by the Assessing Authority. The CIT(Appeals) and the tribunal held that the completed contract method could not be adopted for computing taxable income under the mercantile system of accounting. However, the High Court referred to a judgment by the Madras High Court, which allowed the adoption of the completed contract method under Section 145 for an assessee following the mercantile system of accounting. The High Court noted a contradiction in the orders of the CIT(Appeals) and the tribunal regarding the exclusion of receivables and expenses for incomplete contracts. The matter was remanded to the tribunal for further examination on the computation of taxable income using the completed contract method, clarifying that the method could be adopted under Section 145.

In conclusion, the judgment addressed the issues of applying the project completion method in accounting under the mercantile system and the compliance with Section 144 of the Income Tax Act. The High Court clarified the treatment of billings and expenditures for ongoing contracts, emphasizing the need to exclude them due to pending arbitration. Additionally, the High Court allowed the adoption of the completed contract method under Section 145 for an assessee following the mercantile system of accounting, remanding the matter to the tribunal for further examination.