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TMI Blog1997 (7) TMI 191X X X X Extracts X X X X X X X X Extracts X X X X ..... asons in support of making such addition. 2.1 The CIT(A) observed that the AO has not discussed in detail the method of accounting followed by the assessee in respect of the turnkey projects, the period of execution of which normally overlap two or three accounting years. He further observed that the completed contract method is a recognised method of accounting of the profits of long drawn projects which extend over periods longer than one accounting year. In other words, the expenditure of each year relating to each project are accumulated and are carried forward as work-in-progress and are finally adjusted against the total receipts that are due from the projects in the year of substantial completion of the contracts. The CIT(A) further observed that there may be a continuous flow of advance amounts from the clients which, generally are commensurate with the extent of work done or sometimes even slightly more than the work done, the excess being in the nature of work advance. The CIT(A) observed that the assessee has treated most of the expenditure in accordance with the completed contract method but the value of supply of certain bought out items which are fairly independent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n mercantile system of accounting regularly followed by the assessee." 5. The learned counsel for the assessee submitted that the assessee has consistently maintained its accounts on the basis of similar method of accounting, which has been accepted in the past as well as in the future years. He drew our attention towards the directions given by the Addl. CIT,New Delhi, under s. 144A of the Act for asst. yr. 1984-85. In the said directions, the Addl. CIT in asst. yr. 1984-85 has accepted the completed contract method of accounting followed by the assessee. The learned counsel submitted that the Revenue s ground would fail in view of the directions given by the Addl. CIT under s. 144A for asst. yr. 1994-95. 5.1 The learned counsel for the assessee further submitted that the additions confirmed by the CIT(A) in relation to the various aforesaid projects is patently wrong. He pointed out that the CIT(A) has erred in confirming the addition of Rs. 20,47,269, in respect of turnkey project executed with Atul Food Products. It was pointed out by him that the CIT(A) has sustained the aforesaid addition as per the details mentioned below: . Rs. Gross receipts fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Profit already accounted for 5,49,873 . Balance profit to be added to the returned income 20,45,770 The learned counsel drew our attention towards the revised agreement executed with the said party which shows the total contract price of the project of this party was only Rs. 106 lakhs. Copy of page No. 3 of the revised agreement has been submitted at p. 50 of the compilation. However, the complete copy of the revised contract has not been placed in the record. The learned counsel submitted that the CIT(A) ought to have taken the total contract receipt only at Rs. 1,06,00,000 instead of Rs. 1,30,00,000 adopted by him. 6.1 The learned counsel also submitted that the CIT(A) has erred in confirming the addition of Rs. 50 lakhs in relation to project of M/s. Goetz (India) Ltd. This income was shown by the assessee in asst. yr. 1994-95. Inclusion of the same income in the year under consideration has resulted in double taxation of the same income. 6.2 The learned counsel made the submissions with regard to the additions confirmed in relation to the various projects discussed in the order of the CIT(A). He, strongly urged that the addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ORK DONE FOR ATUL FOOD PRODUCTS Year ended 31ST MARCH, 1993 (Amount in Rs.) .Dr. . . Cr. Opening W.I.P. Nil Sales 4,00,000 Purchases 7,73,601 Closing W.I.P. 4,12,166 Other direct cost Nil . . Gross profit 38,565 . . . 8,12,166 . 8,12,166 .(Year ended 31st March, 1994) Opening W.I.P. 4,12,166 Project receipts 10,14,335 Purchases Nil Sales value 7,69,615 Direct cost 1,82,565 Closing W.I.P. Nil Gross profit 11,89,219 . . . 17,83,950 . 17,83,950 TRADING ACCOUNT OF THE PROJECT FOR ATUL AGRO OIL LTD. Year ended 31st March, 1992 (Amount in Rs.) Dr. . . Cr. Purchase 17,88,443 Closing work in progress 17,88,443 (Year ended31st March, 1993) Opening W.I.P. 17,88,443 Sales value 55,80,000 Purchase 74,84,810 Closing W.I.P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Ltd. has also not been communicated by the assessee to the Departmental authorities. 9.2 The AO and the CIT(A) also required the assessee to communicate the exact date of completion of the project of Atul Food Products. The assessee produced a copy of letter dt.29th June, 1993, addressed by the said client to the assessee requesting them for deputing a person for repairing the plant. The learned counsel was requested to supply a copy of the said letter which was not available with him. The contents of the said letter as reproduced in the order of the CIT(A) indicates that the client required the assessee to repair the plant vide letter dt.29th June, 1993. It necessarily implies that the turnkey project of the said client had already been completed prior to the said date, when the client asked the assessee to carry out certain repairs in the said plant. Ordinarily, it should not be difficult for the assessee to give the exact date, when the erection of the plant of Atul Food Products was finally completed. This information can be correctly ascertained by examining the records of Atul Food Products. Their production register can clearly reveal the exact date when production from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commissioned and guarantee runs completed by28th Feb., 1993. 10.1 The CIT(A) has confirmed the addition of Rs. 50 lakhs in the year under consideration on the ground that there was no valid basis for postponing the income of Rs. 50 lakhs accrued and actually received in the year under consideration. The learned counsel, however, submitted that expenses incurred against the said sum of Rs. 50 lakhs are included in the expenses shown in the trading account for the year ended on31st March, 1993. Proportionate expenses incurred towards the supply of designs and drawings have not at all been allowed by the CIT(A). There is a considerable force in the submission made on behalf of the assessee in this respect. 11. The aforesaid facts and discussions clearly reveal that the matter has not been properly examined by the CIT(A) as well as by the AO. The CIT(A) has given a finding that income has to be determined on the basis of completed contract method without examining as to what type of method of accounting was really followed by the assessee. The CIT(A) nor the AO have examined the method of accounting followed by the assessee in a proper manner. It was necessary on the part of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner to suit the convenience of the assessee. In case, where no written contracts have been executed, it may be necessary to examine the terms of contract by recording the statement of the senior executive of the buyer companies or by examining the entries in the books of accounts of the buyer concerns. The AO should deeply examine the method of accounting followed by the assessee. He should then examine the various types of recognised method of accounting in relation to such turnkey projects. For this purpose, he may refer to various accounting standards issued by theInstituteofChartered Accountantsin this regard or he may refer the well-known books of the Principles of Accountancy. 12.2 If the AO arrives at the conclusion that the method of accounting adopted by the assessee is not a recognised method of accounting, he should give a specific finding as to whether the proviso to s. 145(1) or s. 145(2) is applicable on the facts of the present case. 12.3 Thereafter the AO should adopt a fair and proper method for estimation of income of the assessee in relation to each project carried out by the assessee in the year under consideration. 12.4 The AO may also make a useful refer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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