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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 ..... f the customers. The AO has given detailed reasons 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 bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained 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 from the client 30,42,000 (-) Purchases and other direct costs 9,56,166 Balance gross Profit 20,85,834 (-) Profits already accounted 38,565 Balance to be added 20,47,269 The lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 addition sustained by the CIT(A) should be cancelled. 7. The learned Departmental Representative submitted that the assessee has not maintained any regular or recognised method of accounting. He drew our attention towards a chart submitted at p. 81 of the paper-book which shows that the assessee has booked sales in relation to various projects in the year under consideration, which is claimed to have been booked on the basis of value of certain bought out items supplied to the clients in the year under consideration. The learned Depa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 53,74,230 Direct Costs 11,31,104 . . Gross Profit 5,49,873 . . . 1,09,54,230 . 1,09,54,230 (Year ended31st March, 1994) Opening W.I.P. 53,74,230 Project receipts 52,98,930 Purchase Nil Gross loss 75,300 Direct cost Nil . . . 53,74,230 . 53,74,230 It is an undisputed fact that the assessee has received Rs. 30 lacs upto the end of the relevant accounting year ended on31st March, 1993. The receipts in Atul Food Product have been admittedly understated by Rs. 8 lacs which has been wrongly credited in the accounts of the aforesaid two parties. The income of Atul Oil Ltd. Project for asst. yr. 1993-94 has been disclosed at Rs. 5,49,873 only. In this year, the project for Atul Agro Oil Ltd. had not been completed as is evident from the copy of their trading account for the year ended on31st March, 1994also. Hence the income of Atul Agro Oil Ltd for the year ended on 31st March, 1993 has been disclosed with reference to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n clearly reveal the exact date when production from the said plant supplied by the assessee had commenced. Such precise detail was not furnished by the assessee. The exact date of the completion of the project may be perhaps necessary for proper determination of income from the said project. 10. The CIT(A) has confirmed the addition of Rs. 50 lacs in relation to the project for Goetz (India) Ltd. The copy of trading account of the project for Goetz India Ltd. is reproduced as hereunder: TRADING ACCOUNT OF THE PROJECT FOR GOETZ (INDIA) LTD. YEAR ENDED 31ST MARCH, 1993 (Amount in Rs.) .Dr. . . Cr. Opening W.I.P Nil Closing W.I.P. 94,74,451 Purchases 93,58,867 . . Direct cost 1,15,584 . . Profit/Loss Nil . . . 94,74,451 . 94,74,451 .Year ended31st March, 1994 .Opening W.I.P. 94,74,451 Project receipts 50,00,000 Purchases 1,35,36,476 Closing W.I.P 2,40,94,391 Direct cost 10,83,464 . . Profit 50,00,000 . . . 2,90,94,391 . 2,90,94,391 The CIT(A) has observed that two different contracts were executed with the said client. The first contract signed on4th June, 1992, was for the purpose of designing and supply of drawings for a fully autom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the present case, we are of the view that it would be necessary to set aside the order of the CIT(A) as well as that of the AO and restore the matter back to the AO for passing a fresh order after conducting necessary enquiries and investigations and after thoroughly examining the books of accounts maintained by the assessee in relation to its income from various projects. The AO will inter alia examine the following aspects. 12.1 First of all the AO should carefully examine as to which method of accounting has been followed by the assessee in relation to its income from carrying out of the various projects. The very fact that the assessee has shown income from the various turnkey projects carried out for its various clients in two or more years indicates that the method of accounting followed by the assessee cannot perhaps be termed as completed contract method. The correctness of the method of accounting followed by the assessee of booking of the sales and income thereon in respect of value of supply of certain bought out items in the year in which the items are supplied, is also required to be thoroughly investigated by the AO. For this purpose, the AO will have to take int ..... X X X X Extracts X X X X X X X X Extracts X X X X
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