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TMI Blog2014 (4) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... Completion Method (POCM, for short) 'Percentage of Completion Method' is an accounting method in which the revenues and expenses of long-term contracts are recognized yearly as a percentage of the work completed during that year. This is the opposite of the completed contract method, which allows taxpayers to defer the reporting of any income and expenses until a long-term project is completed. The percentage of completion method of accounting is commonly used in construction projects as distinct from completed contract method. The petitioner had also claimed deduction of Rs.178.63 crores under Section 80-IAB in respect of profits derived from projects in SEZ areas. The petitioner had granted loans and advances to its subsidiaries and shown interest income @ 6.5% per annum in respect of said loans and advances as received from its subsidiaries. 4. Statutory notice under Section 143(2) with a detailed questionnaire dated 1st November, 2012 was issued to the petitioner fixing the case for scrutiny assessment on 8th November, 2012, on which date the case was adjourned to 23rd November, 2012. On the said date, part details were filed but in the meanwhile another questionnaire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out any discrepancy or inaccuracy. Reference in the fifth successive year amounts to harassment and unwarranted inconvenience. Repeated exercise was oppressive and unjustified. (iv) Deduction claimed and admissible under Section 80-IAB in respect of profits from SEZ units has been duly certified by a qualified Chartered Accountant in Form No. 10 CCB. Without pointing out any deficiency, inaccuracy or discrepancy, direction for special audit on the ground that the profit shown from SEZ income was higher than the profit shown from non-SEZ income was unwarranted and does not disclose live nexus. (v) For similar reasons, special audit was directed in the Assessment Year 2008-09 but the Special Auditor did not recommend any disallowance under Section 80 IAB of the Act. In the Assessment Year 2009-10, this issue was not referred for special audit. The Assessing Officer for Assessment Year 2008-09 had made substantial dis-allowance contrary to the recommendation of the Special Auditor and in the Assessment Year 2009-10 again disallowance was made without aid of the special audit report. Commissioner (Appeals) has completely deleted the disallowance made for Assessment Year 2008-09 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d these were the essential pre-requisites. The object being the special audit should be directed, if it assists and succours, the Assessing Officer in framing correct and proper assessment based on the accounts maintained by the assessee, i.e., the Assessing Officer must reach a finding that the accounts of the assessee were complex and in order to protect the interest of the Revenue, recourse to the said provision should be made. The expression or word "complexity" it was observed refers to state of quality of being intricate or difficult to understand but the Supreme Court observed that what would be the complex to one, might be simple to another and, therefore, an Assessing Officer must make a genuine attempt to understand the accounts, appreciate the entries, in the event of doubt, seek explanation and then form the required opinion based upon objective criteria and not purely on the basis of subjective satisfaction. The provision did not entitle the Assessing Officer to pass the buck to the Special Auditor as it was the Assessing Officer's responsibility to scrutinise the accounts. However, the Supreme Court rejected the contention that special audit need not be directed becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial audit should not be ordered for an underlined purpose which was not bonafide. It should not be ordered and approved mechanically and certainly not for unauthorised purpose of extension of limitation to complete the assessment. The petitioner in support of their contentions have referred to decisions of Calcutta High Court in Bata India Limited and Another versus Commissioner of Income Tax and Others, (2002) 257 ITR 622, West Bengal State Co-operative Bank Limited versus Joint Commissioner of Income Tax and Others, (2004) 267 ITR 345 and decision of Kerala High Court in Muthoottu Mini Kuries versus Deputy Commissioner of Income Tax and Another, (2001) 250 ITR 455. In these decisions, it was held that the Assessing Officer should normally have workable skill and idea of accounting because of the nature of duty entrusted to them. Assessing Officer was not a layman or one with no experience in dealing with the accounts. He was supposed to be acquainted with the method of accounting and with comprehensive knowledge with regard to matters required to be examined. 10. Aforesaid rulings when appraised and reflected, state that while examining the question of complexity in accounts, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue direction for special audit is justified for the reasons set out in the order dated 25th March, 2013. (We have not examined the constitutional validity of the amended provisions and we express no opinion on the said aspect). 12. The show cause notice issued on 26th February, 2013 is a detailed one. It mentions hearings held on various dates that the books of accounts were requisitioned, produced and examined and questionnaires, details and information were called for. On POCM calculation in the show cause notice, it was observed:- "It has been submitted that percentage of completion method (POCM) is being adopted by you for recognition of revenue of ongoing projects. Under the POCM method, the budgeted cost of project is compared with the actual stage of completion and based upon the level of completion achieved, proportionate revenue and cost are taken to the profit and loss account. It is noteworthy that the special audit report for the A. Yrs. 2006-07, 2007-08, 2008-09 & 2009-10 contain findings that the revenue recognized from various projects under construction had not been correctly determined by you mainly on account of following discrepancies: (i) Increase in budgeted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purpose of computing and understanding the POCM profit as worked out. By Order sheet entry dated 1st February, 2013, the petitioner was asked to furnish the following information: "Name of the projects Information required Phase-V Area as well as EDC increased Kolkatta Unbooked Area reduced Jallandhar Area Increased Ludhiana Unbooked Area reduced City Court Sikandar Pur Increase in total area Cross Point Unbooked Area reduced Land value related cost Courtyard reduced" 14. Thereafter observations with regard to DLF Phase -V project, Jallandhar Project, City Court Sikandar Pur project and Courtyard project have been made. In another paragraph reference was made relating to Cross Point Project and Kolkatta Project and observations on various entries were highlighted. Thereafter method of accounting on issue of stock to the contractors stands elucidated and observed that on the basis of the entries, there was difficulty in understanding the accounts. These were multiple transactions in relation to sale of plots and development cost with sister concerns. Transactions relating to land purchases were routed through various related group concerns which were very intricate and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -10, wherein the special auditor has recommended an addition of Rs.77.83 Crores under POCM. In this regard, it may please be noted that the assessee company itself had worked out an addition of Rs.120.62 Crores on the lines of Special Auditor's working for the A. Y. 2008-09. This working was filed vide assessee's reply dated 08.12.2011 in response to certain queries raised by the then Assessing Officer vide Order Sheet entries dated 24.11.2011 with regard to working of POCM revenue. It is a different matter that the learned Assessing Officer decided to go with the findings of the Special Auditor even though the same was prejudicial to the interest of revenue." 16. The aforesaid observations to our mind show that substantial additions have been made on POCM issue earlier. Assessee may have succeeded before CIT (Appeals) in the assessment year 2007-08 and 2008-09, but further appeals were pending. With regard to Assessment year 2006-07, addition of more than Rs.120 crores stands sustained in the first appeal. The Petitioner has made inquisitive observations with regard to assessment year 2009-10 as it was indicated that the Petitioner had made addition of Rs. 120.62 crores o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served that during the assessment proceedings on number of instances or entries, queries were raised and 4 or 5 persons were required to clarify the facts. The ledger account did not contain narration therefore scrutiny of the entries had become cumbersome and difficult. 20. On the question of loans and advances to the subsidiaries, the petitioner had submitted that the loans and advances to the subsidiaries should not and would not affect interest payments in the hands of the holding company. We are not primarily concerned with the legal submissions in the present case because the legal principle applicable depends upon facts which have to be verified and ascertained. The petitioner in response to the show cause notice had stated that the petitioner had own funds to the extent of Rs.12,830 crores and had borrowed funds to the extent of Rs.12,638 crores during the year in question. The petitioner has granted loans and advances to the extent of Rs.10,14,344.97 lacs to the subsidiary companies @ 6.5% per annum which as per the petitioner was the borrowing costs. It was claimed that in view of the aforesaid position, the petitioner was not evading tax as the transactions were tax and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le under schedule 15 sales and other income has been shown as income revenue from development charges Rs. 23,831.37. The difference is due to income from land lease income. Further the assessee has raised an objection that during the course of assessment proceedings no query with. respect to SEZ deduction was raised. In this regard it is stated that query can be raised at any point of time before the completion of the assessment in the interest of the revenue and it is not prerogative of the assessee to challenge the same. Further assessee was given opportunity to reply to this query, hence this objection cannot be entertained. 18.8 Assessee has raised use of word Transparent'. In this regard it is stated that non transparency in the maintenance of books of accounts leads to complexity both in terms of examination and determination of revenue realization. Without prejudice it is further stated that the Income Tax Act does not prevent the Assessing Officer from examining the form No lOCC13." 24. We do not find any merit in the contention raised by the petitioner that related party transactions or reasonableness of interest paid to the petitioner on loans and advances by its su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer to aid and assist him. Accounts should be accurate and provide real time record of the financial transactions of the assessee. Preparation of accounts is the work of the accountant on the payrolls or employed by the assessee. In order to ensure reliability and accuracy, enterprises resort to internal audit and an external audit which can be a statutory audit. Internal audits are normally conducted in house generally by acquainted or qualified accountants. Statutory audit is compulsory under the Companies Act, 1956 or when stipulated by the Act and accounts have to be audited by a qualified Chartered Accountant. Chartered Accountants are not ordinary accountants but specialists who have successfully undergone academic study and have extensive practical experience and trained for the said work. Curriculum requires articleship under a mentor who is himself a Chartered Accountant with some years of experience. As opposed to an ordinary accountant, a Chartered Accountant with his experience and academic background is in a better position to investigate, examine and scrutinize entries and records of financial transactions. Calibre and competence of Chartered Accountants is of a h ..... 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