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TMI Blog2017 (1) TMI 1210X X X X Extracts X X X X X X X X Extracts X X X X ..... tory mandate, and jurisprudence of regular assessment vis-a-vis presumptive assessment and catena of judicial precedents as detailed in this order. - Decided against revenue. - ITA No. 1707/Ahd/2013 - - - Dated:- 18-1-2017 - SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER For The Revenue : Shri Hare Govind Singh, CIT-DR For The Assessee : Shri Vartik Choksi, AR and Shri Mrunal N. Shah, AR ORDER PER R.P. TOLANI, JUDICIAL MEMBER:- This appeal by the Revenue is directed against the order of the Learned Commissioner of Income-Tax (Appeals), Gandhinagar dated 18.03.2013 for Assessment Year 2009-2010. 2. Following grounds are raised:- (i) The Ld. CIT(A) has erred in law and on facts in holding that the AO s action of rejecting books of accounts in terms of section 145(3) of the Act and invoking the provisions of section 44BBB(1), is not justified, without appreciating the fact that the assessee has estimated cost taken as benchmark in absence of supporting documents. (ii) The Ld. CIT(A) has further erred in law and on facts in not considering the fact that the assessee being a foreign company, AS-7 is not applicable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under subsection (3) of section 143 and determine the sum payable by, or refundable to, the assessee (emphasis supplied) The section clearly provides an option to an assessee being a foreign company engaged in the business of civil construction, erection of plant or machinery, testing and commissioning of power project to offer to tax lower profits and gains than profit deemed of 10% of the amount receivable by the appellant under sub section (1) of Section 44BBB of the IT Act provided following twin conditions are fulfilled: (1) The appellant shall keep and maintain such books of account and other documents as required under sub-section(2) of section 44AA of the IT Act. (2) The appellant shall get his accounts audited and furnishes a report of such audit as required under section 44AB of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of completion as on 31.03.2009. The management has estimated cost for the entire contract and worked out percentage of completion for each year on the basis of cost incurred as per audited accounts. Accordingly, revenue is recognized on the basis of corresponding percentage to cost estimates given by the management for the entire project period till date i.e. 31.03.2009 as per audited accounts. Determination of Revenues under the percentage of completion method and provision for loss necessarily involves making estimates of costs to be incurred by the Management, which is being of technical nature, have been relied upon by the Auditors. The difference between billed revenue and working below is accounted as Unbilled Contract Revenue due . (e) The AO during the course of assessment proceedings asked the appellant to furnish basis of estimating budgeted cost. In this connection, the Appellant vide letters dated 21/12/2011 and 29/12/2011 submitted to the AO that the management has estimated total cost of the project having regard to the experience in executing the contracts, tenders and quotations from various vendors and sub-contractors. The Appellant further submitted d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry high estimated cost of completion so that it may lead to deferment of tax. In the present case, I find that the figures of 3 years were made available to the AO at the assessment stage itself. There is no big difference in estimated cost and profit percentage declared from year to year, There is no reason therefore to suspect that the figures of estimated cost were deliberately tinkered with. In fact the project has been completed in 2012 itself and it is not the case that it is a long drawn project where undue deferment of tax was the motive. The AO's remark that stage of completion is a better method is not universally applicable. That is why different methods including the percentage of total estimated cost applied by the appellant have been suggested in the accounting standards. The milestone method or the stage of completion method can be very inappropriate where the contractor and the contractee agree for terms of payment much different from the actual stage of work (cost of work completed). In some cases the contractee who becomes very dependent on the contractor for completion of work once the work is given and started would like to retain substantial portion of paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... para 29 of the Accounting Standard-7 Construction Contracts as recognized by the ICAI and the Central Government, the appellant has followed correct method of accounting in terms of Section 44BBB(2) read with Section 145(1) (2) of the IT Act. It is held that the AO's action of rejecting books of accounts in terms of Section 145(3) of the IT Act and assessing income u/s 44BBB(1) of the IT Act on presumptive basis is not justified in view of the observations made earlier. The variation in the income declared by the appellant is held not sustainable and is directed to be deleted. The relevant grounds of appeal are decided accordingly. 3.3 Aggrieved, the Revenue is now in appeal before us. 4. Ld. Departmental Representative relied on the contents of order of AO and contends that: (i) Assessee did not submit proper working of estimated cost of the contract of ₹ 1694,63,01,948/-, besides for a big project, there must have been deliberations and hundreds of pages of documents on the basis of which estimates were prepared. Assessee did not furnish supporting documents in this behalf and no details of schedules, materials or other expenses were submitted in suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vii) The list of requirements of the AS-7 are as under: - There should be a reliable estimate of contract cost - Determining stage of completion (i.e various milestones mentioned in the contract) - Recognize revenue as such % of the contract revenue.( based on stage of completion) Since the whole premise of determining stage of completion depends upon estimated cost assessee was not able to substantiate such estimated cost, the stage of completion determined by the assessee was not reliable as compared to correct status of completion of the contract. In that case the physical completion will be the only reliable method which in assessee's case should have been engineer's certificate or progress reports by technical staff as sent to employer as per terms of contract or as per actual milestones. For properly determining actual or part of milestones completed, again physical work completion is required to be known. In view of these inconsistencies ld. AO held that assessee's a/c book, method and contentions were not acceptable and consequently method of accounting and book results were rejected u/s 145. (viii) Since assessee did not determine the stage of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not applicable to assessee being a foreign company, at other place method of accounting is objected, another place working is objected. Each and every detail was furnished before ld. AO and before ld. CIT(A) as well. There is no reference to any additional evidence filed by the assessee before ld. CIT(A). All the objections of ld. AO have been clarified, reconciled and tabulated before ld. CIT(A) based on the same material which was available on record. In these circumstances there is no merit in the contentions of ld. DR that assessee did not reconcile, substantiate or furnish details in respect of its contentions. Ld. CIT(A) has dealt with all the AOs objections and thereafter decided the issues based on merits supported by judicial precedents. For rejecting books of accounts of assessee and discarding the method of accounting followed by the Appellant as per AS 7 ld. AO went on shifting his stand, objections and observations in arbitrary manner to somehow discredit assessee s contentions . 5.1 Both the contracts i.e. Mundra and Jajhar were fixed price contracts for erection, testing and commissioning of power plants in terms of contract entered into with Adani and Jhajhar P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A: Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the accounting standards until the accounting standards are prescribed by the Central Government under this sub-section.] 5.4 These mandatory provisions of the Companies Act, 1956, obliged the assessee foreign company to prepare Balance Sheet and Profit loss account in compliance to the accounting standards notified by the ICAI including AS-7. Therefore, the observation and reasoning of ld. AO to hold that AS-7 is not applicable is assessee is contrary to law and without any basis. The rejection of books on such untenable reasoning is arbitrary and unsustainable. Ld. CIT(A) has elaborately dealt with these aspects and held the AO s action to be without justification. 5.5 The AS-7 is applicable to each and every con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to how the assessee should adopt method of accounting. Ld. CIT(A) has dealt with this aspect in objective and in terms of legal position. 5.7 The guidelines for recognition of contract revenue and cost are mentioned at paras 21 to 34 of the AS-7 as under: 21. When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. An expected loss on the construction contract should be recognised as an expense immediately in accordance with paragraph 35. 22. In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied: (a) total contract revenue can be measured reliably; (b) it is probable that the economic benefits associated with the contract will flow to the enterprise; (c) both the contract costs to complete the contract and the stage of contract completion at the reporting date can be measured reliably; and (d) the contract costs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be determined in various ways, and depending upon the nature of contract, it may include (a) the proportion that contract costs incurred for work performed upto the reporting date bear to the estimated total contract costs; or (b) surveys of work performed; or(c) completion of a physical proportion of the contract work . 5.9 The management of the Company estimated total cost of the project having regard to the experience in executing the contracts, tenders and quotations from various vendors and sub-contractors. In view of all the facts and circumstances, the first method as given in para 29 of AS-7 was applied, being the most suitable method for recognizing revenue and cost related to the contract. Following these parameters and guidelines assessee duly recognized its revenue and cost for the impugned year following the percentage completion method on the basis of proportion of cost contract costs incurred for work performed upto the reporting date to the estimated total contract costs. It is also an admitted facts that assessees books of accounts are audited under the Companies Act and in the notes to the financial statement, the method recognized to account for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12.48% G Current year s revenue (C X F) 219,89,23,057/- 5.11 Ld. AO asked to furnish basis of estimating budgeted cost, assessee vide letters dated 21/12/2011 and 29/12/2011 explained that the estimated total cost of the project was worked out on the basis of experience in executing the contracts, tenders and quotations from various vendors and sub-contractors. Detailed break-up of the estimated profit loss account for entire project for five financial years 2007-08 to 2011-12 was also furnished. Besides while obtaining order u/s 197 of the Act, the it had submitted the details of budgeted cost which have already been accepted by the department. Audited financial statements for F.Ys.2009-10 and 2010-11 were also submitted a perusal thereof such demonstrated that the assessee had actually incurred the cost as estimated. 5.12 However, the ld. AO did not appreciate these details and unfortunately held that relevant details were and supporting documents for estimate of cost of contract were not filed which is contrary to record. Assessee further provided the relevant details of actual cost incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. AO that as the cost incurred upto the reporting date is ₹ 211,41,21,308/- and the estimated cost for the project is ₹ 1694,63,01,948/-, the revenue is recognized taking into consideration both the figures as per method (a) proportion of contract cost incurred for the work performed upto the reporting date to the estimated contract cost as certified by the management, provided in para 29 of the AS-7. For the sake of convenient, a table was furnished to demonstrate how the revenue was recognized in the profit loss account: S.N Particulars Rs. A Cost incurred in current period 211,41,21,309/- B Total Budget Cost of Contract 1694,63,01,948/- C Contract Price 1762,60,00,000/- D Cumulative costs incurred prior period 3,60 60 007/- E Cumulative revenue recognized in prior period Nil F Percentage of Completion (A+D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method of accounting and for recognizing revenue by a method found suitable to ld. AO as it had propensity to inflate taxable profits by a fiction. 5.17 Ld. Counsel contends that assessee also demonstrated that even if methodology proposed by ld. AO of method (c) i.e. completion of a physical proportion of the contract work, was adopted, the result will be loss to revenue. on the basis of milestones prescribed in the Annexure 3, the revenue recognition will come to a lower amount than the revenue of ₹ 219,89,16,453/- as recognized by the assessee as under : S.N. Particulars Rs. A Physical completion of contract as per milestones prescribed 130,86,91,427/- B Mark-up of 10% (as suggested by AO) 13,08,69,143/- C Cost of physical completion of contract (A-B) 117,78,22,284/- D Estimated contract cost 1694,63,01,948/- E Percentage of completion (C/D*100) 7% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount in Rs. A Profit Element (Contract Revenue of ₹ 219,89,16,454/- Minus Contract Cost of ₹ 211,41,21,309/- 8,47,95,147/- B Less: Project WIP of Mudra project for FY 2007-08 2,72,52,413/- C Add: Cost of Mudra Project incurred in FY 2007-08 3,60,60,007/- D Less : Net Project WIP of Jhajjar Project 6,13,75,443/- E Profit derived at from the project (AB+C-D) 3,22,27,928/- F Other Income 2,94,66,096/- G Net Profit before Taxation 6,16,93,392/- 5.20 These tables demonstrate that there is no merit in AO s allegation that the unbilled revenue account is not reconciled. Therefore, in a these facts, circumstances and details neither the books of accounts can be rejected nor method of accounted be faulted nor a new method proposed by AO is super imposable. 5.21 Sec. 211(3C) of the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as body vested with authority to recommend ASs for endorsement by Central Government in consultation with National Advisory Committee of Accounting Standards, for presentation of financial statements. This being so the assessing officer cannot disregard the method of accounting followed by the assessee on the basis of guidelines provided by the ICAI and cannot reject books of accounts of the assessee. Relevant extract of which is reproduced hereunder : 8. Having heard the learned counsels for the parties and perused the record, what emerges is as follows: However, before we proceed further, we may indicate that, we would be answering the questions of law framed; in the reverse order, in as much as, the second question would be answered first and then, we would take up the other question of law. 8.1 . The foremost aspect which, thus arises for consideration in this case is: whether the method of accounting employed by the assessee to determine the real income evidently derived from lease of assets, could be given a go-by. In determining its income and its presentation, the assessee took recourse to the Guidance Note, issued by the ICAI, on Accounting For Leases. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted reading of the provisions of the said Guidance Note. Both the assessing officer as well as the CIT(A) have adverted to paragraph 2 of the Guidance Note to come to, what we consider an erroneous conclusion in as much as they have held that in determining as to whether deduction on account of lease equalization charges ought to be allowed or not, what has to be borne in mind is ultimately the provisions of the IT Act. In our view, such an observation in paragraph 2 of the Guidance Note is really saying the obvious. Therefore, even if this Guidance Note was silent on this aspect the provisions of the I.T. Act would undoubtedly still apply. Thus, as to what is the impact of provision of para 2 of the Guidance Note will be considered by us as we progress further with our judgment. 9.1 However, what is important at this stage is to first address ourselves to the aspect as to whether the assessing officer could have disregarded the method of accounting followed by the assessee in respect of lease rentals. In our view, the assessing officer could not have do so, as the method of accounting was based on a guideline commended for adoption by a professional body such as the ICAI. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounting policy and its effect, in the accounts, no fault could be found with the change in accounting policy merely on account of the fact that it was employed for the first time in AY 1996-97. The change in accounting policy, as noticed by us above, had the imprimatur of a duly recognized professional body, i.e., the ICAI. Therefore, notwithstanding the fact that the opinion of the ICAI was expressed in a Guidance Note which had not attained a mandatory status, would not, in our view, provide a basis to the assessing officer to disregard the books of accounts of the assessee and in effect method of accounting for leases, followed by the assessee. 5.24 Further reliance is placed upon the following judicial precedents emphasizing that percentage of completion method prescribed in AS-7 is an appropriate and recognized method for construction contract spread over several years. The AO cannot disregard the said method of accounting to reject books of accounts. MKB (Asia) (P) Ltd. vs. CIT 294 ITR 655 (Gau.) CIT vs. Woodward Governor India (P) Ltd. 294 ITR 451 (Delhi) confirmed by the Apex Court in 312 ITR 254. CIT v. Hyundai Heavy Industries Co. Ltd. [2007] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such civil construction, erection, testing or commissioning shall be deemed to be the profits and gains of such business chargeable to tax under the head Profits and gains of business or profession .] [(2) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that subsection, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143and determine the sum payable by, or refundable to, the assessee.] 5.27 A perusal of the provisions of sub-section (2) of S.44BBB of the Act, makes it clear that if the assessee maintains books of account and other documents under sub-section (2) of S.44AA of the Act and gets his them audited and furnishes a report of such audit as required u/s 44AB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB. The Assessing Officer shall then make an assessment of the total income or loss of the assessee under sub-section (3) of section 143. 5.29 Thus when assessee has maintained proper books of accounts audited u/s 44AA and 44AB of the Act, as the assessee has a statutory recognition of account based lower amount of profits the rejection of books may lead to a reasonable estimation of profits. It does not give any leverage to ld. AO to automatically resort to presumptive tax, which by way of promissory estoppels is applicable to no account based foreign companies. S.44BBB provides deeming fiction to tax income @ 10% civil construction receipts. However, courts have held that this deeming fiction is not an absolute proposition and cannot override sections 28 to 43A as also provisions contained in section 4. A harmonious construction and reading of sections 2(45), 4, 5, 44AA, 44AB and 44BBB of the Act lay down a clear scheme of the Act to tax foreign companies. Section 44BBB of the Act is not a charging section but only an optional, fictional and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tlines a statutory basis of assessment, what is being assessed at the statutory rate is the profits of the business , an expression which, as is well-settled, has to be understood in a commercial sense. The opening words of the section make no difference to this concept. In the first place, it is well-settled that in the computation of profits, all proper, outgoings have to be allowed as a deduction, irrespective of whether the statute contains a specific provision in this regard or not [ seeCITv. Chitnavis [1932] 2 Comp. Cas. 464 ; [1932] 6 ITC 453 (PC)]. Salaries paid to employees-and indeed all revenue expenditure incurred- for running a business will have to be taken into account in determining its profits, irrespective of the provisions of sections 28 to 43A. Secondly, the provisions in sections 30 to 43A are primarily intended to restrict or qualify the extent of deduction in regard to certain categories of expenses that would have been normally allowable in the computation. This is indeed clear from the omnibus nature of deductions permissible under section 37. Hence, in a commercial sense, the concept of profits determined under section 44BB or 44BBA, though arrived at on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections 28 to 43A, where an assessee is a non-resident, no allowance shall be made in computing the income chargeable under the head Business income , in respect of head office expenditure to the extent it is in excess of 5 per cent of adjusted total income or the amount of expenditure in the nature of head office expenditure incurred by the assessee as is attributable to the business of assessee in India, whichever is less. Though section 44C contains anon obstente clause and over rides the provisions contained in sections 28 to 43A regarding computation of income, yet various courts have held that where entire business operation is carried out in India, entire head office expenditure incurred is allowable while computing income from India. The limit contained in section 44C will not apply in such a situation. This is so held in the case of Rupenjuli Tea Co. Ltd. v. CIT [1990] 186 ITR 3011 (Cal.) and by Bombay High Court in the case of CIT v. Emirates Commercial Bank Ltd. [2003] 262 ITR 55. Extending the analogy it can be said that where there is no income by way of business income, section 44BBA cannot bring to charge 5 per cent of the specified sum as profits and gains of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 227(4A) of the Companies Act. Besides no other specific books of accounts are prescribed u/s 44AA. Thus assessee s books, audit, financial statements, balance Sheet, P L A/c etc. are fully compliant to relevant provisions of Income Tax and companies Acts. ii. Ld. AO held that AS7 is not applicable to the assessee company ignoring the vital legal propositions of section 594 of the Companies Act, 1956 laying down a statutory mandate that a company, which is incorporated outside India and has established place of a business in India, is required to prepare its Balance Sheet and Profit Loss account as per the various provisions of the Companies Act, as if it is a Indian Company with the meaning of the Companies Act. Consequently, ld. CIT(A) rightly held that the Accounting Standard AS-7 is applicable to it. We find no infirmity in this aspect of his order. Following AS 7, assessee has recognized revenue and cost following the percentage completion method on the basis of proportion of contract costs incurred for work performed till the reporting date to the estimated total contract costs. Undisputedly in the notes to the financial statement, the method recognized to acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 91 ,429/-, which indicated physical work of the contract was completed to that extent only, therefore, method (c) i.e. completion a physical proportion of the contract work as prescribed in para 29 of AS-7 was applicable. Ld. AO has failed to appreciate that method followed by assessee was correct and could not be disturbed on his perception. Besides it has not be controverted that AOs proposition would have lead to lesser revenue being recognized during the impugned year. Thus even the reason of loss of revenue is not ascribable to assessee s method of accounting. In view of these facts and circumstances we see no inconsistency in the order of ld. CIT(A) which is justified and within the parameters of law. v. No worthwhile defect has been pointed out by ld. AO qua the books of accounts, audit and P L A/c. It has been demonstrated that estimated cost and profit percentage declared from year to year nearly match, consequently we see no reason to suspect that the figures of estimated cost were distorted. The project has been completed in 2012 itself and it is not the case that it is a long drawn project where undue deferment of tax was the motive. The AO's remark that stage ..... X X X X Extracts X X X X X X X X Extracts X X X X
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