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TMI Blog2022 (11) TMI 992X X X X Extracts X X X X X X X X Extracts X X X X ..... adopted by the assessee in the current facts and circumstances is right, the bills certified as relating to work completed cannot be recognised as receipts and brought to tax in the Assessment Year 1986-87. The question that mercantile system of accounting should be directed would curtail the discretion available to the assessee - we answer the points in favour of assessee and against the Revenue. Work as executed or the progress bills were presented and approved - enforceable right in the assessee to receive payment - HELD THAT:- From the findings recorded, it is not brought to our notice that the bills certified are gone that far in getting approval from the Iraq Government and an enforceable right in the Assessment Year. The bills are stated as certified. It is definitely an enforceable right in the realm of contract. The assessee since is subjected to vagaries and uncertainties of fluctuation, preferred to have completed contract method for the entire project. The effect of these transaction, recognition of revenue etc would arise either upon completion of the contract and/or rescission of contract, other foreseen and unseen eventualities, that means, arising in the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk was Rs.6,21,90,197/-. The assessee was following the mercantile system of accounting and has been filing the returns accordingly. But, the assessee for the subject assessment year adopted completed contract method of accounting standard and as per the adopted accounting standard did not reflect entries for recognition of revenue from the work executed by the assessee in the previous year 1985-86. The assessee had taken a stand that Iraq was at war with Iran and in these conditions the completion of contract work would either take long time, the time schedule are not certain, and the balance of work whether could be executed by the assessee/sub-contractor in the near future. The assessee, compelled by the circumstances, entered into supplementary agreement dated 05.09.1984 with Ircon Ltd for deferred payment of contract dues. The assessee, keeping in perspective these singular circumstances faced in the execution of sub-contract in Iraq, had chosen to adopt completed contract method of accounting for determination of income from the work executed by the assessee in Iraq. Due to deferred payment agreement between the contractor and the sub-contractor, no part of the contract amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee to receive payment? 4. Learned Standing Counsel Mr.Christopher Abraham adverted to the undisputed circumstances in the case, namely that the assessee, prior to the subject previous year, was following mercantile system of accounting. The departure from mercantile system of accounting to completed contract accounting system for the works under execution in Iraq is rightly noted as an incidence to avoid or evade tax by the assessee. The Assessing Officer rightly added the difference between the amount for which works are certified and the expenses booked by the assessee against the works in Iraq, as income derived from the contract under execution in Iraq, amounting to Rs.6,92,96,722/-. The assessee should have consistency in adopting accounting standard and departure from consistent practice is not bona fide adding of income, hence, is within the discretion and jurisdiction of the Assessing Officer under the Act, particularly having regard to the scope and purpose of Section 145 of the Act. According to argument, the mercantile system of accounting ought to be accepted as consistent to the business practice of the assessee and since no exception to the details of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee for the Assessment Year. 5.1 To convince the Court with an illustration he has drawn our attention to the outflow from the books of account, certified bills, actual receipt from the principal contractor, if are treated as receivable and after deducting expenses income tax is levied, the assessee would be paying tax on amount which is not certain in any manner as on the date of filing of income tax return but further outflow of cash reserves would occasion. According to him, the circumstances leading to the supplemental agreement and limited options in which the assessee had accepted the proposal of Ircon and Union of India are independently considered both by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal. The findings of fact are pure and simple, recorded by the authorities having jurisdiction in this behalf. The questions of law are to be answered in favour of the assessee in the facts and circumstances and no exception to the findings recorded in this behalf would be taken. The learned Senior Counsel finally argues that the questions substantially compel the assessee to follow mercantile system of accounting, in spite of such acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. The assessee has completed a part of the work. The contractor has approved the work executed by the assessee. The assessee received a portion of the payment as well. Therefore, the completed contract method would not reflect fair and reasonable picture of the profit earned by the assessee from year to year or for the subject assessment year. The supplementary agreement for deferred payment postpones receipt of payment and not otherwise. The circumstances in Iraq may not take away the right of assessee to receive contract amount for the completed work. The assessee since has been following mercantile system of accounting, should have followed the same accounting standard for the subject assessment year as well. Therefore, the difference between certified work and the expenses incurred in this behalf has been treated as income assessable to tax in the assessment year and added accordingly. 6.4 The Commissioner of Income Tax (Appeals) in detail referred to the contentions, totality of circumstances and has concluded that the assessee will finalise the profit or loss on account of this particular contract when the entire payment is received and it will be offered to taxation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year under appeal on account of the specific provision contained in clause 19 of the agreement which releated to the payment. As per that clause payment was to be made by IRCON Ltd. to the assessee only when the money was received by IRCON Ltd., from the Iraqi authorities. Further, it was noticed that such payments were deferred upto July, 1989 by an agreement entered into with the Iraqi Government. He also noticed the decisions relied on by the assessee viz., 46 ITR 144(SC), 56 ITR 42(SC); 57 ITR 624(SC), 89 ITR 266(SC) and also 105 ITR 627 (Ker.). He also noticed the contention of the assessee that amounts thus far expended on the contract in a total of Rs.6,21,90,197 were to be treated as work-in-progress as the assessee had adopted completed contract method of accounting for arriving at the profit in respect of this contract. .... .... As the receipts were postponed to later years at the intervention of the Iraqi Government in respect of the contract, the learned CIT(Appeals) held that the amount of Rs.6,29,96,722/- included by the assessing officer as the income of the assessee had not accrued to the assessee during the accounting year relevant to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f completion method would not vary materially. In completed contract accounting method, recognition of revenue is avoided during the execution of the contract. The adoption of this accounting system, in effect, facilitates the drawing of profit or loss at the end of completion of project. There is no prohibition under the Act against changing the account method by an assessee. The change in accountancy method, as long as, held not to be bona fide or intended to avoid/evade payment of tax of income received by the assessee, the assessee is free in its discretion to change the accounting procedure in a year. Section 145 of the Act enables the Assessing Officer to determine whether or not the income deduced by the accounts maintained by the assessee is correct, a computation is proffered, and conform to the circumstances of the case. In this case, we are proposing to examine the discretion available to the assessee and the legal obligations read with functions conferred on the Assessing Officer under Section 145 of the Act. We would like to conclude that normally the choice of the method of accounting remains with the assessee. It is open to the assessee to follow one system of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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