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TMI Blog1997 (1) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment order that the assessee had disclosed engineering fees amounting to Rs. 32,38,34,188 in its accounts. This statement, is however, not fully correct. On examination and verification of the facts, it is found that the above figure actually represents the total amount of engineering fees allocated to the revenue of the assessee out of its receipts etc., in respect of the major jobs done by the assessee. On the other hand, the CIT (Appeals) has discussed that the total amount of engineering fees on jobs as credited to the profit and loss account of the assessee stood at Rs. 39,38,78,316, the details of which are as below : (a) Engineering Fees Rs. 23,59,00,018 (b) Report on Job Rs. 1,24,04,190 (c) Computer job Rs. 7,56,09,980 (d) Licence fees on software Rs. 51,250 (e) Income on investment Rs. 5,78,76,496 (f) Interest received Rs. 1,20,36,382 --------------------------- Rs. 39,38,78,316 --------------------------- Leaving aside the last three items, viz., Licence fees on software, income on investment and interest received, the actual engineering fees on jobs as taken into consideration by the assessee during the year may thus be considered to be of the amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )/95, in which the Tribunal concluded that inasmuch as the assessee had been following a regular method consistently over a period of three decades, that the profits of the assessee being ascertainable properly on the basis of the said method, that the method of accounting being a recognised one as approved by the accounting standards No. 7 and 9 of the ICAI and finally that on the basis of the facts of the case, the method was squarely and fairly applicable for ascertaining the profits of the business of the assessee, there was no point in disturbing the said method by substituting the Assessing Officer's own method of considering the actual receipts. For assessment year 1991-92, therefore, the Tribunal approved of the computation of income by way of engineering fees as adopted by the assessee. 2(c). When the assessment for the present assessment year was taken up by the Assessing Officer and the appeal was also disposed of by the CIT (Appeals), Bangalore, the above mentioned order of the Tribunal, Calcutta Bench, for assessment year 1991-92, had not till then been passed. In the present assessment for assessment year 1992-93, the Assessing Officer discussed the terms of contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osed by the assessee as engineering fees for this year. It is required to be mentioned in this connection that with regard to this matter also, the Assessing Officer has not taken into consideration the correct amount. In fact, the amount of Rs. 40,22,07,539 represents the aggregate amount of fees receivable by the company during the relevant year in respect of the major contracts as stated above. So far as the totality of the contracts of the assessee is concerned, the figure is somewhat higher. 3. In the appeal filed by the assessee before the CIT (Appeals), Bangalore, the learned CIT (Appeals) discussed the issue thread-bare. He emphasised on the following points : (i) Whereas the gross amount of engineering fees considered as income for the year by the assessee comes around the figure of Rs. 32,39,14,188, the total expenses of the assessee-company during the year, which can be considered to be mostly attributable to earning of such income, stands at Rs. 38,11,37,156, i.e., at a much higher figure than the gross income. Therefore, the assessee has tailored its gross income to show a gross loss from its engineering contracts. (ii) Para 7.1 of the Accounting Standard of the ICA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n method as prescribed by the ICAI. The order of the Tribunal for assessment year 1963-64 which related to a very simple case of assignment of portion of the receipt over a period of two years only, cannot therefore be considered to be applicable to the present year. Accordingly, no proper reliance can be placed on the method of accounting being adopted by the assessee which does not depict the true picture of profits of the assessee during the year. 4. In consideration of all the above facts, therefore, the learned CIT(A) distinguished the facts of the present case from those of assessment year 1963-64 as decided by the ITAT. At the same time again, he did not exactly approve of the method as considered by the Assessing Officer in determining the income of the assessee by way of engineering fees. It is required to be reiterated once more in this connection that the CIT (Appeals) did not have the benefit of the order of ITAT for the immediately preceding year, i.e., assessment year 1991-92. 5. During the course of the discussions of the matter before us, Shri K.R. Pradeep, the learned counsel for the assessee strongly relied on the detailed discussions made by the ITAT, Calcutta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned DR, on the other hand, strongly argues that in the method followed by the assessee, the matching principles of revenue and expenses are not being met. By referring to the order of the CIT (Appeals) pointing out the defect by way of not taking into consideration the work-in-progress in respect of incomplete jobs, Shri Arulappa has tried to contend that whereas the expenses relating to the incomplete jobs are being charged to revenue account, the income therefrom is not being taken into consideration. 6(a). Shri Arulappa has also argued that the order of the ITAT for assessment year 1991-92 does not have any binding effect inasmuch as in the said order, the ITAT had clearly noted that the departmental authorities had never challenged the method followed by the assessee, whereas in the present case, the CIT (Appeals) has shown that the assessee actually deviated from the method of accounting as prescribed by the ICAI. 6(b). Shri Arulappa has relied on the decision of the Privy Council in the case of CIT v. Sarangpur Cotton Mfg. Co. Ltd. [1938] 6 ITR 36 in which it has been held that the ITO is not bound to accept the profits shown by the assessee's accounts even where there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Shri Pradeep has, thereafter, tried to rely on the following decisions to the effect that when proper method of accounting is adopted by the assessee by which the profits of the business can be deduced properly, it does not lie upon the Department to reject the accounts by applying the provisions of section 145(2) and impose its own method : (i) Gemini Pictures Circuit Ltd. v. CIT [1958] 33 ITR 547 (Mad.), (ii) Mizar Krishna Annappa Pai & Co v. CIT [1968] 69 ITR 830 (Mys.). (iii) CIT v. Chunilal V. Mehta & Sons (P.) Ltd. [1971] 82 ITR 54 (SC). Another important matter to which Shri Pradeep has brought our notice is that he has refuted the statement of the CIT (Appeals) that as against the gross income from engineering fees being Rs. 32,39,14,188 only, the entire expenses of the assessee-company being of the order of Rs. 38,11,37,156 should be considered to be expenses incurred for earning this income and hence, the assessee disclosed huge loss on this account. Shri Pradeep has brought our notice to the fact that as per the accounts, the gross income by way of engineering fees on jobs was Rs. 39,38,78,316 in addition to which there were also other items of receipts like miscel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of payment do not have any connection with the actual performance of the contract work by the assessee-company. This argument on the part of the assessee seems to be a reasonable one and can be accepted. 8(a). A fairly big and complicated contract undertaken by the assessee not only continues over a number of years but is also actually required to be performed by the efforts of a large number of employees of the assessee, each one being assigned a specific job or duty and some times even a number of such jobs or duties. Each job may again be considered to consist of a number of different smaller jobs which constitute the totality of the overall job. From the discussions made by the learned counsel for the assessee and from a study of the detailed method of working out the income of the assessee as filed before the Assessing Officer, we are made to believe that whenever a particular smaller job is completed by the concerned official of the assessee-company, the value of such job considered quantitatively as well as qualitatively is taken into consideration while determining the percentage of contract completed. In case however, that smaller job remains incomplete, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnecessarily raised the issue relating to the work-in-progress. There is no doubt about the fact that the work-in-progress, either the opening one or the closing one, is not being depicted by the assessee in its accounts. As discussed above, however, in respect of completed items of job included in the overall contract, due care is stated to be taken while determining the percentage of completed contract and in that way, the work-in-progress may be considered to be embedded in the said percentage of completed contract and hence, the income assigned on that account. The assessee is certainly not carrying on any construction activity on its own. Therefore, the question of separately showing work-in-progress cannot arise. Even in the case of a contractor engaged in construction activity also, if the income be determined in accordance with the percentage of completed contract, we feel that the work-in-progress will duly be taken care of. Hence, we do not find any reason behind the clamour raised by the CIT (Appeals) about non-depiction of work-in-progress in the accounts of the assessee. So far as the question of the expenses exceeding the gross income by way of engineering fees as all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation. In this reckoning he can also take into account the Expenditure for work debited in the profit and loss account. On this basis, he can come to a conclusion about the correct Engineering receipts and work-in-progress, if any, to be added on the credit side of the profit and loss account at least so far as it relates to the major concerns listed earlier. Since it is difficult to analyse each of the item in the list provided by the assessee, the Assessing Officer should also consider whether it is possible to quantify suppression, if any, of fees for job and/or work-in-progress component by projecting the suppression, if any, discovered in the cases analyses to the transactions with all principals in that, list. He should exclude the work completed by the end of the relevant previous year from the purview of such projection. The issue is therefore restored to the files of the Assessing Officer for reconsideration in the lines suggested above." It is evident from a mere perusal of the prescription given by the CIT (Appeals) about computing the income of the assessee from this source that he does not at all dish out a well-defined and practical method for the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed an amount of Rs. 7,39,74,792 towards engineering fees for services rendered abroad. The assessee claimed deduction on this account at 50% of this amount of receipt in foreign exchange under section 80-O. The Assessing Officer found that except for PT Ispat Spangs of Indonesia, all other agreements were approved by the CBDT. Hence, theoretically the Assessing Officer admitted the claim of the assessee towards allowance of deduction under section 80-O on the amount of Rs. 7,33,69,952 arrived at by deducting the amount of Rs. 6,04,840 being the receipt towards engineering fees from PT Ispat Spangs, Indonesia. At the same time again, whereas the claim of the assessee was for deduction at the rate of 50% of the total amount, the Assessing Officer calculated expenses incurred in India out of the overall expenses of the office run by the assessee on proportionate basis to be Rs. 6,95,26,332. Ultimately, the Assessing Officer allowed deduction of Rs. 19,21,810 being 50% of the resultant figure of Rs. 38,43,620. The same issue was the subject-matter of examination by the ITAT, Calcutta Bench in assessment year 1985-86. By its order dated 13-9-1991 in ITA No. 1827 (Cal.)/90 for assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia specifically to such earnings, in the assessment order in the matter of computation of total income of the assessee. Only in the paragraph relating to allowance of deduction under section 80-O, proportionate expenses have been computed by the Assessing Officer by applying the ratio of the income earned in the foreign countries to the total gross income earned by the assessee to the overall total expenditure incurred by the company. 12. Shri Pradeep, learned counsel for the assessee has strongly contended in this connection that a subordinate appellate authority is bound to obey the order and directions of the superior Appellate Tribunal or authority and hence, the CIT (Appeals) has been wrong in not following the two orders of the ITAT, Calcutta, as mentioned above. In support of the said contention, he has placed reliance on the judgment of the Supreme Court in the case of Bhopal Sugar Industries Ltd. v. ITO [1960] 40 ITR 618 at page 622. Besides the abovementioned two orders of the ITAT, Calcutta Bench, Shri Pradeep has brought it to our notice that in the case of J.B. Boja & Co. (P.) Ltd, the ITAT, Bombay Bench 'A', Bombay, by its order in ITA Nos. 1850 and 1851 (Bom.) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adhiraja Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India AIR 1971 SC 530, (iii) State of UP. v. Synthetics & Chemicals Ltd. [1992] 87 STC 289 at page 290 (SC), and (iv) State of Haryana v. Goodyear India Ltd. [1990] 76 STC 72 (SC). Thereafter, Shri Pradeep argues that even if it be considered that the expenses specifically incurred in India towards earning the income by way of rendering engineering fees abroad, would have to be deducted from the same, there is no provision anywhere for deduction of the overall expenses in a proportionate manner. In support of his contention in this regard, he has relied upon the following observation of the Calcutta High Court in the case of CIT v. United Collieries Ltd. [1993] 203 ITR 857. "The special deduction under section 80M of the Income-tax Act, 1961, is allowable only on the net dividend which is arrived at after taking into account the expenditure, if any, incurred for the purpose of earning such dividend. Only the actual expenditure incurred by the assessee in earning the dividend income shall be deducted from the dividend income. There is no scope for any estimate of expenditure being made and no notional expenditure can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same. We are unable to agree with this sort of argument. Firstly, the amount under consideration forms a part of the income considered to have been earned by the assessee in this year. Secondly, the matter has not been tried to be argued from this angle by either of the lower authorities. Hence, this fresh point cannot be allowed to be raised by the DR before us. The learned DR also relies on the judgment of the Supreme Court in the case of M.M. Ipoh to argue that inasmuch as res judicata is unknown to income-tax, the earlier decisions of the ITAT would not be applicable to the present year. We are unable to agree with this contention also. On the basis of the same facts, the decision of the Tribunal on the same issue is certainly required to be respected, unless the facts can be distinguished or a definite flaw can be found in the earlier judgment. There is no doubt about the fact that the CIT (Appeals) has tried to find out loopholes in the judgments of the ITAT for the earlier years under consideration, but he has simply given his arguments, which have all been well-considered in the earlier judgments of the Tribunal. Therefore, finally, respectfully following the said judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In support of this contention, Shri Pradeep has relied upon the following decisions: (i) CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891(SC), (ii) Sterling Construction & Trading Co v. ITO [1975] 99 ITR 236 (Kar.), and (iii) CIT v. Nirbheram Daluram [1981] 127 ITR 491/5 Taxman 84 (MP). Further reliance has also been placed in this connection on the judgment of the ITAT, Bangalore Bench in the case of K. S. Dattathreya v. Asstt. CIT [1994] 50 ITD 481. Shri Pradeep furthermore argues that since as per the observations of the CIT (Appeals) as above, this amount may be liable to be treated as unexplained income of the assessee under section 68, the virtual enhancement made by the CIT (Appeals) where the relevant issue was not before him and without allowing any opportunity to the assessee, is liable to be struck down. There is no doubt about the fact that in all of the abovementioned decisions, it has been held that the first appellate authority has no power to enhance the assessment by discovering new sources of income not mentioned in the return of the assessee or considered by the ITO in the order appealed against. However, in the present case, inasmuch as the issue relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n made to the income account Rs. 32,39,14,188 Closing balance as appearing in the printed accounts Rs. 1,24,34,72,768 ------------------------------------- Total Rs. 1,56,73,86,956 ------------------------------------- The total amount received/receivable during the year aggregating to Rs. 82,27,45,028 has thus been bifurcated in the following manner: (a) Advances receivable/received towards jobs performed during the year Rs. 47,56,85,282 (b) Advances received on signing of agreements in respect of jobs where no work was commenced during the year Rs. 34,70,59,746 ------------------------------ Rs. 82,27,45,028 ------------------------------ On a deeper examination of the matter, we are convinced about the veracity of the assertion made by the learned counsel for the assessee in this regard. From the list of the jobs undertaken in this year on which although advances were received but no work was carried on, totalling to Rs. 34,70,59,746, we find that the items enumerated in the said list do not find place in the other list considered by the CIT (Appeals). However, even in the said list also, there are certain items like items No. 74, 141, 161 and 179, where advances are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... All.), and (iv) CIT v. J.K. Industries (P.) Ltd. [1980] 125 ITR 218 (Cal.). In accordance with Explanation 1 to section 32, depreciation is required to be allowed on capital expenses incurred in leasehold premises. That particular Explanation, however, does not determine the character of the expense, viz., whether it is of capital or revenue nature. On the other hand, it has been held in a large number of cases, some of which have been relied upon by the assessee as above, that expenses incurred towards replacing/existing assets like plant and machineries or part of building, etc., are required to be allowed as revenue expenses. In that view, the entire expenses incurred at the Madras office being of the nature of replacement and renewal expenses are required to be allowed. The same, however, cannot be said about the expense incurred towards constructing a new toilet and pantry works in the Calcutta office. This is totally a new construction work and should, therefore, be considered to be of the capital nature. We, therefore, uphold the action of the lower authorities in disallowing the claim of Rs. 1,77,296 incurred in the Calcutta office. So far as other expenses under consider ..... X X X X Extracts X X X X X X X X Extracts X X X X
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