9911796707
TMI Blog1991 (2) TMI 177X X X X Extracts X X X X X X X X Extracts X X X X ..... ', 'Sun Rise' and 'Cherry Chantak'. For carrying out this salvage operation, the assessee engaged the services of three specialised vessels on hire which are fitted with necessary diving gears, namely 'Malacca', 'Orinoco' and 'Monsoon' all through M/s. Smith International of Singapore, shipping agent. The assessee has followed a Hybrid system of account for this salvaging business insofar as it has followed mercantile system for expenses and cash system for income. " "New Business :-- As already stated in para 2, the assessee entered into a contract with the BPT for salvaging operation during the year. The BPT contract is peculiar in nature as it is strictly a time-bound contract, technically known as 'time is the essence of the contract'. it is also bound by a technical qualification on 'no cure no pay basis'. The whole meaning of such technicalities boils down to the basic principles that :-- (1) The contractor shall be bound to perform the work within a fixed time limit. (2) The contractor shall operate against a lump sum consideration agreed as per tender. (3) The contractor shall be entitled to the lump sum only if the contract is discharged successfully and in case of fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... project and not from year to year before the completion. In general contract business there is no third method followed for arriving at true income or loss of the project. The work-in-progress method allows the contractor to charge all its expenses to the trading account against the value of work-in-progress. This method is based on the simple principle that income accrues as the work progress. For this method the essential ingredient is that there shall be a measurable progress made in the discharge of the contract and the progress thus made can be valued rationally. Then only the contractor shall be entitled to debit the expenses incurred by it thus for in discharge of the contract. In the instant case of the assessee this method is palpably inapplicable and the assessee has admitted it too. Vide their reply dated 23-2-1989, M/s. P.P. Katdhare has submitted that in case of salvaging operation quantification of work done is not possible. So the application of work-in-progress method is to be ruled out in the instant case and that leaves one with the only other alternative. The salvage work which operates on no cure no pay basis is ideal for application of 'completion of contract' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. Para 26 of the AS-1 dealing with the disclosure of the accounting policies states that any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. In the instant case of the assessee, the Auditors have not indicated anything to suggest that the assessee has chosen a different accounting policy in respect of the salvage work. The absence of any such indication or disclosure on the Auditor's Report can only point to one conclusion--that the assessee offers a non-existent change in accounting policy in order to claim huge expenses before the Income-tax Authorities pre-maturely. Auditors' Observations : As narrated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee are not fully verifiable and, therefore, not fully ascertainable. Hence such debit of unascertainable expenses to the accounts on accrual basis against some incomplete and immeasurable work cannot be allowed. Motive of the Assessee : The main business of the assessee is that earning income by hiring out its ship "Ocean Pearl". It also earns substantial income by rendering diving services. The assessee started its business in a very small way in the Calendar Year 1981. Its real business started during the Calendar Year 1984 when it acquired the "Ocean Pearl". The ship was acquired by the assessee on 19-12-1984 and was immediately used for charter hire. The total billing shown by the assessee for calendar year 1984 was Rs. 31,47,405. The total billing for the subsequent calendar years kept on increasing, Rs. 1,53,79,887 for 1985, Rs. 2,81,21,686 for 1986, and Rs. 2,48,97,069 in 1987. Since the main source of income by way of billing was the charter hire charges of "Ocean Pearl", the assessee ran the risk of incurring heavy taxation as the expenses against such fixed hire income are limited. The assessee in the meanwhile took up the salvaging contract from the year 1985. In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the B.P.T. But the assessee has not found it convenient to wait to that extent. In fact, the conduct of the assessee shown that its main concern has been to incur expenditure to set it off against legitimate income. This is illustrated by the fact that the assessee willingly did not avail the extended period allowed by the B.P.T. for salvage work in respect of "Cherry Chantak" and allowed the whole contract result in a loss. This fact is borne out of the letter of the B.P.T. addressed to the assessee dated 22-5-1986 which is attached to this order as Annexure 'A'. In view of the motive adopted by the assessee as narrated hitherto, it can be safely concluded that this system of accounting cannot be allowed to the assessee so as to enable it to understate its real income by debiting some unascertainable loss prematurely. The correct procedure and practice would be to treat each salvage contract as a separate project for determination of income/loss at the definite completion of the project. Expenses on Incomplete Projects : From the details filed, the following expenses shall be fully attributable to the 'Incomplete Projects of the assessee, that is the salvage contracts performed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or determining income/loss at the definite completion of the project. His reasoning in nutshell is as under :-- 'I have, heard the learned counsel and looked into the records. The details about all these contracts furnished by the learned counsel are reproduced below : (1) GULF-STAR : Work started 15-6-1985 Work completed on 1-6-1986 Amount of contract Rs. 71 lakhs (2) SUN-GLORY : Work started 4-2-1985 Work completed 5-12-1988 Amount of contract Rs. 71 lakhs (3) CHERRY CHENTAK: The first phase of the contract was to locate the ship and the contract amount was Rs. 20,00,000 for this. Wreck could not be located till 30-11-1985 and B.P.T. refused further extension vide their letter dated 22-5-1986. There was no question of further salvage work. (4) SUN RISE : Work started 15-2-1985 Due date of completion of work 20-9-1986 Work completed Not yet. It will be seen from the above facts that none of the contracts was completed during the accounting period relating to the Assessment year 1986-87 which ended on 31-12-1985. Payments of all these contracts was based on "No Cure No Pay" basis and no estimate of the amount receivable could, be made until the contract was complet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling expenditure and tender fees expenses were spent exclusively on these contracts. The rest of the expenses have by and large been divided in the ratio of vessels used for these contracts and other services and the allocation appears to be justified. The estimate of Rs. 1 lac out of Head Office and other Misc. expenses allocable to these contracts also appears to be in order and does not need any interference.' 3. The assessee is aggrieved, hence this second appeal and we have heard the parties at length. The grievance of the assessee stands summarised as under :-- (i) The assessee is agitated and aggrieved with the action of the learned lower authorities in treating 75% of the expenditure incurred as the expenses incurred on marine salvage operation, which the revenue claims to be new business. The assessee claims that this expenditure is allowable as in the nature of revenue one in computing the total income of the assessee. (ii) The assessee is aggrieved against the action of the learned lower authorities in not allowing the claim for investment allowance on new machinery purchased during the year. The assessee has placed on our file paper books containing 1 to 40 pages, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received/ Date - Rs. 70.09 lakhs on 28-6-1986 - Rs. 0.91 lakhs Remarks - Work started in Assessment year 1986-87 and got completed in assessment year 1987-88 Payment also received in Assessment year 1987-88. (2) SUN GLORY SALVAGING Date of Contract - 21-1-1985 Time allowed - 9 months Work actually started - 4-2-1985 Work completed - 5-12-1988 Amount/Date billed - Rs. 71 lakhs on 5-12-1988 Amount actually received - Rs. 59.65 lakhs on 27-12-1988. Rs. 11.34 lakhs not received for non-compliance on time. Remarks - Work started in Assessment year 1986-87 and was completed in assessment year 1989-90 Amount received in Assessment year 1989-90. (3) SUNRISE -SALVAGING Date of Contract - 15-2-1985 Time allowed - 15 months Work actually started - 6-10-1986 Work completed - -- Amount billed/Date - -- Amount received - -- Remarks - Work started in Assessment year 1987-88 was pending till Assessment year 1989-90. (4) CHERRY CHENTAK - SURVEY Date of Contract - 15-2-1985 Time allowed - 2 months Work started - 19-4-1985 Work stopped - 7-6-1985 Amount billed/date - -- Amount received - -- Remarks - Whether conditions prevented resumption after 7-6-1985. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at.), Tirath Ram Ahuja (P.) Ltd. v. CIT [1990] 186 ITR 428 (SC), Fancy Corpn. Ltd. v. CIT [ 1986] 162 ITR 827 (Bom.), Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) and the decision of the Hon'ble SupremeCourt in the case of ClT v. British Paints (India) Ltd. 1990 (4) Judgments Today (SC) 694 have been pressed into service for the proposition that method of accounting has to be a definite one and it cannot be two-some vis-a-vis the expenditure and the income. In short, the learned Senior Departmental Representative who addressed us at length and exhaustively reading from the assessment order, the order of the learned first appellate authority and the case law pleaded that all contracts have to be taken as different projects and income/expenditure assessed in respect of each separately on a definite method of accounting. Concludingly, he justified the orders of the learned lower authorities. The assessee, on its turn, pleaded that assessee's system of accounting is accepted in earlier years and it is hybrid system. The finding of the learned lower authorities and the contention of the learned Senior Departmental Representative are misconceived inasmuch as it is not a new line of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arted on 19-4-1984, i.e., after the time allowed but it was stopped on 7-6-1985 and weather conditions are claimed to have prevented resumption after 7-6-1985. The assessee was allowed extension up to 30th November 1985 and further extension in time was refused by Bombay Port Trust in 1986 May. 6. Now in respect of all the four contracts mentioned above, vis-a-vis the accounting period relevant to the assessment year under appeal, the assessee has not received any income, much less it can be said that any income has arisen or accrued to the assessee. In this context, sections 4 and 5 of the Income-tax Act, 1961 being relevant stand reproduced hereunder :-- 'Charge of income-tax : 4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year or previous years, as the case may be, of every person : Provided that where by virtue of any provision of this Act income-tax is to be charged charged in respect of the income of a period other than the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom whatever source derived, which is received or is deemed to be received in India or, else, has accrued or arisen or can be said to have accrued or arisen, i.e., deemed to be so. In respect of all the four contracts, the assessee has neither received nor can be deemed to have received in India any income. Nothing has either arisen or accrued to the assessee, much less it can be deemed to be so. The assessee has received income in respect of first contract in the assessment year 1987-88. In respect of the second, the income has been received in the assessment year 1989-90. In respect of the third, the subject matter was pending till assessment year 1989-90. In respect of the fourth contract, it got frustrated, since the time was of essence and the contract died due to efflux of time. The first three contracts involved services of salvaging and the fourth one of the services of survey. Services cannot be said to be projects as has been contended on behalf of the assessee rightly, since the business activity of the assessee is providing services in terms of salvaging and survey and, as the name of the assessee depicts, it is under-water services. These services are a normal feature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od relevant to the assessment year but did not receive any dividend on the shares purchased with those moneys. The Hon'ble Supreme Court held that although moneys borrowed for investment in shares have not yielded any dividend, interest in terms of expenditure was an admissible deduction in computing the income of the assessee. 8. On the facts and in the circumstances of the assessee's case, de hors the method of accounting, i.e., whether it is cash, mercantile or hybrid, the expenditure is an allowable deduction inasmuch as within the meaning of sections 4 and 5 of the Act, the assessee has neither received nor can be deemed to have received in India any income, since in the accounting period relevant to assessment year under appeal neither any income has arisen nor accrued, much less it can be deemed to be so. Out of the four contracts, income in respect of the two has arisen and accrued to the assessee in the assessment years 1987-88 and 1989-90 respectively. In respect of the third, up to assessment year 1989-90, the issue was pending finality and in respect of the fourth contract, the contract itself got frustrated. On the basis of the concept of real income and the scope of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... To summarise, on the facts and in the circumstances of the case, we do hold that claim of the assessee made as expenditure was allowable ; that the activity of the assessee in the accounting period relevant to assessment year under appeal remained identical with the activities carried on by the assessee in the immediate preceding assessment year ; that since neither proviso to sub-section (1) of section 145 nor sub-section (2) of section 145 has been applied, the disallowance of expenditure partially on estimate cannot be upheld; that each of the contracts of the assessee for this assessment year cannot be said to be separate and distinct project inasmuch as the assessee has been rendering services and more so for this assessment year there cannot be a departure simply because no income has resulted from those contracts as in the earlier assessment years when the contracts were taken and finished in the same accounting period they resulted in income; that earning of income is not a pre-requisite for allowance of expenditure in view of the ratio of the decision of the Hon'ble Supreme Court mentioned in the body of the order, viz., Rajendra Prasad Moody's case that since disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court has held that the only section under which the method of computing income for the purposes of sections 10, 11 and 12 is provided for is section 13 and to divorce that section or to consider that those sections along with section 23, occupy detached position, one having no connection with the other is to misappropriate the whole tenor of the Income-tax Law. The Hon'ble High Court held that the law does not impose any burden on the Income Tax Authorities to prove by positive evidence that the accounts are unreliable or that the figure at which they assess is the correct figure, since the question of unreliability of account is a question of fact and primarily falls for the determination of the Income Tax Authorities alone. In Sarangpur Cotton Mfg. Co. Ltd.'s case the Hon'ble Privy Council, dealing with section 13 of the Act--method of accounting-- 'held that for assessment purposes a method of accounting has to be compulsory and the income has to be computed on those bases and the income-tax authorities can invoke that section where income otherwise cannot be properly deduced. In Jamna Das RameshwarDas's case the Punjab High Court (as it then was) has held that the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als that the income, profits and gains cannot be properly deduced from assessee's accounts, the Income-tax Officer can make a computation upon such basis and in such manner as he may determine under the proviso to section 13 of the Income-tax Act, 1922. In P.M. Mohammed Meerakhan's case again a decision of the Hon'ble Supreme Court, the Hon'ble Supreme Court has held that each year was a self-contained unit and in the case of a trading adventure for computing the true profits of the year the value of the stock-in-trade at the beginning and at the end of the accounting period had to be taken into account and it was not correct to say that the profits of the adventure could be determined only at the time of the completion of the sale of the entire estate. In Sree Shanmugar Mills Ltd.'s case the Madras High Court again was seized with method of accounting -- rejection of account books -- rejection of method of accounting -- distinction between right of Officer to reject accounts books -- proviso to section 13 and estimate of income. The Hon'ble Madras High Court held that proviso to section 13, of the Indian Income-tax Act, 1922 can be invoked only if a finding is recorded as to the u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while holding that the decision of the Income-tax Appellate Tribunal will not give rise to a question of law since what the ITAT has held was after appreciation of facts. It upheld the decision of the Hon'ble Delhi High Court in Tirath Ram Ahuja (P.) Ltd. v. CIT [1976] 103 ITR 15. The Hon'ble Delhi High Court has held that in respect of a construction contract, which had to be abandoned owing to the outbreak of war, the finding of the Appellate Tribunal that neither profits nor loss in respect of the work carried out by the assessee was to be taken into account was an inference from basic or primary facts and did not involve any point of law. In Fancy Corpn. Ltd.'s case the Hon'ble jurisdictional High Court -- the Bombay High Court -- was concerned with the case of an assessee-company carrying on business of embroidering cotton cloth and art silk cloth. The assessee-company attempted to instal a borewell at its new factory side. The attempt failed. The assessee claimed deduction of the expenditure incurred. The Assessing Officer and the ITAT rejected the claim. The Hon'ble Bombay High Court upheld the findings with the reasoning that if the well had been successfully bored, it wou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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