2016 (8) TMI 1205 - HC - Income Tax

Contract accounting method dispute over project completion vs work-in-progress leads to allowance of assessee's method

Dispute concerns recognition of revenue for long-term contracts where the assessee consistently applied the project completion (completed contract) ... Project Completion Method - Percentage Completion Method - Work-in-Progress method - rejection of books under Section 145(3) - consistency of accounting method - tax treatment of construction income on transfer of titleProject Completion Method - Percentage Completion Method - Work-in-Progress method - consistency of accounting method - rejection of books under Section 145(3) - Whether the Tribunal was justified in rejecting the Project Completion Method consistently followed by the assessee and in applying the work-in-progress method to assess income for the year 2001-02. - HELD THAT: - The Court found that the assessee had consistently followed the Project Completion/Percentage Completion accounting method for its construction business. Reliance was placed on earlier decisions which recognised project completion and percentage completion as permissible systems of accounting for construction activities and held that the department cannot lightly depart from acceptance of a regularly followed method unless it is shown to be defective or incapable of revealing true income. The Assessing Officer invoked Section 145(3) to reject book results but the record did not demonstrate that the method adopted by the assessee was inconsistent or rendered profit indeterminable; subsequent assessments showed profits offered in later years in accordance with the same method. In these circumstances the Tribunal's rejection of the assessee's method in favor of taxing on a work-in-progress basis was held to be incorrect. The Court concluded that the Tribunal and CIT(A) erred in displacing the assessee's consistently followed accounting method without cogent material showing defectiveness, and accordingly restored the assessee's method for the year under appeal.Appeal allowed; the Project Completion/Percentage Completion method followed by the assessee is to be accepted for AY 2001-02 and the Tribunal's order rejecting that method is set aside.Final Conclusion: The appeal is allowed: the Tribunal's rejection of the assessee's consistently followed Project Completion/Percentage Completion accounting method for AY 2001-02 in favour of taxing on a work-in-progress basis was incorrect, and the assessee's method is accepted. Issues involved:1. Challenge to the order passed by the tribunal regarding the assessment year 2001-02.2. Rejection of the Project Completion Method by the tribunal and taxing net profit based on work in progress.3. Consistency in following the chosen method of accounting by the assessee.4. Interpretation of Section 145(3) of the Income Tax Act.Detailed Analysis:1. The appellant challenged the tribunal's order for the assessment year 2001-02 where the appeal was dismissed, confirming the CIT (A)'s order. The main question raised was whether the tribunal was correct in rejecting the Project Completion Method followed by the assessee and instead taxing 80% of the net profit based on work in progress.2. The appellant's counsel argued that the tribunal erred in rejecting the Project Completion Method, a well-known method for taxing income in building construction businesses. It was contended that consistency in applying the chosen method is crucial, and rejecting it in an intermediate year creates inconsistencies in the assessee's assessment files.3. The counsel relied on previous judgments, including the case of Shivalik Buildwell (P.) Ltd., to support the contention that the chosen accounting method should be respected if consistently followed and accepted by the revenue in earlier years. The counsel emphasized the importance of the assessee's right to choose a method of accounting unless it does not provide a true picture of profit.4. The department's counsel, on the other hand, argued that the tribunal's order was just and proper, citing Section 145(3) of the Income Tax Act, which allows for the rejection of books of accounts if the income cannot be properly deduced. The department contended that the AO correctly invoked this provision to determine the income at 10% of total gross receipts.5. After considering the arguments and the consistency of the assessee in following the chosen method, the Court found in favor of the appellant. Citing precedents like Shivalik Buildwell (P.) Ltd. and Umang Hiralal Thakkar, the Court held that the tribunal and CIT (A) were incorrect in rejecting the Project Completion Method. The Court allowed the appeal, ruling in favor of the assessee and against the department.