TaxTMI 
TaxTMI 
2013 (4) TMI 372
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.... The petitioner maintains regular business of accounts and files returns of income within the timeframe stipulated under the Income Tax Act (in short 'Act'). It has been following a consistent method of providing for and returning the income from the supply and installation of elevators and escalators on the basis of the 'completed contract method'. The financials of the petitioner are subject to audit by qualified Chartered Accountants and all provisions set out under the Companies Act and the relevant accounting standards are followed consistently. The method of accounting following by the petitioner has been subject to scrutiny by the Income Tax Department and accepted. 2.3. The Accounting Standard No.9 issued by the Institute of Chartered Accountants of India, provide for various parameters to be followed for the recognition of income. The Accounting Standard specifically deals with the methods of accounting to be followed, relevant to the particular activity that the assessee is engaged in. The petitioner enters into a contract with an entity/person for the supply of a specified number of elevators/escalators. The contract of supply involves stages such as preparation of draw....
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....the income earned by the petitioner and recognized by it for the purpose of taxation. The 'completed contract method' is an accepted method of recognition of income in a case such as the petitioner, wherein the contract or agreement between the parties provides for execution or rendering of services over several stages of the contract. The achievement of each milestone results in part payment by the customer. However, the final product is ready for use and transfer to the customer only at the time of completion of the contract; the intervening milestone, though significant in terms of the execution of contract per se, do not result in any independent or individual benefit that can be enjoyed. That apart, it is only on the final stage of execution of the contract and the handing over of the elevator/escalator/service to the customer that the title in the property that is the subject matter of the contract would actually pass to the customer. The agreement is clear in that the title to the property vests in and remains with the petitioner till such time and this has been accepted by the Income Tax Department, as being the correct method to recognize and account for income contracts s....
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....id circumstances, the petitioner was surprised to receive a notice from the respondent dated 26.12.2011, to which he filed a detailed reply dated 28.12.2011 submitting that the proposal of the Assessing Officer was not correct on merits and further, not in line and contrary to, the basis of assessments over several years. 2.8. On the merits of the proposal, the petitioner highlighted to the Assessing Officer that the presumption of the Revenue that the milestone payments made by the customer at each stage of work would constitute 'income' in regard to that extent of the work, is totally without basis. The arrangement entered into between itself and the customer amounts to sale of goods manufactured and sold along with incidental and associated services. In fact, the arrangement for manufacture and sale of goods and rendering of connected services carried on by the petitioner attracts the levy of tax both by the Sales Tax Department as well as Service Tax Department. Insofar as the arrangement that the petitioner has with its customers is a composite contract, primarily involving the sale of goods with the additional component of associated services, the petitioner raises an invoic....
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.... stated as follows: 3.1. The stand of the petitioner is that only in case of Delhi Metro Project, they have accounted the income in percentage of completion method and that there were no long term contracts in the previous year. It has failed to distinguish as to what is Long Term contract (LT) and Short Term contract (ST). Long Term Contract generally means that it extends to more than one Financial year (Accounting year). During the course of hearing, as per the submission given, it is evident that advances are received at different stages of contract extending to more than one financial year and hence, it is clear that the advances received were for LT contract and not for short term contract. 3.2. The Contract entered into does not dictate the accounting standards and accounting principles involved to be followed. The contract entered into by the petitioner and its clients at best can bring out the obligations both financial and legal between the contracting parties. It is once again reaffirmed that the petitioner has made the deviation from the completed contract method to percentage of completion method for long term contracts. The petitioner has all along stated that its b....
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....computation of income was made by applying the principles of percentage of completion method thereby bringing the income in the form of advances to tax. By doing so, there is no such dichotomy of treatment by the respondent and there is no super imposition of percentage completion method over completed contract method followed by the petitioner. 3.6. Arriving at the correct income as per the percentage completion method cannot be considered as an admission of changing the method of accounting followed by the petitioner. The respondent has arrived at the correct income to be offered as per the petitioner's own accounting principles. Hence, it can be considered only as a failure on the part of the petitioner to follow their own accounting methods. 3.7. The petitioner has stated by its communication dated 28.12.2011 that their method of accounting is mercantile and revenue recognition is only on completion of sale of goods and the same is not correct. The books of accounts does not give a true picture of their actual income. In fact, by doing so, the petitioner seeks to defer the income to later years. Also, the correct method of calculating income as per percentage completion metho....
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....ntered into and the date when the activity is completed usually fall into different accounting periods. A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that the closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use." A construction contract may be negotiated for the construction of a single asset such as a bridge, building, dam, pipeline, road, ship or tunnel, etc. A construction contract may also deal with the construction of a number of assets which are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use; examples of such contracts include those for the construction of refineries and other complex pieces of plant or equipment." 3.11. In the above circumstances, the respondent prays for dismissal of the writ petition as not maintainable on the ground of alternative remedy as well as devoid of merits. 4. To the counter of the respondent, the petitioner has filed a rejoinder affidavit, wherein, it is stated thus: 4.1. Adverting to paragraph 2, the petitioner sub....
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.... income from such contracts thus accrues to the petitioner only on the complete execution of the contract and when the title passes to the customer. It is for this reason that the petitioner treats every part payment made by the customer in the course of the installation of the equipment as an advance towards execution of the contract and offers the entire income to taxation on completion of the contract and handing over the equipment to the customer. 4.4. Adverting to paragraph 5, the averment of the respondent that the petitioner's claim of following the completed contract method without detailing the said nature/length of contract should be rejected as improper, is denied, as the said averment is opposed to fact. In the financial year relevant to AY 2008-2009 (2007-08), the petitioner has been engaged only in short term contracts in respect of which it is following the completed contract method. This has been consistently accepted by the Department. In the case of Delhi Metro, the Government, as the purchaser would not prefer to await installation of over 200 equipments and wished to, in the interest of the public, take possession of a corridor and make it available for public ....
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....t strictly speaking, res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasonings, in the absence of any material change justifying the Revenue to take a different view of the matter- and, if there was no change, it was in support of the assessee- we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-Tax in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under Sections 11 and 12 of the Income Tax Act of 1961." (i....
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....ards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation." (iv) (2011) 239 CTR (Del) 216 (Commissioner of Income Tax vs. Triveni Engineering & Industries Ltd.,) "10. ... "10. The following have been generally accepted as fundamental accounting assumptions: (a) Going concern. The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the sale of the operations. (b) Consistency. It is assumed that accounting of policies are consistent from one period to another. (c) Accrual refers to the assumption that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate. 11. After considering the submissions of the counsel on either side, in the given facts, we are prima facie of the view that arguments of the learned counsel for the assessee to prevail. The learned counsel for the Re....
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....of any of the Fundamental Rights or where there has been a violation of the principle of natural justice or where the order of proceedings are wholly without jurisdiction or the vires of an Act is challenged. There is a plethora of case-law on this point put to cut down this circle of forensic Whirlpool, we would rely on some old decisions of the evolutionary era of the constitutional law as they still hold the field. 20. Much water has since flown beneath the bridge, but there has been no corrosive effect on these decisions which, though old, continue to hold the field with the result that law as to the jurisdiction of the High Court in entertaining a writ petition under Article 226 of the Constitution, in spite of the alternative statutory remedies, is not affected, specially in a case where the authority against whom the writ is filed is shown to have had no jurisdiction or had purported to usurp jurisdiction without any legal foundation. 21. That being so, the High court was not justified in dismissing the writ petition at the initial stage without examining the contention that the show cause notice issued to the appellant was wholly without jurisdiction and that the Registra....
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....ng the order of what he meant, or of what was in his mind, or what he intended to do. Public orders made by public authorities are meant to have public effect and are intended to affect the acting and conduct of those to whom they are addressed and must be construed objectively with reference to the language used in the order itself."" (viii) (2007) 288 ITR 39 (Mad.) (Bilahari Investments P. Ltd. vs. Commissioner of Income-Tax) "... that a conjoint reading of sections 5 and 145 of the Income Tax Act, 1961, made it clear that all income received or deemed to be received or accruing or arising during the previous year shall form part of the total income of the assessee and such income shall be computed in accordance with the accounting system which the assessee regularly followed. Therefore, when the assessees followed the mercantile system of accounting as statutorily required under the Companies Act, in which entries were posted in the books of account on the date of the transaction, that is, on the date on which rights accrued or liabilities were incurred irrespective of the date of payment, the income derived during a particular previous year by way of chit dividend had to be r....
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....s read as one integrated scheme spread over a period of time." (x) (2009) 312 ITR 254 (SC) (Commissioner of Income-Tax vs. Woodward Governor India P. Ltd.) "... Section 145(1) enacts that for the purpose of Section 28 and Section 56 alone, income, profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. In this case, we are concerned with Section 28. Therefore, Section 145(1) is attracted to the facts of the present case. Under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. ... Therefore, the accounting method followed by an assesee continuously for a given period of time needs to be presumed to be correct till the Assessing Officer comes to the conclusion for reasons to be given that the system does not reflect the true and correct profits. As stated, there is no finding given by the Assessing Officer on the correctness of the accounting standard followed by the assessee(s) in this batch of Civil Appeals. " 6. On the other hand, learned counsel for the....
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....eupon the assessee filed writ petitions in the High Court challenging the assessments among other things on the ground that the Sales Tax Officer had acted in flagrant violation of the rules of natural justice as they were deprived of their opportunity to place their case and that he was not justified in disallowing the claim for deductions. The High Court dismissed the petitions on the grounds that the assessee had a right of appeal and that this was not a case of inherent lack of jurisdiction. The assessee preferred petitions in the Supreme Court for special leave to appeal and an Officer of the assesee-Company also filed writ petitions in the Supreme Court challenging the validity of the assessment orders." (ii) a decision of this Court reported in (2005) 2 MLJ 246 (M/s.Nivaram Pharma Private Ltd. vs. The Customs, Excise and Gold (Control), Appellate Tribunal, South Regional Bench, Madras and others) : "15. There are well settled principles of writ jurisdiction and Judges also must exercise self-discipline. It has been repeatedly held by the Supreme Court that in tax matters there should be no short circuiting the statutory remedies of appeal, revision, etc. We are therefore s....
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....counting standards and accounting principles involved to be followed; the contract at best can bring out the obligations both financial and legal between the contracting parties and that the petitioner has made the deviation from the completed contract method to percentage of completion method for long term contracts. 10. Admittedly, the authority, who passed the impugned order, is the original authority viz., Assistant Commissioner of Income-Tax, as against whose order, an appeal remedy is very much available to the petitioner. Chapter XX of the Income-Tax Act provides for appeals and revision, wherein so many stages are contemplated which the petitioner has to exhaust in order to refer the case to the High Court. Chapter XX (A) containing Sections 246 to 251 deals with appeals to the Deputy Commissioner (Appeals) and Commissioner (Appeals). Chapter XX (B) containing Sections 252 to 255 contemplates appeals to the Appellate Tribunal. While Chapter XX (C) containing Sections 256 to 260 provides for reference to High Court, XX (CC) containing Sections 260A and 260B provides for appeals to High Court. Thereafter, appeals to the Supreme Court under Chapter XX(D) vide Section 261 lie.....
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.... into by the appropriate appellate authority and the said authority can give due indulgence to such a claim of the petitioner and, if the appellate authority feels that it is not proper and that those are not the correct reasons, it may set right the order of the original authority and come to a decision, subject to the petitioner approaching the said appellate authority. Bypassing such an efficacious alternative remedy, the petitioner has approached this Court, which cannot be entertained. 14. If the petitioner is aggrieved over the order of the assessing authority, when there are sufficient alternative statutory appeal remedies available to the petitioner, he is no exception to the same, in order to approach this Court directly. In other words, when the petitioner has not exhausted the alternative appeal remedies before the appropriate authorities as against the order of the original authority, this Court cannot sit in appeal over the order of the original authority. It has been repeatedly held by the Supreme Court that in tax matters there should be no short circuiting the statutory remedies of appeal, revision etc. It is also well settled that when there is an alternative reme....