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TaxTMI 
TaxTMI 
TaxTMI 
2022 (11) TMI 992
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....r 1986-87. 2. The assessee, as a contractor, is engaged in the business of construction of dams, bridges, railway lines, canal embankment etc. The assessee, as part of its business, had undertaken the construction of a branch railway line for a cement factory in Iraq. The standing of assessee in the execution of work is that of a sub-contractor and the principal contractor was Indian Railway Construction Company (for short 'Ircon Ltd.') It is an admitted circumstance that the assessee had entered into back to back contract with Ircon Ltd. The assessee had completed a portion of the contract work during the previous year ending 1985-86. The completed portion of contract during the previous year ending on 31.03.1986, bills were submitted and the quantum of executed work was certified at Rs.13,14,66,919/-. The assessee, as against the said certified amount of Rs.13,14,66,919/-, received Rs.3,27,60,321/-. The expenses booked during the year against execution of the said work 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 contrac....
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....stances the following questions are referred for our opinion: 1) "Whether on the facts and in the circumstances of the case and also in view of the fact that the assessee was following mercantile system of accounting with regard to the expenditure with reference to the sub-contract with Ircon Ltd. should not the contract receipt or the right to contract receipt be considered under the mercantile system of accounting for assessment purpose? 2) Whether, on the facts and in the circumstances of the case and considering the method of accounting followed by the assessee with regard to the expenditure incurred, should not be the bills certified as relating to the work completed during the year be brought to tax in the assessment year 1986-87? 3) Whether on the facts and circumstances of the case the Tribunal is right in law in holding that the mere fact that the work was executed or the progress bills were presented and approved does not create an enforceable right in the 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 me....
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....ncies. Therefore, the uncertainty was looming large and the option taken by the assessee conforms to the certified accounting standards followed and verified by the Institute of Chartered Accountants. According to him, the assessee has discretion to opt for a particular accounting system unless and until the system so adopted by the assessee is established as a ruse conceived to evade payment of tax and a finding to the said effect is recorded by the Assessing Officer. In the instant case, no such finding is recorded by the Assessing Officer. The reasons of Assessing Officer were independently examined by both CIT (Appeals) and the Appellate Tribunal, and have been disapproved. Therefore, for the sake of asking, the assessee shall not be compelled to revert to mercantile system and adopt the tax planning as per the wish of Revenue. Alternatively the mercantile system does not reflect the actual state of affairs of assessee/Company, much less the taxable income of 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 a....
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....arties and the findings recorded by the three authorities. Annexure D is agreement dated 27.08.1981 entered into between Ircon and the assessee. Under the said agreement Ircon has sub-contracted a portion of the work for execution in favour of assessee. On 05.09.1984 the assessee entered into supplementary agreement for defferment of payment. The assessee, for the subject year recorded work completed as amounting to Rs.13,14,66,919/-, expenses incurred as Rs.6,21,90,197/- and actual receipts amounting to Rs.3,27,60,321/-. The assessee by resorting to completed contract accounting standard, did not include the details of Iraq contract in the subject return. 6.3 The Assessing Officer accepts that an assessee may follow different kinds of accounting system, according to assessees' convenience. The Revenue is concerned with the reflection of fair and reasonable declaration of income as arising out of business carried on during subject year by the assessee. 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 fai....
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.... Therefore, the dictum that an income is taxable only when it has become due, applies to both the cases. After analysing various case laws mentioned above, I have come to a conclusion that the amount of Rs.6,92,96,722/- included by the Assessing Officer is the income of the appellant had not accrued to the appellant during the accounting year relevant to the assessment year. Hence, this addition has to be deleted." 7 The Income Tax Appellate Tribunal in appeal filed by the Revenue held that: "The learned CIT (Appeals) saw merit in the contention of the assessee that having regard to the special features of this contract and the difficulties faced by the assessee in executing the work in a war-torn country facing financial and economic crisis, the assessee was well advised to follow the completed contract method. He also noticed the contention of the assessee that no part of the income has accrued during the accounting year relevant to the 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....
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....ction of funds due from a customer under the terms of a contract. In accounting parlance, this method yields same results as the percentage of completion method, but only after the project has been completed. The completed contract method, prior to completion, does not yield any useful information and the delay in income recognition allows the business to defer the recognition of related income tax issues. In the said accountancy pattern, the revenue and accounts recognition defer till the end of the project, consequently the timing of revenue recognition is delayed. 7.3 The completed contract method is resorted to when it is not possible to derive dependable estimates about the percentage of completion of the project or when there are inherent hazards that may interfere with completion of a project or when contracts are of such a short-term nature that the results reported under the completed contract method and the percentage of 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 ....