AO denied deduction u/s 80-IB(10) only on the ground that assessee engaged in business of construction had adopted ‘Project completion method’ instead of ‘Percentage completion method’ as prescribed under AS-7 (Revised). The Hon’ble High Court observed that there was no allegation to the effect that on account of “Project completion method” adopted by the assessee, its profit for any particular year was distorted. Further, the assessee had followed the same system consistently for a long period of time. It was thus held that assessee must be allowed deduction u/s 80-IB(10).
HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL No.1389 of 2011
COMMISSIONER OF INCOME TAX
Date : 23/10/2012
(Per : HONOURABLE MR. JUSTICE AKIL KURESHI)
1. The assessee is in appeal against the judgment of the Income Tax Appellate Tribunal (‘the Tribunal’, for short) dated 27-5-2011. For the assessment year 2003-04, following question is presented for our consideration:-
“Whether the Appellate Tribunal is right in law and on facts in deleting the disallowance of Rs.28,84,378/- made by the Assessing Officer by adopting the ‘Percentage Completion Method’ instead of ‘Project Completion Method’ declared by the assessee, without considering the fact that every assessee, engaged in the construction business has to follow Percentage Completion Method, as per AS-7 [Revised]?”
2. From the record, we notice that the respondent assessee is engaged in the business of construction. It had undertaken construction of housing project at an estimated cost of Rs.7,41,60,000/-. On the income derived from such project, it claimed deduction under section 80IB(10) of the Income Tax Act, 1961 (‘the Act’, for short). The revenue in this appeal objects to such claim only on the ground that the assessee had adopted the ‘Project Completion Method’. The Assessing Officer was of the opinion that the assessee ought to have adopted ‘Percentage Completion Method’. Ultimately, when the issue reached the Tribunal, the Tribunal followed decisions of other Tribunals and also referred to the decision of the Apex Court in case of Commissioner of Income-Tax vs. Bilahari Investment P. Ltd. reported in (2008) 299 ITR 1 to hold that recognition of income is attainable by several methods of accounting. The Tribunal observed that Completed Construction Method is one such accounting method as much as the Percentage Completion Method. The Tribunal recorded that there was no finding of the Assessing Officer that the completed construction method adopted by the assessee distorted the profits for any year. The assessee had followed the same method of accounting year after year.3. We are of the opinion that the Tribunal committed no error. Completed Construction Method is one of the recognised methods for accounting particularly adopted in construction business. The Apex Court in case of Bilahari Investment P. Ltd. (supra) in the background of the assessee being a company subscribing to chit funds as a business activity held and observed that
“Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It maybe noted that the same result could be attained by any one of the accounting methods. The completed contract method is one such method. Similarly, the percentage of completion method is another such method.
Under the completed contract method, the revenue is not recognised until the contract is complete. Under the said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the contract is completed. This method leads to objective assessment of the results of the contract.
On the other hand, the percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognised under this method is determined by reference to the stage of completion of the contract. The stage of completion can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract.
As stated above, we are concerned with assessment years 1991-92 to 1997-98. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessees, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from the completed contract method to deferred revenue expenditure, is revenue neutral. Therefore, we do not wish to interfere with the impugned judgment of the High Court.”
4. We may notice that in the present case, there is no allegation that on account of the particular method of accounting employed by the assessee, the assessee’s profit for any particular year was distorted. It is also noteworthy that the assessee had followed the same system consistently for a long period of time.
5. In a recent decision of this court in case of Manan Corporation vs. Asstt. Commissioner of Income-Tax in Tax Appeal No.1053/2011, a Division Bench of this Court had noted as under:-
“25. Corollary to this is one more aspect that requires reference here. The Government of India Ministry of Finance, Department of Revenue to all Chief Commissioners of Income-Tax and all Director Generals of Income-Tax issued Instruction No.4 of 2009 dated 30.6.2009 in respect of Section 80IB(10) of the Act would be available on year to year basis where the assessee is showing profit on partial completion or the same would be available on the year of completion of the project, which is clarified as under:-
“3. The above issue has been considered by the Board and it is clarified as under:-
(a) The deduction can be claimed on a year to year basis where the assessee is showing profit from partial completion of the project in every year.
(b) In a case it is late, found that the condition of completing the project within the specified time limit of 4 years as started in section 80-IB(10) has not been satisfied, the deduction granted to the assessee in the earlier years should be withdrawn.”
26. From the reading of the above instruction, it can be also said that the Government being aware of both the accounting methods has expected either of them to be followed in cases of individual assessee. However, in post amendment period, strict adherence to completion period of four years is insisted upon where project completion method is followed. This limitation of period did not exist prior to the amendment, what is vital to draw from this is that the amendment cannot discriminate those following project completion method if in the interregnum period, amendment is brought in the statute. The say of the assessee therefore gets further fortified when it says that only because it chose to follow the method of accounting of project completion basis, whose completion date falls after 1.4.2005, they can be denied the deduction on profits derived and those assessee who claim deduction on workin-progress basis, they would be entitled to such deduction. However, it necessitated strict compliance of the provisions and completion of the same within the stipulated time period.”
6. In the result, we see no infirmity in the view of the Tribunal. The tax appeal is, therefore, dismissed.