Income once assessed in a particular year cannot be assessed in any other year

IN THE ITAT MUMBAI BENCH ‘L’

Lingtec Constructors LP

versus

Income-tax Officer, (International Taxation) 1(2), Mumbai

IT APPEAL NO. 5376 (MUM.) OF 2003

[ASSESSMENT YEAR 1999-2000]

AUGUST 24, 2012

ORDER

I.P. Bansal, Judicial Member

This is an appeal by the assessee. It is directed against order passed by Ld. CIT(A)XXXI, Mumbai dated 16/05/2003 for the assessment year 1999-2000.

2. The grounds of appeal filed originally were lengthy and narrative. The assessee has filed a concise grounds of appeal which read as under:

“(1)  The learned CIT(A) erred in confirming the action of Assessing Officer of considering the initial work agreements to be independent contract rather than part of a main contract.

(2)  The learned CIT(A) erred in not accepting the principle of Accounting Standard 7 issued by Institute of Chartered Accountant of India.

(3)  The learned CIT(A) erred in confirming the action of A.O of treating advance of Rs. 320 crores as income and Rs. 16 crores as taxable income.

(4)  The learned CIT(A) erred in confirming action of A.O. of applying Rule 10 of the Income Tax Rules.

(5)  The Learned CIT(A) erred in confirming the charging of interest u/s 234 B of the Income Tax Act.

(6)  The appellant crave for leave to add to alter to delete or to amend any of the grounds of appeal if necessary”

3. The assessee is a non-resident firm having its registered office in the State of Delaware and the principal place of business at Enron Corporation, 1400, Smith Street, Houston, Taxas 77002. It has entered into a contract with M/s. Dabhol Power Corporation (DPC) in connection with responsibility for onshore construction work and onshore services in connection with Phase II Dabhol Power Project and the attached Liquefied Natural Gas (LNG) unloading, storage and re-gasification. During the year under consideration following contracts were entered into by the assessee with DPC.

(i)  Onshore Construction Contract for Phase II of the Dabhol Power Project dated November 30, 1998.

(ii)  Onshore Services Contract for Phase II of Dabhol Power Project dated November 30, 1998.

(iii)  Onshore Construction Contract for LNG facility dated November 20, 1998.

(iv)  Onshore Services Contract for LNG facility dated November 20, 1998.

4. According to assessee, aforementioned main contracts were not effective as of 31/3/1999 due to terms and conditions of the contract. Therefore, the assessee firm executed following contracts:

(i)  Onshore Construction Initial Work Agreement (‘OnCon IWA’) dated August 31,1998 valued at USD 78,345,000; and

(ii)  Onshore Construction Initial Work Agreement (‘OnCon IWA’) dated August 31,1998 valued at USD 8,266,000

It was noticed that assessee firm had incurred total expenses of Rs. 149,78,24,027/- for the execution of the above mentioned two contracts which was shown as work-in-progress in the statement of assets and liability for the year ended 31/3/1999 and it was submitted to the AO that no invoices were raised on DPC for work executed during the year. This fact is mentioned by AO in para-8 of the assessment order. It was further noticed that assessee had received a sum of Rs. 320,14,19,720/-, which was claimed to be an advance come from Enron Development Corporation (‘EDC’) and not from DPC.

5. The assessee did not disclose any income arising out of contract on the basis of clause “a” of Note-2 “Summary of Significant Accounting Policies” and it was stated as follows:

“It is the firm’s policy to recognize revenues only after 20% of the project work has been complete. The firm recognizes contract revenues for the contracts entered into with DPC under the percentage of completion method using cost incurred to date in relation to the estimated total cost of the contracts based on the appropriate stage of completion of the project. Till March 31st 1999 the firm had incurred approximately 14% of the estimated cost on the total Onshore LNG Facility contracts. Accounting Standard 7 issued by Institute of Chartered Accountants of India states that “Normally profit is not recognized in fixed price contract unless the contract has progressed to a reasonable extent. Ordinarily this test is not considered as having been satisfied unless 20 to 25% of the work is completed. As costs as compared to the estimated costs as at 31st March 1999 have been incurred only to the extent of approximately 14% of the firm has not recognized profits during the period ending 31st March 1999 and the work completed upto 31st March 1999 has been recorded as WIP in this financial statement and accordingly P&L A/c. has been prepared for the relevant year.”

6. The AO required the assessee to explain as to why the income accrued to the assessee firm during the year should not be brought to tax in the year of accrual. Vide reply dated 8/3/2002 it was submitted that the assessee recognizes the contract revenue for the contracts entered into with DPC under the “percentage of completion method” using cost incurred to date in relation to the estimated cost of the contracts based on the appropriate stage of completion of the project under the percentage of completion method revenues/profits are not recognized in fixed price contract unless the work under the contract has progressed to a reasonable extent. Ordinarily this test is not considered as having been not satisfied unless 20 to 25% of the work is completed. Reference was made to Accounting Standard-7 (AS-7) and it was submitted that the work was completed only to the extent of 14% of the total contract, therefore, assessee was not liable to declare any income having regard to the facts of the case.

7. AO vide letter dated 15/3/2002 required the assessee to explain as to why advances shown to be received by it of a sum of Rs. 320,14,19,720/-should not be treated as receipt of the firm and he disbelieved the version of the assessee that assessee did not issue/raise invoice to DPC, therefore, income did not accrue to it. Vide letter dated 20/3/2002 it was submitted by the assessee that the advance of Rs.320,14,19,720/- received from EDC are in the nature of progress payments under the aforementioned two initial work agreements “OnCon IWA”. Para 9.3 of the AS-7 states that as per “percentage of completion method” for recognizing revenue on construction contracts, progress payments and advances received from customers may not necessarily reflect stage of completion and, therefore, cannot be usually treated as equivalent to revenue earned. Reference was also made to Para 15.1 of AS-7, according to which progress payments and advances received from customers in respect of construction contracts in relation to work performed thereon are disclosed in the financial statement either as liability or shown as deduction from the amount of contract work-in-progress. It was submitted that in the financial statement progress payments and advances received from EDC in respect of work performed under “OnCon IWA” are disclosed as a liability as “advances”. Thus it was pleaded that the aforementioned amount is liability and not income per se which cannot be treated as income. The AO did not accept such submission of the assessee as according to AO as per para 7.2 of the AS-7, under the “percentage of completion method” revenue is recognized as contract activity progresses based on the stage of completion reached. The costs incurred in reaching the stage of completion are matched with this revenue, resulting reporting of results which can be attributed to the proportion of work completed. Although as per the principle of “prudence” revenue is recognized only when realized, under such method, the revenue is recognized as activity progresses even though in certain circumstances it may not be realized. The AO observed that assessee in its submission has never produced the stage of completion of contract activity, the proportion that costs incurred to date bear to the estimated total cost and the details of services conducted to measure the work performed and completion of the physical proportion of the contract work. In absence of details of the above exercise assessee did not comply with the provisions of para -7.2 of AS-7 and thus assessee was not able to show stage of contract performance completed at the end of the financial year. (para 5.2 of the assessment order) The AO also referred to disclosure clause of AS-7 which requires disclosure with regard to construction contracts regarding progress payments received and advances and retention on account of contracts included in the work-in-progress. The AO also referred to the International Accounting Standard – 11, which also require the disclosure of amount of advances received and amount of retention. From the above facts the AO has drawn the following conclusion to hold that the version of the assessee cannot be accepted.

“In view of the above discussions and for the reasons mentioned hereunder, viz:

(A)  In the absence of details of stage of completion of contract furnished by the assessee, the advances received from the customer by the Assessee are being taken as income or a reasonable amount is estimated as income as discussed in the following paragraphs.

(B)  Further the assessee has also not tried to prove that only 14% of the work has been completed. The onus of proving that the minimum limit for work completion as submitted by the assessee at 20% below which the profit could not be accounted for has not been discharged by the assessee. However, the loss if any had to be provided for. The assessee has at any stage and inspite of various opportunities given never tried to substantiate their claim that only 14% of the work has been completed.

(C)  In the notes to accounts also, the assessee has stated that till 31st March 1999 the firm had incurred approximately 14% of estimated cost on the total onshore LNG facility contracts. However again at no stage the assessee has disclosed the estimated cost or the estimated revenue out of the total contract price in proportion to works completed and related contract cost.”

8. Again in para-11 the AO has mentioned that the assessee firm did not provide certified quantity of the work executed by it. Therefore, taking the aggregate amount aforementioned two “OnCon IWA” the AO valued those contracts at Rs.366,19,13,000/- and also taking into account the cost incurred by the assessee of work-in-progress at Rs. 149,78,24,024/- the AO has arrived at a conclusion that since assessee has completed 40% of the work, its income was liable to be assessed in the year under consideration. He estimated the taxable receipts of the assessee at RS.160 crores and taking 10% as net profit he assessed the income of the assessee at Rs.16.00 crores against nil declared by the assessee.

9. The Ld. CIT(A) confirmed the order of the AO. The assessee is aggrieved and hence, has raised aforementioned grounds of appeal.

10. Ld. A.R submitted that Ground No.1 to 4 essentially raise one issue only i.e. with regard to estimation of income during the year under consideration. He submitted that according to the note given in the financial statement unless 20 to25% of the total contract is not completed, the assessee is not under an obligation to disclose any income and this position of law has been accepted by the Mumbai Tribunal in the case of Dy. DIT (International Taxation) v. Strok Engineers & Contractors B.V. India Project Office [2010] 127 ITD 211, wherein it has been held that if the work is not completed upto 20 to 22%, till that stage, no income need to be identified and offered for taxation.

11. He further submitted that “OnCon IWA” contracts were not independent contract and those contracts have to be seen with the principal contract and while computing percentage of completion the value of the main contracts is required to be taken into consideration. He submitted that copy of all these contracts have been filed in the revised paper book which only will be referred during the course of arguments and it contains 82 pages. Copy of the main agreement is filed at page 73 to 82 of the paper book and according to attachement-4 placed at page 82 the total value of the main contract has been fixed at US$ 22,98,64,000 and Rs. 112,50,00,000. He submitted that if the total value of the contract is converted in terms of rupees total amount will be a sum of Rs. 1084,34,49,920 as per following calculations:

Rate of US$ adopted by AO in para 11 at Rs.42.28 per dollar:

Ld. A.R submitted that if profit element of 10% as taken by AO is removed from the aforementioned value of the contract i.e. a sum of Rs. 108,43,64,992 the cost of the project will come to Rs. 975,90,84,928. He submitted that the cost incurred by the assessee on the project during the year under consideration is only a sum of Rs. 149,78,24,027. Therefore, the percentage of contract completed by the assessee turn down only to 15.34% which is less than 20% of the total cost of the project.

12. He further submitted that AO as well as Ld. CIT(A) both are incorrect in treating “OnCon IWA” on stand alone basis. He submitted that conjoint reading of those contracts with the main contract will reveal that “OnCon IWA” contracts were not independent contracts as in the initial contract as well as main contract reference of both has been made. He submitted that entering into initial work agreement was only a stop gap arrangement and could not be treated as separate contract which is assessable independently. He submitted that ultimately the payments received with respect to “OnCon IWA” contracts were to merge with the main contract and thus there was no independent existence of the “OnCon IWA” contracts. To substantiate his arguments Ld.AR referred to clause-4 of the “OnCon IWA” entered into by the assessee on 31/8/1998 which is tripartite agreement amongs Enron Development Corporation (“EDC”) and Dabhol Power Company (the “Company”) and the assessee (“Lingtec”). Clause 4 of the said agreement read as under:

“4. Consolidation with LNG Facility Onshore Construction Contract:

Upon the execution and effectiveness of the LNG OnCon Contract prior to Financial Close, (i) the Initial Work shall become consolidated (without duplication) with the Contractor’s scope of work under such contract and shall become subject to the terms and conditions of the LNG OnCon Contract applicable to the work performed thereunder, including, without limitation, the payment schedule and warranty provisions therein, (ii) the amounts paid by or on behalf of the Company or LINGTEC hereunder shall be deemed to have been paid by or on behalf of such party under such contract, and shall become subject to the terms and conditions of the LNG OnCon Contract applicable to the payments made thereunder, and (iii) the provisions of Clauses 2 and 5 of this Initial OnCon Agreement shall remain in full force and effect until financial Close.”

Simultaneously Ld. A.R referred to Clause – 10 of the main agreement for LNG facilities which is dated 20th November, 1998 and Clause -10 was referred in which the reference to initial work agreement has extensively been made . Thus it was submitted by Ld. A.R that the total value of the contract is required to be taken into consideration while computing percentage of completion of the project. Therefore, he pleaded that Ld. CIT(A) has wrongly confirmed the order of the AO vide which an addition of Rs. 16.00 crores was made to the income of the assessee.

13. As against aforementioned arguments of Ld. A.R it was vehemently pleaded by Ld. D.R that “OnCon IWA” were independent contracts. He submitted that the main contract was not even in existence on the date when final contract was arrived at between the assessee and DPC. He submitted that “OnCon IWA” was a tripartite agreement , whereas the final contract was between assessee and DPC. Therefore, he submitted that Ld. CIT(A) has rightly concluded that “OnCon IWA” were independent agreement and percentage of completion of the work contract has to be seen in the light of the value of contract as mentioned in “OnCon IWA”.

14. He further submitted that the assessee is incorrect in contending that no invoices were issued to DPC. He submitted that Clasue-2 of the “OnCon IWA” clearly spelt out such obligation and he particularly referred to clause 2(a), which reads as under:

“(a)  EDC hereby agrees to pay LINGTEC according to the payment schedule set forth in Appendix 3 hereto. LENGTEC acknowledges receipt as of the date hereof of S[zero] to be credited against amounts due under such schedule. Payment by EDC shall be made within 14 days following the presentation by LINGTEC to the Company of an invoice accompanied by such evidence of the progress of the Initial Work achieved as may reasonably be required by the Company, which invoice shall be transmitted by the Company to EDC within one business day following receipt by the Company. If LINGTEC has failed to demonstrate to the Company’s reasonable satisfaction that the progress during a month in respect of the Initial Work is equal to or greater than the progress anticipated by the schedule of Initial Work in Appendix 2, then the Company shall be entitled at its discretion to direct EDC to make such adjustment to the relevant scheduled payment (including, if appropriate, the withholding of the whole of such a payment) as may in all the circumstances be fair and reasonable or to make a payment pro rata to the Company’s assessment of the value of LINGTEC’s work to date against the value which would have been achieved. In the event EDC fails to pay to LINGTEC an amount due under this Section 2 within 30 days of the date such amount was due, LINGTEC shall be entitled to terminate this Initial OnCon Agreement forthwith. Interest shall accrue on any unpaid amounts from the date such amount become due and owing.”

Referring to the above clause he submitted that it has been clearly spelt out that payment by EDC shall be made within 14 days following presentation by LINGTEC to the company of an invoice accompanied by such evidence of the progress of the initial work achieved as may reasonably required by the company, which invoice shall be transmitted by the company to EDC within one business day following receipt by the company. In case the payment is not received within 30 days of the date such amount was due then assessee was entitled to terminate the OnCon Agreement and interest right shall also accrue to the assessee on unpaid amounts. Thus it was submitted by Ld. D.R that it is difficult to believe that the assessee had received payments from EDC without referring to the work executed by it. Therefore, it was submitted by Ld. D.R that work carried out by the assessee in pursuance of “OnCon IWA” was an independent work and the percentage of completion has to be seen vis-à-vis on that agreement only and the contention of the assessee that percentage should be computed only on the basis of total cost of the project should be rejected.

15. In the alternative, he submitted that in view of the aforementioned clause if the assessee has received the entire sum of Rs.320,14,19,720/-from EDC only in pursuance to this contract then the same would be considered to be received by the assessee only on submission of report regarding completion of work and if that amount is taken into consideration then even considering the total value of the contract reducing there from the estimated profit, the completion of work done by the assessee would be more than 20% of the project and, therefore, also the profit is assessable during the year under consideration. Thus it was submitted by Ld. D.R that in any case assessment has rightly been made in the hands of the assessee and the order of Ld. CIT(A) on this issue should be upheld.

16. Ld. D.R submitted that for the next assessment year Ld. CIT(A) has already given deduction of this income which has been assessed for the year under consideration as income having already been assessed and if Tribunal come to a conclusion that the amount is not assessable in the year under consideration, then suitable directions to remove those directions of Ld.CIT(A) should be given as department did not prefer any appeal against those direction of Ld. CIT(A) on the ground that the said addition has already been upheld by Ld. CIT(A) in respect of the year under consideration.

17. In the rejoinder Ld. A.R submitted that Ld. D.R cannot improve the case of AO as it is not even the case of AO that the payment of Rs.320,14,19,720/- was in respect of work completed by the assessee during the year under consideration. For rest of the arguments of Ld. DR, Ld. A.R reiterated the submissions made by him earlier.

18. We have considered the rival submissions in the light of the material placed before us. So far as it relates to the contention of the assessee that “OnCon IWA” should be considered to be part and parcel of the main agreement, we have carefully gone through both the agreements. Though both the agreements have been entered into on different dates but they have correlation and they relate to one project only. Therefore, it cannot be said that “OnCon IWA” was a contract independent in itself. Therefore, the percentage of completion, has to be seen in the light of total value of the contract. Here it will be relevant to mention the arguments of Ld. D.R that in view of clause 2(a) of the “OnCon IWA” which has already been reproduced in the above part of this order, any payment was to be received by the assessee from EDC was in respect of work done by the assessee with regard to this project. The assessee did not produce invoices before AO and this fact has been spelt out in the assessment order at more than one place. Ld. A.R also did not deny the fact that these invoices were not produced either before AO or before Ld. CIT(A). simultaneously it was submitted by Ld. A.R that assessee is in a position to produce invoices which could not be produced earlier. Those invoices will be very relevant and germane to the issue as from those invoices it can be determined that how much work was completed by the assessee during the year under consideration. No material has been brought on record by the assessee to show that the total amount received by it amounting to Rs. 320,14,19,720/- from EDC did not pertain to “OnCon IWA” as the payment, if any, was to be made by EDC on the basis of that contract was in respect of work done by the assessee. If the total amount of Rs. 320,14,19,720/- is paid by EDC on completion of such work then the percentage of work as computed in the above part of this order will be more than 20%. However, in the interest of justice, we consider it just necessary to restore this issue to the file of AO with direction to allow another opportunity to the assessee to place on record all the invoices on the basis of which assessee had been receiving payments from EDC in respect of “OnCon IWA”. If the entire payment received by assessee during the year is in respect of said agreement and is in respect of work done under that agreement then the project having completed more than 20% will be liable to be assessed to that extent during the year under consideration and appropriate assessment will be done by the AO with regard to year under consideration. We direct accordingly.

19. We may mention here that consideration of entire payments made by EDC to the assessee during the year under consideration is in no way improvement upon the case of the A.O as the said question has been raised by the A.O in the assessment order itself and the fact remains that no material has been placed on record by the assessee that the entire payment of Rs. 320,14,19,720/- made by EDC to assessee did not pertain to the work contract. In the contract of such magnitude parties had to act only in accordance with the agreement.

20. So far as it relates to contention of Ld. D.R that suitable directions should be given in respect of subsequent year, it may be mentioned that the parties can have recourse to the law which are applicable to them. But it is natural fall out that if anything is assessed in the year under consideration that cannot be again assessed in any other year and this will be applicable in either condition. If any amount is not assessed in the year under consideration then that part of income will be assessable in relevant year and if something is assessed in the year under consideration that cannot be assessed in any other year. With these observations Ground No.1 to 4 of concised grounds are considered to be allowed for statistical purposes.

21. Ground No.5 is with regard to levy of interest under section 234B of the Income Tax Act, 1961 (the Act). As the matter is restored back to the file of AO with regard to main issue, we direct the AO to reconsider the issue regarding leviability or otherwise of interest under section 234B as per provisions of law after deciding first issue and after giving the assessee reasonable opportunity of hearing in this regard. This ground is also considered to be allowed for statistical purposes.

22. In the result, the appeal filed by the assessee is considered to be allowed for statistical purposes in the manner aforesaid.