The Income Tax Appellate Tribunal (ITAT), Mumbai Bench held that the CIT(A) erred in confirming taxation of Rs.63.09 as income, in respect of contracts accounted under POC Method against UHDE India.
The assessee-company, UHDE India Pvt. Ltd. filed its return of income for the assessment year 2008-09 on 26.09.2008 declaring total income of Rs.39,02,18,840. The assessee is engaged in the business of supply of processes; designing, construction and commissioning of complete plants for chemical fertilizers, petrochemicals, refining and other related industries.
During the course of assessment proceedings, the assessee submitted before the AO that out of the percentage of completed contracts of Rs.847,505,498/-, the advances of uncompleted contracts were already taxed at Rs.216,569,265/-.
It was explained to the AO that as per accounting standard, the assessee has booked sales based on percentage completion method which is reflected by actual cost incurred by it and not based on bills raised which are based on various milestones reached in the project.
The AO was not convinced with the above submission of the assessee on the ground that the accounting standard (AS-7) is not recognized under section 145(2) of the Act, since the assessee is following mercantile system of accounting, all the invoices i.e. progress billings raised by the assessee should have been reflected in the total sales in the books of accounts; the ratio of actual direct costs incurred till reporting date to total expected direct costs on the contract as the basis of fixation of percentage of completion by the Institute of Chartered Accountants of India (ICAI) would not give true profit earned by the assessee.
The AO held that the ratio of the actual sales till the reporting date to the total sale price of the project would give the correct figure of percentage completion of the project. Accordingly, the AO made an addition of Rs.63,09,36,233 treating it as under-statement of profits in respect of 28 contracts which are accounted under percentage completion method, allowing due credits for the amounts taxed in earlier years.
The coram of Vikas Awasthy and N.K.Pradhan the assessee is following a consistent method of accounting to recognize the revenue under these contracts. The percentage of completion of the project has been worked out as per total cost incurred on the project to date vis-à-vis total budgeted cost and that fraction is applied to the contract value for the purpose of revenue recognition.
“Similar formulae have been adopted by the assessee in preceding two years which has been accepted by the revenue. No case of revenue leakage has been established before us. Nothing on record suggest that remaining income under the project has not been offered by the assessee in subsequent years, following the same method of accounting. Simply because progress billing was more than the stage of percentage of completion, the same, in itself, could not be the basis to usurp the consistent method of accounting being followed by the assessee. Therefore, the additions made by the revenue, under the circumstances, could not be sustained,” the ITAT while allowing the appeal of the assessee said.
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