Gauhati H.C : Whether, on the facts and circumstances of the case, the Tribunal was right in not accepting the valuation of closing work-in-progress in accordance with accounting standard (AS-7) as laid down by the Institute of Chartered Accountants of India and to work out the profit on the basis of the accounts maintained ?

High Court Of Gauhati

MKB (Asia) (P) Ltd. vs. CIT

Section 145

Asst. Year 1992-93 to 1995-96

P.G. Agarwal & Mutum B.K. Singh, JJ.

IT Appeal No. 29 of 2004

16th November, 2006

Counsel Appeared :

G.K. Joshi, R.K. Joshi & Mrs. U. Chakraborty, for the Appellant : U.C. Bhuyan, for the Respondent


P.G. Agarwal, J. :

We have heard Mr. G.K. Joshi, senior advocate for the appellant and Mr. U. Bhuyan, learned counsel for the respondent IT Department.

2. The above four appeals have been heard analogously as the question of law raised is identical and they are disposed of by this common order.

3. The appellant is a private limited company engaged in the business of execution of works contract. Being the assessee under the IT Act,1961, (for short, the Act), it filed its report for the financial years 1991-92, 1992-93, 1993-94 and 1994-95 showing the income and its tax liability, etc. The appellant also filed the audit report, trading account, balance sheet, etc. as required under law.

4. The appellant company followed the accounting system AS-7 as laid down by the Institute of Chartered Accountants of India, wherein the closing value of work-in-progress is determined on the basis of the method provided therein. The assessing authority issued a notice under s. 143(2) of the Act and thereafter completed the assessment holding, inter alia, that the submissions made by the assessee are not acceptable. The assessing authority held, inter alia : “The assessee has debited all the expenses inquired in respect of the work-in-progress account. When the work has progressed and all expenses have been debited, there is no reason why profit should not be determined on the basis of the entire work-in-progress. If in the process the assessee had derived profit then the same should be assessed as income. Similarly, if in the process, the assessee incurs loss the same will also have to be considered. There is no question of deferment. The computation of total income cannot proceed on hypothetical basis. It proceeds on actual basis.”

5. Feeling aggrieved, the appellant filed separate appeals for the four periods and the appellate authority allowed the appeals observing : “Having carefully considered the matter, I am of the opinion that the accounting system adopted by the appellant for valuation of work-in-progress of its long-term contract works was in consonance with the commercial accounting principles and with the practice followed widely by similar businessmen. This fact is conclusively proved in view of the mandatory accounting standard, viz. ‘AS-7’ issued by ICAI. No doubt, this system takes into account anticipated losses and contingencies and makes a departure from the ‘doctrine of actualities’ and although, very often, difference is found between commercial accounting and the accounting for income-tax purpose, it cannot be denied that the appellant made the departure from ‘doctrine of actualities’ on a scientific and prudent manner based upon measurable standards laid down by the highest accounting authority in the country, viz., ICAI.”

6. The Revenue, thereafter, took the matter to the Tribunal who set aside the order of the appellate authority and restored the order of the AO, and, hence the present appeals. The substantial question of law formulated by this Court in all the above four appeals, reads as follows :

“Whether, on the facts and circumstances of the case, the Tribunal was right in not accepting the valuation of closing work-in-progress in accordance with accounting standard (AS-7) as laid down by the Institute of Chartered Accountants of India and to work out the profit on the basis of the accounts maintained ?”

7. Learned counsel for the appellant has produced before us the text of accounting standard AS-7 issued by the ICAI. It shows that this system was introduced in the year 1983 and it was made mandatory in the year 1990. There is no dispute at the Bar that this accounting system is an approved system of maintenance of accounts applicable to construction works contract. Sri Bhuyan, learned counsel for the respondents, has submitted that the question raised is more or less academic as in the long run, the assessee is not affected as the liability of tax on the income of the total works contract remains the same and the question is at what stage the tax is to be paid. Mr. Joshi was fair enough to submit that it is not a question of additional liability of tax, but the question is whether the IT Department can force the assessee to adopt a particular system of accounting, or whether the assessee has the option. While going through AS-7, we find that the executor of the works contract is required to pay income- tax even on the part completion of the work also, but a formula has been provided for the purpose regarding valuation, etc., keeping in mind the ultimate payment to be received against the entire work.

8. In the present case, the factual part is not under dispute and hence we would confine to the question raised.

9. A similar question had arisen in the case of CIT vs. Doom Dooma India Ltd. (1994) 117 CTR (Gau) 156 : (1993) 200 ITR 496 (Gau), wherein the question of valuation of stock arose as a result of the accounting system. Referring to the provision of s. 145 of the Act, this Court held :

“It is for the assessee to adopt any recognized method of accounting for his business. The income shall be computed in accordance with the method of accounting regularly employed by the assessee. In other words, it is open to the assessee to opt for such method of accounting as he deems reasonable and appropriate. He may opt to adopt the manufacturing cost price method or the market price method provided the method is followed in regard to both the opening stock and the closing stock. It is not open to him to adopt one method for valuing the opening stock and a different method for valuing the closing stock so as to intentionally suppress the income derived or derivable in the particular previous year. Even where an assessee has adopted a particular method for a period of years, there is no provision of law which prevents him from changing to any other method, provided the change over is not made in the same assessment year. The proviso to sub-s. (1) empowers the AO to compute the income on such basis and in such manner as he determines if the accounts are correct and complete but the method adopted is such that, in his opinion, the income cannot properly be deduced therefrom. The jurisdiction can be invoked where he is of the opinion that the income cannot properly be deduced therefrom. He cannot exercise the jurisdiction merely on the ground that the method adopted, which is otherwise regular or fair, is detrimental to the Revenue or advantageous to the assessee. If the AO is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the AO may make an assessment in the manner provided in s. 144.”

10. In support of the above findings, this Court had placed reliance on the following decisions of the apex Court : (1) Chainrup Sampatram vs. CIT (1953) 24 ITR 481 (SC); (2) Investment Ltd. vs. CIT (1970) 77 ITR 533 (SC); and (3) A.L.A. Firm vs. CIT (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC).

11. We may recapitulate the following observations of the Hon’ble Supreme Court in Investment Ltd. vs. CIT (supra) :

“A taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts, and for that purpose to value his stock-in-trade either at cost or at market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping account or of valuation. The method of accounting regularly employed may be discarded only if in the opinion of the taxing authorities income of the trade cannot be properly deduced therefrom. Valuation of stock at cost is one of the recognized methods. No inference may, therefore, arise from the employment by the company of the method of valuing stock at cost, that the stock valued was not stock- in-trade.”

12. As stated above, the accounting system AS-7 is an approved system of accounting by the ICAI and as such the authenticity of the said accounting system is not under challenge. The assessee firm/appellant being a private limited company was maintaining its accounts following the said system and the accounts were duly audited by a qualified chartered accountant, maintenance of the accounts as well as the valuation of work-in-progress will not prejudice either side. Admittedly, the particular work contract was not completed and it comes under the category of work-inprogress. There is also no dispute that the ultimate liability of the assessee as regards tax will be dependant upon the total (fixed) amount received by the assessee against the particular work contract.

13. We, therefore, hold that the IT authority has no option/jurisdiction to meddle in the matter either by directing the assessee to maintain its accounts in a particular manner or adopt a different method for valuing the work-in- progress. We reiterate the decision in Doom Dooma India Ltd. (supra) and hold that an assessee has as the option/liberty to adopt any recognized method of accounting for his business and the income shall be computed in accordance with such regularly maintained accounting system.

14. In the result, the substantial question of law is answered in favour of the appellant and against the Revenue. The impugned order passed by the Tribunal is set aside and that of the CIT(A) is restored.

15. The appeal stands disposed of.

[Citation : 294 ITR 655]

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