Madras H.C : Where assessee filed a writ petition challenging initiation of reassessment proceedings based on change in method of accounting adopted by Assessing Officer, in view of fact that assessee had sufficient alternative remedy of filing appeal before appellate authorities, writ petition was to be dismissed being non-maintainable

High Court Of Madras

Kone Elevator India (P.) Ltd. vs. ACIT, Company Circle – II(4)

Assessment Year : 2008-09

Section : 145, 147

V. Dhanapalan, J.

W.P. No. 1638 Of 2012

April 10, 2013

ORDER

1. Seeking to quash the order of assessment dated 30.12.2011 in PAN No.AAACK2567P, relating to the assessment year 2008-09, on the file of the respondent herein, the petitioner has come up with the present Writ Petition.

2. Facts leading to the filing of the case would run thus:

2.1 The petitioner is a Company registered under the provisions of the Indian Companies Act. It is engaged in the business of manufacture, supply, installation and commissioning of new elevators, supply, installation of escalators and maintenance, servicing and modernisation of both elevators as well as escalators. It also renders software services to group Companies. The petitioner has been carrying on the aforesaid line of business for more than 20 years and there has been no change in the nature of business carried on by them over this period.

2.2 The petitioner maintains regular business of accounts and files returns of income within the timeframe stipulated under the Income Tax Act (in short ‘Act’). It has been following a consistent method of providing for and returning the income from the supply and installation of elevators and escalators on the basis of the ‘completed contract method’. The financials of the petitioner are subject to audit by qualified Chartered Accountants and all provisions set out under the Companies Act and the relevant accounting standards are followed consistently. The method of accounting following by the petitioner has been subject to scrutiny by the Income Tax Department and accepted.

2.3 The Accounting Standard No.9 issued by the Institute of Chartered Accountants of India, provide for various parameters to be followed for the recognition of income. The Accounting Standard specifically deals with the methods of accounting to be followed, relevant to the particular activity that the assessee is engaged in. The petitioner enters into a contract with an entity/person for the supply of a specified number of elevators/escalators. The contract of supply involves stages such as preparation of drawing, approval of general arrangement drawings, despatch of materials by pre-erection work at the site of the customer, delivery of materials, erection and installation and finally, handing over the elevators/escalators to the customer. The contract entered into between the petitioner and the ultimate customer thus breaks down the entire chain of supply and services into several stages in respect of which the customer is expected to pay a demarcated amount. The payment made by the customer at each stage of the execution of the contract would be accounted for as an advance received to the credit of such customer. The contract is completed and the work is executed in full only when the title to the property in the goods, being the elevator or the escalator, passes to the customer. It is agreed by the parties that such passing of title shall only be effected only at the time when the payment is received in full.

2.4 The contract between the parties specifies that the material supplied by the petitioner shall remain the property of the petitioner till such time the payment is received in full. It protects specifically the right of the petitioner to remove any equipment supplied by the petitioner at the cost of the customer, in event of any default in payment. The income from such contracts thus accrues to the petitioner only on the execution of the contract and when the title passes to the customer. The petitioner accordingly treats every part payment made by the customer in the course of the installation of contract as an advance towards execution of the same and offers the entire income to taxation on completion of the contract and handing over of the equipment to the customer, which is referred to as the ‘completed contract method’ and is a recognized method of accounting in terms of Accounting Standard 9 issued by the ICAI. The accrual of income and the recognition of the same is thus in accordance with the Accounting Standard 9 and is a mandatory method that has been consistently followed by the petitioner in respect of the income offered by it for taxation, ever since its inception more than 20 years ago.

2.5 The Income Tax Department has, till date completed the assessments of the returns of income filed by the petitioner consistently, accepting the method of accounting of income adopted by it insofar as this method reflects a true and fair picture of the income earned by the petitioner and recognized by it for the purpose of taxation. The ‘completed contract method’ is an accepted method of recognition of income in a case such as the petitioner, wherein the contract or agreement between the parties provides for execution or rendering of services over several stages of the contract. The achievement of each milestone results in part payment by the customer. However, the final product is ready for use and transfer to the customer only at the time of completion of the contract; the intervening milestone, though significant in terms of the execution of contract per se, do not result in any independent or individual benefit that can be enjoyed. That apart, it is only on the final stage of execution of the contract and the handing over of the elevator/escalator/service to the customer that the title in the property that is the subject matter of the contract would actually pass to the customer. The agreement is clear in that the title to the property vests in and remains with the petitioner till such time and this has been accepted by the Income Tax Department, as being the correct method to recognize and account for income contracts such as the arrangement that the petitioner engages in. Till date, both the petitioner and the respondent have consistently been accepting and following the position that the method of accounting followed by the petitioner, i.e. the ‘completed contract method’ is the correct method to be adopted and followed for recognition of revenue.

2.6 The petitioner prepares statutory reports, disclosures and compliances in regard to its business transactions and financials along with the returns of income. The disclosures and financials, duly prepared by qualified professionals/Chartered Accountants disclose the basis of ‘revenue recognition’ in the note to the accounts for the relevant years. This basis of revenue recognition has been consistently similar over the years.

2.7 On the basis of the revenue recognized by the petitioner, orders of assessment under the provisions of scrutiny have been completed in respect of various assessment years till date. According to the petitioner, the method adopted by them for recognition of revenue is in order and has been consistently accepted by the Income Tax Department till date. While so, in respect of Assessment Year 2008-2009, the petitioner filed a return of income dated 28.09.2008 declaring income of Rs.52,95,14,660/- under the normal provisions and book profit of Rs.74,36,76,800/- u/s 115 JB of the Act. An intimation under Section 143(1), dated 03.03.2010 was issued. Notice u/s 143(2) of the Act calling upon the petitioner to produce various details in connection with its return of income was served on 13.08.2008 (wrongly mentioned as 09.10.2007) and the petitioner duly complied with the same and appeared before the respondent and furnished all the required particulars. In accordance with the practice followed in respect of earlier assessments, the petitioner had, in respect of the income earned for the financial year 01.04.2007 to 31.03.2008, returned income on the basis of Accounting Standard 9 following the ‘completed contract’ method. The disclosure in the notes on accounts for the relevant year is identical to the disclosures made in respect of the earlier years and the nature of business carried on by the petitioner and the activity that is engaged in, remain identical to that of the earlier years. Thus, there is no deviation or change in the circumstances between the present year and the earlier years. In the said circumstances, the petitioner was surprised to receive a notice from the respondent dated 26.12.2011, to which he filed a detailed reply dated 28.12.2011 submitting that the proposal of the Assessing Officer was not correct on merits and further, not in line and contrary to, the basis of assessments over several years.

2.8 On the merits of the proposal, the petitioner highlighted to the Assessing Officer that the presumption of the Revenue that the milestone payments made by the customer at each stage of work would constitute ‘income’ in regard to that extent of the work, is totally without basis. The arrangement entered into between itself and the customer amounts to sale of goods manufactured and sold along with incidental and associated services. In fact, the arrangement for manufacture and sale of goods and rendering of connected services carried on by the petitioner attracts the levy of tax both by the Sales Tax Department as well as Service Tax Department. Insofar as the arrangement that the petitioner has with its customers is a composite contract, primarily involving the sale of goods with the additional component of associated services, the petitioner raises an invoice specifying that 85% of the contract value is reckoned towards Value Added Tax in relation to the sale of goods being lift/escalator and accessories and 15% of the value towards Service Tax in respect of the services rendered in connection with erection, installation and commissioning of the goods supplied.

2.9 The Department was well aware of the legal position while completing the assessments in respect of the earlier years and has accepted the method of accounting adopted by the petitioner after scrutiny and due application of mind. The present proposal to bring to tax the advances as ‘income’ of the petitioner is arbitrary. The methodology adopted by the assessee and accepted by the Department till date is supported by the accounting standards. According to the petitioner, the proposal to bring to tax the amount of Rs. 410 crores is contrary to the provisions of the Act insofar as the advances received in the current financial year amounts only to Rs. 96 crores, being the difference between the advances relating to the earlier years (Rs. 316 crores) and advances relating to the current financial year (Rs. 410 crores). In fact, the amount of Rs. 316 crores relates to advances pertaining to assessment years prior to financial year 2007-08 and cannot in any event brought to tax as income in respect of Assessment Year 2008-09 insofar as there is no concept of taxation of ‘prior period’ income under the provisions of the Act.

2.10 The assessments in relation to the earlier years have been completed and the present stand of the Revenue would disturb a position that has been accepted consistently and in respect of which, there is no justification or necessity for a change. According to the petitioner, all the details as required by the respondent were furnished to him and the petitioner was given to understand that its stand would be accepted. While so, the petitioner was shocked to receive an order of assessment dated 30.12.2011 bringing to tax the entire amount of advances received as on 31.03.2008 corresponding to Rs. 410,96,81,202/- as income of the petitioner. A total demand of Rs. 20,63,60,929/- has been raised by the respondent vide order of assessment dated 30.12.2011 that is contrary to the provisions of the Act, principles of consistency and violation of the principles of natural justice.

3. The respondent has filed a counter affidavit, wherein, he has stated as follows:

3.1 The stand of the petitioner is that only in case of Delhi Metro Project, they have accounted the income in percentage of completion method and that there were no long term contracts in the previous year. It has failed to distinguish as to what is Long Term contract (LT) and Short Term contract (ST). Long Term Contract generally means that it extends to more than one Financial year (Accounting year). During the course of hearing, as per the submission given, it is evident that advances are received at different stages of contract extending to more than one financial year and hence, it is clear that the advances received were for LT contract and not for short term contract.

3.2 The Contract entered into does not dictate the accounting standards and accounting principles involved to be followed. The contract entered into by the petitioner and its clients at best can bring out the obligations both financial and legal between the contracting parties. It is once again reaffirmed that the petitioner has made the deviation from the completed contract method to percentage of completion method for long term contracts. The petitioner has all along stated that its business constitutes a works contract and not sale of goods before the Sales Tax authorities. In order to avoid sales tax, it has been classifying its business as works contract before the Sales Tax authorities and when it comes to Income Tax, it states that the entire process of manufacturing, commissioning and installation of elevators is sale of goods and not works contract. Hence, facts are to be seen in the light of their representations before the respective authorities and the writ needs to be quashed.

3.3 According to the petitioner, the stand adopted by them is in accordance with AS 9 issued by ICAI. AS 9 specifically applies to sale of goods and services and does not apply to works contract. Moreover, as per the ICAI guidelines, if the contract for sale of goods extends to more than one accounting year, application of AS7 is appropriate rather than AS9. The petitioner’s stand has changed from ‘Works contract’ to ‘Contract of Sales’ and in that case, the application of Accounting Standard 7 becomes more relevant as it is squarely covered under the percentage of completion method. Even if it is a contract of sale, then AS 9 would not be applicable as it extends beyond one financial year and only AS 7 would be applicable.

3.4 With regard to the petitioner’s reference to the dictum of the Hon’ble Supreme Court in the case of Wood Ward Governor, wherein the Bench has held that where the assessee or department are deviating from the stand consistently adopted over the years, there should be a justification in that regard, the respondent has stated that there is no deviation on the part of the department in considering the petitioner’s case and in fact, it is the petitioner who has deviated from its method of accounting for long term contracts.

3.5 Further, an income corresponding to Rs.40 crores was not offered to tax voluntarily by the petitioner in its returns of income for A.Y.2008-09. The respondent seeks to bring the income of the petitioner corresponding to the advances received to tax as opposed to the petitioner’s stand of offering income only in the year of completion of the contract. Advances received pertains to contracts originating in different previous years. The computation of income by the respondent commences from the return of income returned by the petitioner which has been computed on the basis of completion contract method. The computation of income was made by applying the principles of percentage of completion method thereby bringing the income in the form of advances to tax. By doing so, there is no such dichotomy of treatment by the respondent and there is no super imposition of percentage completion method over completed contract method followed by the petitioner.

3.6 Arriving at the correct income as per the percentage completion method cannot be considered as an admission of changing the method of accounting followed by the petitioner. The respondent has arrived at the correct income to be offered as per the petitioner’s own accounting principles. Hence, it can be considered only as a failure on the part of the petitioner to follow their own accounting methods.

3.7 The petitioner has stated by its communication dated 28.12.2011 that their method of accounting is mercantile and revenue recognition is only on completion of sale of goods and the same is not correct. The books of accounts does not give a true picture of their actual income. In fact, by doing so, the petitioner seeks to defer the income to later years. Also, the correct method of calculating income as per percentage completion method will make sure that revenue is offered to tax as and when it is received, and it is not revenue neutral as claimed by the petitioner. The contention that TDS would cover the profit is irrelevant for the issue, as the basic question involved is that percentage completion method is to be followed in all contracts that stretch beyond one accounting year.

3.8 The petitioner had income from long term contracts is undeniable in AY 2008-09, that the petitioner failed to account income as per AS 7 is undeniable, that the respondent or the Department has never even attempted to suo moto change the accounting method of the petitioner, that it is the petitioner’s stand that it is a works contract before Sales Tax and sales before Income Tax, that the petitioner’s averment that revenue is to be recognised as per AS 9 does not stand merit since the sales extend for more than a year and advances are received prior to the sales booking makes AS 9 inept in the petitioner’s case.

3.9 AS 9 recognises revenue both from the sale of products and rendering of services. However, in the case of services, it reckons the applicability of percentage of completion method but not so in the case of sale of goods. Therefore, what is explicitly stated as applicable to rendering of services will be equally applicable for sale of goods. Further, as per the petitioner’s case, in the case of goods having long production cycle time, as long as there is a valid contract and the parties to the contract agree regarding billing details, contractual obligations and payment terms, there is no need to apply the rule of explicit statement in the Standard.

3.10 Considering the nature of business, the type of product and the long production cycle time involved, the method adopted by the Company is not in order. With regard to long production cycle items taking more than a year to complete, the ‘Objective’ paragraph, definition of the term ‘construction contract’ and paragraph 3 of the Accounting Standard (AS) 7 (revised 2002), ‘Construction Contracts’, issued by the Institute of Chartered Accountants of India, which inter alia state as follows:

“The objective of this Statement is to prescribe the accounting treatment of revenue and costs associated with construction contracts. Because of the nature of the activity undertaken in construction contracts, the date at which the contract activity is entered into and the date when the activity is completed usually fall into different accounting periods.

A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that the closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.”

A construction contract may be negotiated for the construction of a single asset such as a bridge, building, dam, pipeline, road, ship or tunnel, etc. A construction contract may also deal with the construction of a number of assets which are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use; examples of such contracts include those for the construction of refineries and other complex pieces of plant or equipment.”

3.11 In the above circumstances, the respondent prays for dismissal of the writ petition as not maintainable on the ground of alternative remedy as well as devoid of merits.

4. To the counter of the respondent, the petitioner has filed a rejoinder affidavit, wherein, it is stated thus:

4.1 Adverting to paragraph 2, the petitioner submits that though the order is passed under Section 143(3) of the Income Tax Act, the basis of the order itself is arbitrary and contrary to law and that the impugned order is passed in violation of the principles of natural justice, in so far as the petitioner had specifically raised the issue of consistency of treatment that has not been adverted to or adjudicated.

4.2 Adverting to paragraph 3, the petitioner submits that it has been following a consistent method of accounting and returning the income from the supply and installation of elevators and escalators on the basis of the completed contract method and the said method of accounting adopted by the petitioner has remained the same over the years and has been accepted by the respondent consistently for the past over two decades. The only exception pertains to the contract entered with the Delhi Metro for the supply of over 200 elevators and escalators, wherein the Delhi Metro Rail Corporation (DMRC) contracted with the petitioner to hand over possession of equipment in each corridor, thus, in effect treating each corridor of the Metro as a separate contract. Income as well as expenditure, in this case alone, is reckoned on stage wise completion of the contract. In any event, in the financial year relevant to AY 2008-09, there were no long term contracts that were ongoing and the petitioner was executing only short term contracts in respect of which, admittedly, the petitioner and the Department were following only the completed contract method. Though the respondent states that he does not seek to change the method adopted by the appellant and accepted consistently by him, this is exactly what the impugned order does. Opportunity to the petitioner was not granted to clarify these aspects and this renders the impugned order liable to be cancelled.

4.3 With regard to the admission of the respondent that the taxability of the part payments received by the customers is the subject matter of the impugned order of assessment, the petitioner submits that the contract between the parties specifies that the materials supplied by the petitioner shall remain the property of the petitioner till such time the payment is received in full. It protects specifically the right of the petitioner to remove any equipment supplied by the petitioner at the cost of the customer, in the event of any default in payment. The income from such contracts thus accrues to the petitioner only on the complete execution of the contract and when the title passes to the customer. It is for this reason that the petitioner treats every part payment made by the customer in the course of the installation of the equipment as an advance towards execution of the contract and offers the entire income to taxation on completion of the contract and handing over the equipment to the customer.

4.4 Adverting to paragraph 5, the averment of the respondent that the petitioner’s claim of following the completed contract method without detailing the said nature/length of contract should be rejected as improper, is denied, as the said averment is opposed to fact. In the financial year relevant to AY 2008-2009 (2007-08), the petitioner has been engaged only in short term contracts in respect of which it is following the completed contract method. This has been consistently accepted by the Department. In the case of Delhi Metro, the Government, as the purchaser would not prefer to await installation of over 200 equipments and wished to, in the interest of the public, take possession of a corridor and make it available for public use as and when each corridor was completed. Thus each corridor of the Delhi Metro is a separate contract and income therefrom is reckoned and offered to tax on the basis of either completed corridor’ or stage wise completion. The petitioner was advised that in so far as the contract with the Government was a single one, notwithstanding the specific requirement therein concerning the completion and handing over of each corridor, a disclosure should be made in the financials. It is for this reason that the financials contain such a disclosure.

5. The only contention of the learned counsel for the petitioner is that there is a change of accounting from completed contract method to percentage completion method and, therefore, there is a violation of principles of natural justice. She would cite the following decisions:

(i)  Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC)

“It has been said that the taxes are the price that we pay for civilization. If so, it is essential that those who are entrusted with the task of calculating and realising that price should familiarise themselves with the relevant provisions and become well-versed with the law on the subject. Any remissness on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue. At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. So far as the income-tax assessment orders are concerned, they cannot be reopened on the score of income escaping assessment under Section 147 of the Act of 1961 after the expiry of four years from the end of the assessment year unless there be omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. As already mentioned, this cannot be said in the present case. The appeal is consequently allowed, the judgment of the High Court is set aside and the impugned notices are quashed. The parties in the circumstances shall bear their own costs throughout.”

(ii) Radhasoami Satsang v. CIT [1992] 60 Taxman 248 (SC)

“We are aware of the fact that strictly speaking, res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.

On these reasonings, in the absence of any material change justifying the Revenue to take a different view of the matter- and, if there was no change, it was in support of the assessee- we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-Tax in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under Sections 11 and 12 of the Income Tax Act of 1961.”

(iii) Oil and Natural Gas Corpn. Ltd., v. CIT [2010] 322 ITR 180/189 Taxman 292 (SC)

“Thus, the questions surviving for determination are: (i) that when the assessee maintained their accounts on mercantile system of accounting and there was no finding by the Assessing Officer on the correctness or completeness of the account and that the assessee had complied with the accounting standards laid down by the Central Government, can the “loss” suffered by it on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet be allowed as expenditure under Section 37(1) of the Act notwithstanding the fact that the liability had not been actually discharged in the year in which the fluctuation in the rate of foreign exchange had occurred, and (ii) whether on account of fluctuation in the rate of exchange at the end of the previous year, the assessee is entitled to adjust the actual cost of imported assets acquired in foreign currency?

Having carefully perused the decision of this court in Woodward’s case [2009] 312 ITR 254, we are of the opinion that both the issues stand concluded by the said decision. Dealing with the said issues extensively, speaking for the Bench, S.H. Kapadia, J., summarised the following factors which should be taken into account in order to find out if an expenditure on account of fluctuation in the foreign currency rates, when the assessee is following mercantile system of accounting, is deductible (page 267):

“(i) whether the system of accounting followed by the assessee is the mercantile system, which brings in the debits of the amount of expenditure for which a legal liability has been incurred even before it is actually disbursed and brings into credits, what is due, immediately it becomes due and before it is actually received;

(ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide?

(iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it;

(iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains;

(v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards;

(vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation.”

(iv) CIT v. Triveni Engineering & Industries Ltd. [2011] 196 Taxman 94/[2010] 8 taxmann.com 146 (Delhi)

“10…. “10. The following have been generally accepted as fundamental accounting assumptions:

(a) Going concern. The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the sale of the operations.

(b) Consistency. It is assumed that accounting of policies are consistent from one period to another.

(c) Accrual refers to the assumption that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate.

11. After considering the submissions of the counsel on either side, in the given facts, we are prima facie of the view that arguments of the learned counsel for the assessee to prevail. The learned counsel for the Revenue may be correct in stating the proposition of law, generally. No doubt, unless the expenditure is actually incurred or it accrued in the relevant year, it would not be allowed as deduction. Such a liability has to be in praesenti. However, at the same time, in the given scenario where in relation to the project works undertaken by the assessee, completed contract method of accounting is followed, which is consistent with the accounting standards and these accounting standards also lay down the norms indicating the particular point of time when the provisions for all known liabilities and losses has to be made, the making of such a provision by the assessee appears to be justified more so when the assessee had recognized gain as well on such project during this year itself. This appears to be in consonance with principle of matching cost and revenue as well. However, in the projected scenario of this case, after taking stock of the entire situation, we are of the opinion that it is not necessary to conclusively answer the aforesaid questions formulated. It is because of the reason that we find that the entire exercise is revenue neutral. It may be pointed out that it is a matter of record that against the provision of Rs. 139 lakhs, the assessee had to actually incur expenditure of Rs. 218.03 lakhs, i.e. more than the provision made. It is undisputed that the expenditure incurred by the assessee on the project is admissible deduction. The only dispute that the Revenue seeks to raise is regarding the year of allowability of expenditure. Considering that the assessee is a company assessed at uniform rate of tax, the entire exercise of seeking to disturb the year of allowability of expenditure is, in any case, revenue neutral.”

(v) Whirlpool Corpn. v. Registrar of Trade Marks 1999 AIR (SC) 22

“15. Under Article 226 of the Constitution, the High Court, having regard to the facts of the case, has a discretion to entertain or not to entertain a Writ Petition. But the High Court has imposed upon itself certain restrictions one of which is that if an effective and efficacious remedy is available, the High Court would not normally exercise its jurisdiction. But the alternative remedy has been consistently held by this Court not to operate as a bar in at least three contingencies, namely, where the writ petition has been filed for the enforcement of any of the Fundamental Rights or where there has been a violation of the principle of natural justice or where the order of proceedings are wholly without jurisdiction or the vires of an Act is challenged. There is a plethora of case-law on this point put to cut down this circle of forensic Whirlpool, we would rely on some old decisions of the evolutionary era of the constitutional law as they still hold the field.

20. Much water has since flown beneath the bridge, but there has been no corrosive effect on these decisions which, though old, continue to hold the field with the result that law as to the jurisdiction of the High Court in entertaining a writ petition under Article 226 of the Constitution, in spite of the alternative statutory remedies, is not affected, specially in a case where the authority against whom the writ is filed is shown to have had no jurisdiction or had purported to usurp jurisdiction without any legal foundation.

21. That being so, the High court was not justified in dismissing the writ petition at the initial stage without examining the contention that the show cause notice issued to the appellant was wholly without jurisdiction and that the Registrar, in the circumstances of the case, was not justified in acting as the “TRIBUNAL”.

(vi) State of H.P. And others v. Gujarat Ambuja Cement Ltd. 2005 JT 6 (SC) 298

“10. We shall first deal with the plea regarding alternative remedy as raised by the appellant-State. Except for a period when Article 226 was amended by the Constitution (42nd Amendment) Act, 1976, the power relating to alternative remedy has been considered to be a rule of self-imposed limitation. It is essentially a rule of policy, convenience and discretion and never a rule of law. Despite the existence of an alternative remedy it is within the jurisdiction of discretion of the High Court to grant relief under Article 226 of the Constitution. At the same time, it cannot be lost sight of that though the matter relating to an alternative remedy has nothing to do with the jurisdiction of the case, normally the High Court should not interfere if there is an adequate efficacious alternative remedy. If somebody approaches the High Court without availing the alternative remedy provided the High Court should ensure that he has made out a strong case or that there exist good grounds to invoke the extraordinary jurisdiction.

11…. The Court, in extraordinary circumstances, may exercise the power if it comes to the conclusion that there has been a breach of principles of natural justice or procedure required for decision has not been adopted.”

(vii) Mohinder Singh Gill v. Chief Election Commissioner AIR 1978 SC 851

“8. The second equally relevant matter is that when a statutory functionary makes an order based on certain grounds, its validity must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of affidavit or otherwise. Otherwise, an order bad in the beginning may, by the time it comes to court on account of a challenge, get validated by additional grounds later brought out. We may here draw attention to the observations of Bose J. in Gordhandas Bhanji (AIR 1952 SC 16) (at p.18):

“Public orders publicly made, in exercise of a statutory authority cannot be construed in the light of explanations subsequently given by the officer making the order of what he meant, or of what was in his mind, or what he intended to do. Public orders made by public authorities are meant to have public effect and are intended to affect the acting and conduct of those to whom they are addressed and must be construed objectively with reference to the language used in the order itself.””

(viii) Bilahari Investments (P.) Ltd. v. Commissioner of Income-Tax [2007] 288 ITR 39 (Mad.)

“… that a conjoint reading of sections 5 and 145 of the Income Tax Act, 1961, made it clear that all income received or deemed to be received or accruing or arising during the previous year shall form part of the total income of the assessee and such income shall be computed in accordance with the accounting system which the assessee regularly followed. Therefore, when the assessees followed the mercantile system of accounting as statutorily required under the Companies Act, in which entries were posted in the books of account on the date of the transaction, that is, on the date on which rights accrued or liabilities were incurred irrespective of the date of payment, the income derived during a particular previous year by way of chit dividend had to be reckoned and assessed as income of that year. The dividend had to be taxed on the basis of its accrual, in the year of the bid.”

(ix) CIT v. Bilahari Investment (P.) Ltd. [2008] 299 ITR (1) SC

“Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be 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.

The above indicates the difference between the completed contract method and the percentage of completion method.

In the judgment of the Bombay High Court in Taparia Tools Ltd., it has been held that in every case of substitution of one method by another method, the burden is on the Department to prove that the method in vogue is not correct and it distorts the profits of a particular year. Under the mercantile system of accounting based on the concept of accrual, the method of accounting followed by the assessees is relevant. In the present case, there is no finding recorded by the Assessing Officer that the completed contract method distorts the profits of a particular year. Moreover, as held in various judgments, the chit scheme is one integrated scheme spread over a period of time, sometimes exceeding 12 months. We have examined the computation of tax effect in these cases and we find that the entire exercise is revenue neutral, particularly when the scheme is read as one integrated scheme spread over a period of time.”

(x) CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326 (SC)

“… Section 145(1) enacts that for the purpose of Section 28 and Section 56 alone, income, profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. In this case, we are concerned with Section 28. Therefore, Section 145(1) is attracted to the facts of the present case. Under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. … Therefore, the accounting method followed by an assesee continuously for a given period of time needs to be presumed to be correct till the Assessing Officer comes to the conclusion for reasons to be given that the system does not reflect the true and correct profits. As stated, there is no finding given by the Assessing Officer on the correctness of the accounting standard followed by the assessee(s) in this batch of Civil Appeals.”

6. On the other hand, learned counsel for the respondent would contend that the contract entered into does not dictate the accounting standards and accounting principles involved to be followed; the contract entered into by the petitioner and its clients at best can bring out the obligations both financial and legal between the contracting parties and that the petitioner has made the deviation from the completed contract method to percentage of completion method for long term contracts and hence the impugned order is perfectly in order. He would also contend that if the petitioner is aggrieved over the order of the assessing authority, he has alternative appeal remedies before the appropriate authorities and, hence, this Writ Petition is liable to be dismissed. He would cite the following authorities :

(i) a decision of the Supreme Court reported in Titaghur Paper Mills Co. Ltd. v. State of Orissa [1983] 53 STC 315

“For the assessment year 1980-81, the assessee has filed its returns of inside sales and inter-State sales returning the gross turnovers and claiming deductions of sales to registered dealers in the case of both the turnovers and also deduction in respect of sales to departments of Government in the case of the turnover of inter-State sales. During the proceedings for assessment the assessee sought adjournments on one ground or another. Eventually, the Sales Tax Officer refused to grant any further adjournments holding that the assessee had sufficient opportunity and made assessments to the best of his judgment under Rule 15 of the Central Sales Tax (Orissa) Rules, 1957, and Section 12(4) of the Orissa Sales Tax Act, 1947, treating the gross turnovers returned to be their taxable turnovers. In the case of inter-State sales, he disallowed the assessee’s claim for deduction representing sales to registered dealers and departments of Government as well as the amount claimed as deduction on account of tax collected from the purchasers, as the requisite declarations in Form C were not forthcoming. He also disallowed the concessional rate of tax at 4 per cent. Similarly, while making an assessment under Section 12(4) of the Act, he treated the gross turnover of inside sales as returned by the petitioners to be their taxable turnover and disallowed the assessee’s claim for deduction of sales to registered dealers as the prescribed declarations had not been produced. Thereupon the assessee filed writ petitions in the High Court challenging the assessments among other things on the ground that the Sales Tax Officer had acted in flagrant violation of the rules of natural justice as they were deprived of their opportunity to place their case and that he was not justified in disallowing the claim for deductions. The High Court dismissed the petitions on the grounds that the assessee had a right of appeal and that this was not a case of inherent lack of jurisdiction. The assessee preferred petitions in the Supreme Court for special leave to appeal and an Officer of the assessee-Company also filed writ petitions in the Supreme Court challenging the validity of the assessment orders.”

(ii) a decision of this Court reported in (2005) 2 MLJ 246 (M/s.Nivaram Pharma Private Ltd. v. The Customs, Excise and Gold (Control), Appellate Tribunal, South Regional Bench, Madras and others) :

“15. There are well settled principles of writ jurisdiction and Judges also must exercise self-discipline. It has been repeatedly held by the Supreme Court that in tax matters there should be no short circuiting the statutory remedies of appeal, revision, etc. We are therefore surprised that in this case the learned Single Judge did not observe this well settled principle of self-discipline and entertained the writ petition despite existence of statutory remedies.”

(iii) yet another decision of this Court reported in (Dr. K. Neduncheziyan v. Deputy Commissioner of Income-Tax, Central Circle [2005] 148 Taxman 617 :

“6. It is well-settled that when there is an alternative remedy ordinarily writ jurisdiction of this Court under Article 226 of the Constitution should not be invoked. This principle applies with greater force regarding tax proceedings.”

7. I have heard the learned counsel for the parties and also gone through the records.

8. The stand of the petitioner is that it is a company engaged in the business of manufacture, supply, installation and commissioning of new elevators, escalators, maintenance etc.; it maintains regular business of accounts and files returns of income within the timeframe stipulated under the Income Tax Act; it has been following a consistent method of providing for and returning the income from the supply and installation of elevators and escalators on the basis of ‘completed contract method’; accordingly, it treats every part payment made by the customer in the course of the installation of contract as an advance towards execution of the same and offers the entire income to taxation on completion of the contract and handing over of the equipment to the customer, which is referred to as the ‘completed contract method’ and is a recognized method of accounting in terms of Accounting Standard 9 issued by the ICAI, which is a method that has been consistently followed by the petitioner in respect of the income offered by it for taxation for more than 20 years and its income was assessed on completed contract method, while so, the respondent, vide the order of assessment dated 30.12.2011, brought to tax the entire amount of advances received as on 31.03.2008, corresponding to Rs.410,96,81,202/- as income of the petitioner and a total demand of Rs.20,63,60,929/- has been raised, thereby changing the method of accounting to percentage completion method, which is contrary to the provisions of the Act and the principles of consistency.

9. The above stand of the petitioner has been objected to by the respondent stating that the contract entered into by the petitioner and its clients does not dictate the accounting standards and accounting principles involved to be followed; the contract at best can bring out the obligations both financial and legal between the contracting parties and that the petitioner has made the deviation from the completed contract method to percentage of completion method for long term contracts.

10. Admittedly, the authority, who passed the impugned order, is the original authority viz., Assistant Commissioner of Income-Tax, as against whose order, an appeal remedy is very much available to the petitioner. Chapter XX of the Income-Tax Act provides for appeals and revision, wherein so many stages are contemplated which the petitioner has to exhaust in order to refer the case to the High Court. Chapter XX (A) containing Sections 246 to 251 deals with appeals to the Deputy Commissioner (Appeals) and Commissioner (Appeals). Chapter XX (B) containing Sections 252 to 255 contemplates appeals to the Appellate Tribunal. While Chapter XX (C) containing Sections 256 to 260 provides for reference to High Court, XX (CC) containing Sections 260A and 260B provides for appeals to High Court. Thereafter, appeals to the Supreme Court under Chapter XX(D) vide Section 261 lie. Chapter XX (E) under Sections 263 and 264 also provides for revision by the Commissioner. This is the order of the day for income tax matters. When that being the clear position, the petitioner, instead of exhausting the said appeal remedies, has approached this Court straight, bypassing the statutory remedies, which practice cannot be appreciated.

11. The only point of the learned counsel for the petitioner for filing this Writ Petition is that the first respondent has reopened the assessment by changing the method of accounting from completed contract method to percentage completion method without assigning valid reasons and, therefore, the impugned order is non-est in law.

12. To conclude the assessment order under Section 143 (3), the respondent has passed an order to the effect that as and when the expenditure is incurred, the same will be booked by them towards the cost for the jobs and it results in WIP corresponding to the jobs. Not only that, when the advances are received, the company uses the amount for the purpose of purchase of materials and store it for usage for the jobs. Thus, the advances are already committed to the jobs and moneys incurred for the same. From the above, it is re-ascertained that expenditure is incurred against the advance received as shown in the books. However, the revenue has not been recognized. Hence, following the percentage completion method of contract, the tax due has been arrived at.

13. It is the cardinal principle under Section 145(1) of the Income Tax Act that under one system of accounting, what is due is brought into credit before it is actually received and it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. Therefore, the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the Assessing Officer comes to the conclusion for reasons to be given that the system does not reflect the true and correct profits. The petitioner has construed that the decision of the original authority in going for reopening of assessment without giving reasons is contrary to law. The opinion formed by the original authority for going for such a change and the reasons adduced by it are now contested by the petitioner saying that they are not the reasons at all. These are all matters which can be looked into by the appropriate appellate authority and the said authority can give due indulgence to such a claim of the petitioner and, if the appellate authority feels that it is not proper and that those are not the correct reasons, it may set right the order of the original authority and come to a decision, subject to the petitioner approaching the said appellate authority. Bypassing such an efficacious alternative remedy, the petitioner has approached this Court, which cannot be entertained.

14. If the petitioner is aggrieved over the order of the assessing authority, when there are sufficient alternative statutory appeal remedies available to the petitioner, he is no exception to the same, in order to approach this Court directly. In other words, when the petitioner has not exhausted the alternative appeal remedies before the appropriate authorities as against the order of the original authority, this Court cannot sit in appeal over the order of the original authority. It has been repeatedly held by the Supreme Court that in tax matters there should be no short circuiting the statutory remedies of appeal, revision etc. It is also well settled that when there is an alternative remedy, writ jurisdiction of this Court under Article 226 of the Constitution should not be invoked. This principle applies with greater force regarding tax proceedings.

15. The change in method and the reasons for the change are the matters which can be seriously looked into by the appellate authority, if the petitioner moves the concerned forum in accordance with law.

16. It is true, reasons are to be given for change in the accounting system, but the same cannot be a ground to waive the appellate remedy when the appellate forum can very well within its jurisdiction and powers adjudicate the matter on the questions and issues raised by the petitioner. When such an appellate remedy is very much available to the petitioner before the appellate forum, without availing the same, the petitioner is before this Court. It is also true that waiver of appellate remedy is available to the petitioner in circumstances where there is an infringement of fundamental right, a violation of principles of natural justice or when there is anything ultra vires the law. In this case, in the absence of any of the above elements, it is not proper for the petitioner to avoid the effective alternative appeal remedy. Therefore, the contention of the learned counsel for the petitioner cannot be sustained.

17. Under the circumstances, it is quite unnecessary for this Court to go deep into the matter, as this is not the proper forum to deal with the same, at this stage. Accordingly, this Writ Petition is dismissed, as not maintainable. The parties to the proceedings are at liberty to agitate all the contentions raised before this Court before the appellate authority, dealing with the appeal. It is made clear that while computing the period of limitation, if any, for filing the appeal, the period of pendency of this Writ Petition, shall be excluded. The appellate authority shall dispose of the appeal uninfluenced by any of the observations made in this order on merits and in accordance with law. No costs. Consequently, the connected M.P.No.1 of 2012 is also dismissed.

[Citation : 355 ITR 139]

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