1. In the appeal by the revenue it is contended that the deduction under section 80-O is to be allowed only on the net income brought into India in convertible foreign exchange and not on the gross amount of income so brought. In the assessment order, the deduction was computed as under : debited to P & L A/c Rs. 29,33,75,063B.Total receipt inclusion of foreign receipts Rs. 44,57,57,946C.Total foreign receipts Rs. 5,41,84,270Less : Receipt on which benefit ofdeduction would not be allowed Rs. 3,61,827 Rs. 5,38,22,443Expenditure allowable to foreign receipts ----- = -------------------------------- = 3,54,23,176 B 44,57,57,946Less : Expenditure - Rs. 3,54,23,176 Rs. 1,83,99,267 -----------------50% of Rs. 1,83,99,267, i.e., Rs. 91,99,633 allowed as deductionunder section 80-O." 2. On appeal, the CIT(A) following the order of the Tribunal in the assessee's case for the assessment year 1985-86 and the orders of the CIT(A) for the assessment years 1989-90 and 1990-91, accepted the assessee's contention and held that the deduction has to be allowed on the gross amount of income brought into India in convertible foreign exchange without deducting any expenses in India.
3. We find that the issue is covered in favour of the assessee by the order of the Tribunal dated 13-9-1991 in ITA No. 1827 (Cal.) of 1990 and ITA No. 2284 (Cal.) of 1990 for the assessment year 1985-86. In this order the issue has been deal with at length and the provisions of section 80-O have been considered along with section 80AB. The Tribunal ultimately upheld the assessee's contention.
4. Respectfully following the Tribunal's order, we uphold the decision of the CIT(A) and dismiss the appeal by the department.
5. There is also one more aspect of the matter which we thought we should record in the order. While considering a similar provision in section 80M of the Act, the Calcutta High Court held in the case of CIT v. United Collieries Ltd. [1993] 203 ITR 857 that though the deduction is available only on the net dividend which is arrived at after taking into account the expenditure incurred for the purpose of earning the dividend, only the actual expenditure incurred by the assessee for earning the dividend shall be deducted and there is no scope for any estimate of the expenditure being made and no notional expenditure can be allocated for the purpose of earning the income unless the facts of a particular case warrant such allocation. In the present case, the working of the deduction extracted above shows that the allocation has been made on notional basis. There is also no material brought on record to show that such allocation is warranted on the facts of the case. As per the principles laid down in the judgment, the deduction of the notional expenditure of Rs. 3,54,23,176 from the foreign receipts of Rs. 5,38,22,443 appears to be unjustified.
6. In the assessee's cross objection, the only point which survives is that the CIT(A) failed to decide the claim for deduction under section 80-O in respect of the fees amounting to Rs. 3,61,827 received from P.T. Ispat Sponge, Indonesia. On a perusal of the order of the CIT(A) we find that he has not given any finding in respect of this ground that was raised before him in ground No. 1.2 before him. We direct him to consider the ground on merits. The cross-objection is thus partly allowed.
The assessee-company is engaged in the business of execution of turnkey projects in the engineering sector. It acts as consuming engineers and also offers services in computer consultancy and software development.
In this appeal we are concerned with the accounting period ended 31-3-1991, the relevant assessment year being 1991-92. In the profit and loss account filed along with the return, a sum of Rs. 27,20,20,884 was credited as 'engineering fees' from the engineering consultancy business. The ITO found that there was a huge increase from Rs. 56.75 cr. in the assessment year 1990-91 to Rs. 74.45 cr. in the assessment year 1991-92 in the amount of "advance against jobs" in the balance sheet. He was of the view that "the amount of Engineering Fee disclosed is not commensurate with the amount of advance received for the jobs".
He called upon the assessee to explain the apparent discrepancy. He also cited certain jobs from which the aggregate amount payable came to Rs. 31.20 cr. and directed the company to explain why only a lesser amount has been taken to the profit and loss account. According to him, the assessee was following the mercantile system of accounting which enjoined that it should take credit for amounts receivable, that as per the terms of the agreement with its clients the assessee was to receive certain payments during the accounting year and such terms did not offer any scope for re-working the amounts to be taken credit for and therefore the company had not properly disclosed the amount of engineering fees. His views were communicated to the assessee by letter dated 1-12-1993 and in this letter he specifically referred to the agreement with TISCO (Tata Iron & Steel Co. Ltd.) in connection with the Phase-III expansion programme undertaken by the assessee, under which the assessee was to receive a sum of Rs. 12 cr. during the year, but had taken only Rs. 2.5 cr. as income for the year.
8. The assessee's response by letter dated 1-2-1994 was elaborate and covered all the factual and legal aspects of the quary raised by the ITO. Particular emphasis was laid on the fact that as per the Accounting Standards 7 & 9 of the Institute of Chartered Accountants of India, which were being followed by the assessee-company, revenue is recognised with reference to the actual work completed based on proper evaluation, by its technical personnel, of the status of the work at the end of each accounting year, that the specification of the terms of payment in the agreements did not mean that the realisation thereof matched with the work performed and that the amounts paid would remain in the nature of advance, as highlighted in the Accounting Standards, to be appropriated only on the basis of actual performance of the work.
In particular, the reasons which justified the company's view that only Rs. 2.5 cr. (out of Rs. 12 cr. payable and paid) could be considered as income for the year for its work in connection with Phase-III programme for TISCO, were also explained. As required by the ITO the information in connection with the 18 major jobs undertaken by the company was furnished as Annexure II to the letter, Annexure I being the Accounting Standards.
(i) The assessee has not accounted for the correct income as per the system of accounting followed by it (i.e., mercantile system).
(ii) The income should be accounted for as and when the assessee gets the right to receive it, under the mercantile system. The assessee has not done so despite the fact that it obtained the right to receive the payment (and in many cases, actually received it) under the relevant agreements.
(iii) Even as per the agreement with TISCO, the terms of payment were fixed only after proper and satisfactory evaluation of the work, its cost, etc., and, therefore, there was no need for a further evaluation thereof by the assessee through its technical personnel allegedly for ascertaining the income for the year.
(iv) The corresponding expenses debited to the profit and loss account have not been reduced by the assessee, though the income has been reduced before being taken to the profit and loss account.
(v) By following the 'completion of project method' and by recognising income only in the year the project is completed, the assessee had "succeeded in splitting the income by spreading it over and thus reduced its tax liability".
In view of these conclusions, the ITO arrived at the amount of engineering fees to be credited to the Profit & Loss Account, on the basis of the information supplied by the assessee in its letter dated 1-2-1994, at Rs. 41,48,26,015. As the assessee had disclosed only Rs. 27,20,884 in its Profit & Loss Account, the balance of Rs. 14,28,09,131 was added to the business income.
10. On appeal, the CIT(A) whole-heartedly agreed with and approved the decision taken by the ITO and confirmed the addition. Thereafter the assessee filed an application under section 154 of the Act pointing out to the CIT(A) that if the income is to be so assessed on the basis of the agreements, then the assessee should be held entitled to deduction of estimated expenses for completion of the projects, on the basis of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC). By order dated 25-7-1995, the CIT(A) agreed with the assessee's contention and directed the ITO to work out and allow the deduction for costs committed by the assessee as per the contracts.
11. The assessee-company is in further appeal before us reiterating its stand amply elaborated before the departmental authorities. By way of assistance, detailed paper-books, running to 218 pages, were filed. The orders of the departmental authorities were vehemently defended on behalf of the revenue.
12. The crux of the question is this : To which of the two should primacy be given - to the terms of the agreements relating to the projects undertaken by the assessee or to the method of accounting adopted by the assessee on the basis of the accounting standards laid down by the Institute of Chartered Accountants of India (ICAI) - in determining the proper profits to be assessed for the year To us, it appears that primacy should be given to the latter, on the facts before us. In the course of business, an assessee enters into many transactions with others and also enters into many arrangements or agreements, all relating to the actual execution of the business.
Relationships are defined in such arrangements/agreements, rights and liabilities are created or extinguished ; sometime they are modified to suit the changing situations or to conform to the requirements of law.
But essentially, they remain what they are : means by which the business activity is carried on. Such agreements/arrangements invariably provide for monetary terms. How such monetary terms and conditions are interpreted in the accounts of the parties is what is basically referred to as the "method of accounting". In this field, the businessman is given a wide selection of methods and whatever method of accounting is chosen by him has been made the compulsory basis for computation of his profits by section 145 of the Act. The rationale of the provision is not difficult to fathom. The businessman is the best person to know clearly whether his business has resulted in a profit or loss. And when as per the accounting system employed by him there is a profit or loss, that is normally to be accepted by the income-tax authorities. There are conditions for the applicability of this rule.
The first is that the income should have been computed in accordance with the system followed. The second is that the system should have been regularly employed. The third is that it should be a recognised system. The fourth is that the system should be one from which true profits and gains can be deduced. Shorn of niceties and legalise, these constitute the basic principle underlying the section.
13. As regards the second condition, it is satisfied in this case. The assessee has been contending right from the inception that it has been following the method of accounting for profits from the engineering consultancy work on the basis of 'percentage of progress' method, one which has been approved by the ICAI in its Accounting Standards and further that the system has been followed for the last thirty years and has also been accepted by the income-tax authorities. This factual position has not been controverted on behalf of the income-tax authorities. In fact, once they had attempted to tinker with the same in the assessment year 1963-64 but that attempt was thwarted by the Tribunal. The assessee had undertaken some work for the Bokaro Steel Plant. The work covered a period of 14 months for which the assessee, under the agreement, was to receive a sum of Rs. 60 lakhs. The work started in the accounting year in May. The accounting year came to an end on June. According to the ITO, the assessee ought to have taken into account 1/7th of the above sum, for the purpose of assessment. The assessee had accounted for earnings from this contract only to the extent of Rs. 5 lakhs. The contention on behalf of the assessee was that receipts of a particular period had no relation to the work completed during that period. In other words, it was contended that the receipts under the agreement gave no indication of the income, which was worked out as per the calculations furnished by the technical personnel on the basis of the actual performance in the accounting period. The contention found acceptance in the hands of the Tribunal in the following words : "We have carefully considered the submissions of the learned representative of the assessee and also the various documents and technical date produced before us. We are satisfied that the allocation of the earnings this year to the extent of Rs. 5 lakhs only has been made on proper scientific lines and cannot be called in question merely because it would not correspondent exactly to time basis. The allocation of the earnings on time basis is only a make-shift arrangement when more precise data are not available. We would therefore hold that the enhancement of the assessable income by Rs. 3,00,000 on the basis of a corresponding increase in the amount of earnings attributable to this year is not justified. The addition of Rs. 3,00,000 is accordingly deleted." 14. It was not contended on behalf of the revenue, nor is there any material to which our attention had been drawn, to the effect that the Tribunal's order has not become final and that further proceedings were pursued with. The order was passed on 16-2-1965. The income of the assessee was continued to be computed on that basis in all the assessment years which followed up to the year under appeal.
15. Thus, the undisputed position is that the 'percentage of completion' method of arriving at the profits for the year in respect of the engineering consultancy business has been regularly employed by the assessee and has been accepted by the revenue authorities.
16. We now proceed to a consideration of the question as to whether the "percentage of completion" method is an accepted or recognised method of arriving at the profits from the contracts. We find that the Accounting Standards laid down by the ICAI (No. 7 & 9) do approve the same. AS 9 was laid down in the year 1985. It deals with revenue recognition from rendering of services. Viewing the activities of the present assessee as constituting the rendering of engineering services, we may consider what the AS (Accounting Standard, for short) says. As per para 4, revenue "is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them". Para 4.2 defines 'completed services contract method' as one "which recognises revenue in the statement of profit and loss only when the rendering of services under a contract is completed or substantially completed". Para 4.3 defines 'proportionate completion method' as a "method of accounting which recognises revenue in the statement of profit and loss proportionately with the degree of completion of services under a contract". The Explanation at para 5 explains that revenue recognition is mainly concerned with the timing of recognition of revenue in the profit and loss account and the amount of revenue is usually determined by the agreement with the parties. Paragraph 7 is as follows : 7.1 Revenue from service transactions is usually recognised as the service is performed, either by the proportionate completion method or by the completed service contract method.
(i) Proportionate completion method - Performance consists of the execution of more than one Act. Revenue is recognised proportionately by reference to the performance of each Act. The revenue recognised under this method would be determined on the basis of contract value, associated costs, number of acts or other suitable basis. For practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue is recognised on a straight line basis over the specific period unless there is evidence that some other method better represents the pattern of performance.
(ii) Completed service contract method - Performance consists of the execution of a single Act. Alternatively, services are performed in more than single Act, and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts. The completed service contract method is relevant to these patterns of performance and accordingly revenue is recognised when the sole or final act takes place and the service becomes chargeable." "12. In a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainly exists regarding the amount of the consideration that will be derived from rendering the service." 17. AS-7 for construction contracts was issued in November 1983. In para 4 it is stated that contracts for the provision of services fall within its scope. Examples of such contracts given are : contracts for the services of project managers and architects and for technical engineering services related to the construction of an asset. Para 7 prescribes the percentage of completion method and the completed contract method for accounting purposes. Para 7.2 defines the 'percentage of completion method' as below : "7.2 Under the percentage of completion method, revenue is recognised as the 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 in the reporting of results which can be attributed to the proportion of work completed. Although (as per the principle of 'prudence') revenue is recognised as the activity progresses even though in certain circumstances it may not be realised." The basis for recognising revenue on construction contracts is given at para 9 (relevant portion only) : "Basis for Recognising Revenue on Construction Contracts 9.
Percentage of completion method 9.1. Under the percentage of completion method, the amount of revenue recognised is determined by reference to the stage of completion of the contract activity at the end of each accounting period. The advantage of the method of accounting for contract revenue is that it reflects revenue in the accounting period during which activity is undertaken to earn such revenue.
9.2. The stage of completion used to determine revenue to be recognised the financial statements is measured in an appropriate manner. For this purpose, no special weightage should be given to a single factor ; instead, all relevant factors should be taken into consideration ; for example, the proportion that costs incurred to date bear to the estimated total costs of the contract, by surveys which measure work performed and completion of a physical proportion of the contract work.
9.3. Progress payments and advances received from customers may not necessarily reflect the stage of completion and therefore cannot usually be treated as equivalent to revenue earned." 18. The actual accounting standard is given in paras 16 to 21 but for the present purposes, paras 16 to 19 alone are relevant and they are as below : "16. In accounting for constructions contracts in financial statements, either the percentage of completion method or the completed contract method may be used. When a contractor uses a particular method of accounting for a contract, then the same method should be adopted for all other contracts which meet similar criteria.
17. The percentage of completion method can be used if the outcome of the contract can be reliably estimated.
17.1 In the case of fixed price contracts, this degree of reliability would be provided if the following conditions are satisfied : (i) total contract revenue to be received can be reliably estimated ; (ii) both the costs to complete the contract and the stage of contract performance completed at the reporting date can be reasonably estimated ; and (iii) the cost attributable to the contract can be clearly identified so that actual experience can be compared with prior estimate.
17.2 Profit in the case of fixed price contracts, normally should not be recognised unless the work on a contract has progressed to a reasonable extent.
17.3 In the case of cost plus contract, this degree of reliability would be provided only if both the following conditions are satisfied : (i) cost attributable to the contract can be clearly identified ; and (ii) cost other than those that are specifically reimbursable under the contract can be reliably estimated.
17.4 While recognising the profit under percentage of completion method, an appropriate allowance for future unforeseeable factors should be made on either a specific or a percentage basis (sic).
18. The costs included in the amount at which construction contract work is stated should comprise those cost that relate directly to a specific contract and those that are attributable to the contract activity in general and can be allocated to specific contracts.
19. A foreseeable loss on the entire contract should be provided for in the financial statements irrespective of the amount of work done and the method of accounting followed." 19. The accounting standards laid down as above, reflect the views of a professional body, viz., the ICAI and are therefore entitled to the highest respect. Their view with regard to capitalisation of interest during pre-production period was accepted as reflecting the proper commercial principles of accounting by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. The Madras High Court accepted the view of the ICAI as reflecting the correct accounting practice in Sivakami Mills Ltd. v. CIT [1979] 120 ITR 211. Even the views expressed by author, whose books on accountancy are recognised throughout the world, have been applied by the Calcutta High Court in the case of Garden Reach Workshop Ltd. v. CIT [1981] 132 ITR 814.
20. A method of accounting or accounting practice or policy prescribed or approved by the ICAI is normally to be given effect to. Similarly, the views of authors of recognised books on accountancy are entitled to highest respect.
21. We will now examine whether the assessee has in fact followed the accounting standards. The authorities appear never to have questioned that it has. As mentioned earlier, in the letter to the ITO, dated 1-2-1994, the assessee has made the following points : (i) That it has followed the accounting standards consistently for the past 38 years.
(ii) That in respect of jobs completed during any year the income is fully allocated to that year irrespective of the amount actually received.
(iii) In respect of jobs which are likely to extend for a period of 4 to 5 years, the percentage on completion method of accounting is adopted. The progress made on each job during the year with reference to the total engineering effort involved in completing the entire job is evaluated in terms of outputs such as number of specification/drawings produced, man-month inputs on the job vis-a-vis the total estimate of inputs, etc. This evaluation is done by technical personnel.
(iv) At the end of each year, project managers involved in each job work out the total percentage of the job completed, based on the status of each item of scope of work for the entire job. From such working, the percentage of job already completed up to the end of the earlier year is deducted, thus arriving at the percentage of work completed during the relevant year. This percentage is applied to the total fees for the job, whether received or receivable, and the amount so arrived at is credited as income from engineering fees in P & L A/c for the relevant year.
(v) The time-bound payments made as per the terms of the agreement are not commensurate with the quantum of work that is completed during the year necessitating the adoption of the "percentage of completion" method of recognising revenue. An indication of this fact (i.e., that the payments are merely time-bound) is given by the fact that invariably the execution of the contracts get delayed considerably and invariably the delay is outside the control of the assessee. All contracts therefore, contain a provision for extension of the period of the contract.
(vi) In view of the above peculiar circumstances, the amounts received under the contracts are always termed as advance, to be appropriated as income on the basis of the actual performance of the work.
After making, inter alia, the above points, the assessee also dealt with the TISCO Phase-III project and gave reasons justifying its action in appropriating only Rs. 2.5 cr. as income from the contract as against Rs. 12 cr. received.
22. The income-tax authorities have not challenged any of the above facts. The ITO in the assessment order has stated that the assessee did not furnish any evidence to support its claim that the performance is evaluated by the project managers. Along with the letter dated 1-2-1994 the assessee had furnished copies of the "Job progress report for the year ended 31-3-1991" in respect of ASP-Stage II Expansion project and RSP - Coke Oven Battery project, in Annexure B to the said letter.
After this letter, which also contained a reference to the project evaluation, there is nothing to show that any evidence in this behalf was directed to be produced. Even in its earlier letter dated 20-10-1993, the assessee had made a similar claim which is noticed by the ITO himself in his letter of 1-12-1993 ; nevertheless, the ITO has not called upon the assessee to lead any evidence in this behalf in his letter. Thus the assessee's claim has never been doubted on facts. The ITO did not also dispute the figures given in the progress report furnished as Annexure B to the assessee's letter dated 1-2-1994, which obviously were based on the project evaluation made by the project engineers. Therefore, there is nothing to doubt or suspect the assessee's claim that it had actually followed the "percentage on completion" method of revenue recognition as prescribed by the accounting standards.
23. The accounting practice of taking into consideration the value of the work done or the actual performance while estimating the profits for each year in the case of long-term contracts has been recognised and recommended by the Institute of Chartered Accountants in England and Wales, which are extracted in Spicer & Peglor's Book-keeping and Accounts, 16th Edition. The following observations support the assessee's contention : "In business which involve the acceptance and completion of long-term contracts it is often appropriate to spread over the period of the contracts on a properly determined basis, the profits which are expected to be earned when the contracts are completed.
This procedure takes up in each period during the performance of the contract a reasonable amount as representing the contribution of that period towards the eventual profit ; it thus recognises to a prudent extent the value of the work done in each period and restrict the distortion which would result from bringing in the whole of the profit in the period of completion. The principles which determine whether an element of profit is to be included are : (a) profit should not be included until it is reasonably clear from the state of the work that a profit will ultimately be earned ; it is, therefore, inappropriate to include any profit element where at the balance-sheet date the contract has been in progress for a comparatively short time or to include an amount in excess of the profit element property attributable to the work actually done ; (b) provision should be made for foreseeable losses and allowance should be made as far as practicable for penalties, guarantees and other contingencies ; (c) a clear basis for including a profit element should be established and adhered to consistently." Brown and Howard's Principals & Practice of Management Accountancy, 3rd Edn. at page 419 says that in the case of long-term contracts, "there is regarded as earned to date only that proportion which prudently reflects the amount of work carried out to date". Thus, the assessee's claim is also supported by the views of the authors of standard books on accountancy.
24. Strong reliance has been placed by the income-tax authorities upon the principle that under the mercantile method of accounting any income that has accrued to the assessee has to be brought into account and on the basis of the agreements, the assessee obtained the right to receive the income at stated intervals of time and the moment that point of time was reached the right fructified into a debt due and that such moment cannot be postponed to suit what is called the revenue recognition theory. But as already stated, it is only a question of giving primacy or preference to the accounting standards over the rights of the assessee under the agreements. The projects undertaken by the assessee, a glimpse of which is given at pages 11 to 30 of the paper book, are quite complicated matters. They involve highly specialised engineering consultancy services. There is a time-schedule by which the project is to be completed and often the assessee, for reasons beyond its control, is unable to meet the schedule. Projects are delayed. In some cases additional payment is provided for. In some cases, even before a proper agreement for the engineering services is entered into, a memorandum of understanding is entered into, on the basis of which the work is started. The agreement proper follows. In the case of TISCO Phase-III project, which has been taken as example by both sides, the actual work commenced on 1-1-1989 but the agreement was entered into only on 29-11-1990. We have perused the agreement. It is highly technical. Annexure 1.1 to 1.6 are devoted only to the scope of the assessee's work. As per cl. D, various time-limits are provided for, for completion of different segments of work. The first of such time-limit is March 1992 for "raw material handling system for 'G' blast furnace". Various other segments of work have to be completed in February, March & May 1993 and March 1994. But the total remuneration for the services, as per cl. E/2.1, was payable in monthly instalments commencing from 1-1-1989, "subject to satisfactory progress which will be reviewed every four months". The income-tax authorities have relied heavily on this term. But then nothing more can be read into it except that it reserves to TISCO the right to withhold the payments if the progress of the work is not to the satisfaction of TISCO. From that term, it is not possible to infer that the payments under the agreement are commensurate with or proportionate to the quantum or progress of the work. The assessee's case that the right to receive the payments, which are essentially time-bound, is not the same thing as the right to receive income, which arises only in proportion to or commensurate with the actual performance or the actual discharge of the assessee's duties seems eminently acceptable in view of the peculiar nature of the contracts. Details have been filed on behalf of the assessee to show that in some years it has taken credit for income, based on the evaluation of the work, even at a figure higher than the time-bound payments due/received in the year. Those details have been filed before the Assessing Officer (vide Ann. A to letter dated 1-2-1994), some examples of which are as follows :----------------------------------------------------------------------Project Amount payable Amount Amount allocated to (Rs.) (As per actually "Engineering fees" agreement) received by the assessee1. Vizag 1,51,04,317 1,25,06,920 1,58,34,317 MMSM.5. Orissa Mining 8,50,004 9,63,337 13,27,334 Corpn. Ltd., Ltd., Delhi.
3,50,000 2,00,000 4,95,000----------------------------------------------------------------------- It is, therefore, clear that a genuine effort has been made by the assessee to estimate its income on the basis of the actual performance and that there is no intention to postpone or defer the income with a view to reducing the income for income-tax purposes.
25. At pages 217-218 of the paper-book, the assessee has furnished details in respect of TISCO Phase-III project for the assessment years 1990-91 to 1996-97 to show the fallacy in the view taken by the income-tax authorities. During this period, the assessee has received a total sum of Rs. 46.5 cr. The assessee has appropriated to the Profit & Loss A/cs. of these years an aggregate income of Rs. 26 cr. on the basis that during the said period 52% of the work had been performed.
The following are the details extracted by us :---------------------------------------------------------------------Assmt.
Amount Work performed Amount of Engg. fees Yr.
recd. (Rs.) (%) taken to P & L A/c.----------------------------------------------------------------------1990-91 13 cr.
5% 2.5 cr.1991-92 13 cr.
5% 2.5 cr.1992-93 12 cr.
5% 2.5 cr.1993-94 5 cr.
8% 4.00 cr.1994-95 3.31 cr.
13% 6.50 cr.1995-96 19 lakhs 16% 8.00 cr.---------------------------------------------------------------------- If the method following by the assessee (i.e., taking credit for income on the basis of the work performed irrespective of the actual receipts) is discarded, it would result in a distorted picture of the profits earned in different years, inasmuch as it would have no relation to the work performed. The method of taking credit for the income on the basis of the time-bound payments under the agreements, canvassed by the revenue authorities, has the advantage of simplicity, but we are not sure at all whether that method would reflect the true profits and gains from the contracts for each accounting period. The assessee's method is more scientific, is based on accounting standard issued by ICAI supported by standard text books, has been approved by the Tribunal once and has been consistently followed by the assessee and also accepted by the assessing authorities up to the assessment year 1990-91. There seems little justification for departing from the same.
26. Several decisions were cited by both sides but since none of them is directly on point, we have not referred to them.
27. For these reasons, we uphold the 'percentage on completion' method followed by the assessee. The addition of Rs. 14,28,05,131 is decided and the appeal is allowed.
28. A further direction is necessary. The CIT(A) has, by order dated 23-7-1995 passed under section 154, dealt with the alternative ground and directed the Assessing Officer to allow estimated expenses on the basis of Calcutta Co. Ltd. (supra). Since we have deleted the addition itself, there is no scope for upholding the allowance of the estimated expenses. Therefore, though there is no appeal now before us against the CIT(A)'s order under section 154, in the light of the judgment of the Supreme Court in the case of Kapurchand Shrimal v. CIT [1981] 131 ITR 451, we have to issue consequential directions, which we hereby do to the effect that the assessee would not be entitled to any deduction pursuant to the CIT(A)'s order dated 23-7-1995.