We are a foreign company on an approved turnkey power project. We keep books, they are audited, and we recognise revenue on percentage of completion under AS-7. The Assessing Officer has rejected the books under section 145(3) and taxed 10 per cent of our billings under section 44BBB(1). Can he do that?
The Ahmedabad Bench of the Tribunal held he could not, on these facts, and dismissed the Revenue's appeal. Section 44BBB(2) gives the assessee an option to be assessed on lower profits on two conditions only — that it keeps and maintains books and other documents as required under s.44AA(2) and that it gets its accounts audited and furnishes the s.44AB report — and where those are satisfied and a recognised method of accounting under AS-7 has been regularly followed and disclosed, the officer's action in rejecting the books under s.145(3) and assessing under s.44BBB(1) on a presumptive basis is not justified.
Decided by the ITAT (Income Tax Appellate Tribunal, Ahmedabad — Shri R.P. Tolani, Judicial Member and Shri Amarjit Singh, Accountant Member (order by R.P. Tolani JM); date of hearing 9 January 2017) on 2017-01-18, reported as ITA No. 1707/Ahd/2013, assessment year 2009-2010, order pronounced 18 January 2017; no law-report citation was printed on the source read. It bears on section 44BBB, section 44BBB(1), section 44BBB(2), section 44AA, section 44AA(2), section 44AB, section 145, section 145(1), section 145(2), section 145(3), section 143(3), section 197 of the Income Tax Act 1961, in Presumptive Taxation & Audit, Assessment & Scrutiny and Evidence & Burden of Proof matters.
This is the practical content of the sub-section (2) option that the Finance Act 2003 inserted with effect from 1 April 2004, and it addresses the move an Assessing Officer will actually make. He cannot deny the option outright, so he attacks the accounts instead: reject them under s.145(3) and the presumption reappears. What the Tribunal held is that the s.145(3) rejection has to stand on its own feet. It found, at its paragraph 6, that no worthwhile defect had been pointed out in the books, the audit or the profit and loss account; that the assessee's method — percentage of completion on the ratio of contract costs incurred to estimated total contract costs, under Accounting Standard 7 (Revised) — was disclosed in the notes to the financial statements; that AS-7 applied because s.594 of the Companies Act 1956 requires a company incorporated outside India with a place of business in India to prepare its balance sheet and profit and loss account as if it were an Indian company; that the estimated cost and declared profit percentage matched from year to year and the budgeted cost had already been furnished to and accepted by the tax office when an order under s.197 was obtained; and that the Assessing Officer's preferred milestone method was neither substantiated on merits nor shown to produce more revenue. Two cautions. The Tribunal's own decision is confined to whether the rejection was justified on these facts — it is a fact-heavy decision and a case with real book defects will be decided differently. And the wider propositions in this order about s.44BBB not being a charging section appear in the recital of the assessee's submissions at paragraphs 5.26 to 5.31, not in the Tribunal's own findings; do not cite them as the Tribunal's holding.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee is a foreign company executing fixed-price construction contracts with Adani Power Limited and Jhajjar Power Limited in connection with a turnkey power project, with its site at Village Tunda and Siracha, Taluka Mundra, Kutch. For assessment year 2009-2010 it opted to be assessed under s.44BBB(2), maintained books of account, had them audited, and recognised contract revenue and expenses on the percentage of completion method under Accounting Standard 7 (Revised) — the percentage being worked out for each year on the basis of cost incurred as per audited accounts against management estimates of cost for the entire contract — with the policy disclosed in Schedule 11 of the significant accounting policies and notes to the accounts. It had earlier furnished the details of budgeted cost to the tax office when obtaining an order under s.197, which the Department had accepted, and during the assessment it furnished a detailed break-up of the estimated profit and loss account for the whole project across financial years 2007-08 to 2011-12 together with audited financial statements for financial years 2009-10 and 2010-11 showing that costs were actually incurred nearly as estimated. The Assessing Officer held that AS-7 did not apply, contended that the assessee ought to have measured the stage of completion by the physical proportion of the contract work completed as reflected in invoices raised, rejected the books under s.145(3) and assessed the income presumptively under s.44BBB(1). The Commissioner of Income-tax (Appeals), Gandhinagar, by order dated 18 March 2013, held that the assessee had fulfilled all the conditions in s.44BBB(2), had followed a method prescribed in paragraph 29 of Accounting Standard 7, and that the rejection of the books and presumptive assessment were not justified. The Revenue appealed.
The Revenue's appeal was dismissed. Section 44BBB(2) gives the assessee, being a foreign company engaged in the business of civil construction, an option to be assessed under the regular provisions on fulfilment of two conditions — keeping and maintaining books of account and other documents as required under s.44AA(2), and getting the accounts audited and furnishing the report as required under s.44AB — and it was not disputed that the assessee had maintained proper books, got them audited and filed its return accordingly. Accounting Standard 7 applied to the assessee. No worthwhile defect had been pointed out in the books, the audit or the profit and loss account. The Commissioner (Appeals) was right that the assessee had fulfilled all the conditions prescribed under s.44BBB(2) and had followed a recognised method for determining the stage of completion as prescribed in paragraph 29 of Accounting Standard 7, and had followed the correct method of accounting in terms of s.44BBB(2) read with s.145(1) and (2); the Assessing Officer's action in rejecting the books under s.145(3) and assessing income under s.44BBB(1) on a presumptive basis was not justified, and the Commissioner (Appeals)' order was upheld.
At paragraph 6(i) the Tribunal set out s.44BBB(2) and read it as providing an option to a foreign company engaged in the business of civil construction to be assessed under the regular provisions on fulfilment of the two conditions it states, noting that no other specific books of account are prescribed under s.44AA and that the assessee's books, audit report, financial statements, balance sheet and profit and loss account complied with the relevant provisions of the Income-tax Act and the Companies Act. At paragraph 6(ii) it held that the Assessing Officer had wrongly held AS-7 inapplicable, ignoring s.594 of the Companies Act 1956, under which a company incorporated outside India with an established place of business in India must prepare its balance sheet and profit and loss account as per the Companies Act as if it were an Indian company; the accounting policy adopted was set out in the notes to the financial statements. At paragraph 6(iii) it noted the budgeted cost details furnished to the tax office at the s.197 stage and accepted by the Department, and the detailed estimates and audited statements furnished during the assessment. At paragraphs 6(iv) and 6(v) it rejected the Assessing Officer's preference for a milestone measure of stage of completion, observing that the milestone method may be very inappropriate where the parties agree payment terms different from the actual stage of work, that the estimated cost and declared profit percentage nearly matched from year to year, that the project was completed in 2012 so this was not a case of undue deferment of tax, and that the officer's proposition would have led to less revenue being recognised in the year. At paragraph 6(vi) it held the s.145(3) rejection unjustified, applying the Gujarat High Court's decision in CIT v. Advanced Construction Co. (P) Ltd, 275 ITR 30, that the choice of method of accounting lies with the assessee provided it is regularly followed, and that the Department is bound to accept it save where the Assessing Officer finds that true income cannot be arrived at by the method employed.
Consequently we hold that the ld. AO's action of rejecting books of accounts in terms of Section 145(3) of the IT Act and assessing income u/s 44BBB(1) of the IT Act on presumptive basis is not justified, the order of ld. CIT(A) is upheld.
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Handle my notice → Ask a CA on WhatsAppThe Ahmedabad Bench of the Tribunal held he could not, on these facts, and dismissed the Revenue's appeal. Section 44BBB(2) gives the assessee an option to be assessed on lower profits on two conditions only — that it keeps and maintains books and other documents as required under s.44AA(2) and that it gets its accounts audited and furnishes the s.44AB report — and where those are satisfied and a recognised method of accounting under AS-7 has been regularly followed and disclosed, the officer's action in rejecting the books under s.145(3) and assessing under s.44BBB(1) on a presumptive basis is not justified. This was decided by the ITAT (Income Tax Appellate Tribunal, Ahmedabad — Shri R.P. Tolani, Judicial Member and Shri Amarjit Singh, Accountant Member (order by R.P. Tolani JM); date of hearing 9 January 2017) and bears on section 44BBB, section 44BBB(1), section 44BBB(2), section 44AA, section 44AA(2), section 44AB, section 145, section 145(1), section 145(2), section 145(3), section 143(3), section 197 of the Income Tax Act 1961. It is reported as ITA No. 1707/Ahd/2013, assessment year 2009-2010, order pronounced 18 January 2017; no law-report citation was printed on the source read. This is the practical content of the sub-section (2) option that the Finance Act 2003 inserted with effect from 1 April 2004, and it addresses the move an Assessing Officer will actually make. He cannot deny the option outright, so he attacks the accounts instead: reject them under s.145(3) and the presumption reappears. What the Tribunal held is that the s.145(3) rejection has to stand on its own feet. It found, at its paragraph 6, that no worthwhile defect had been pointed out in the books, the audit or the profit and loss account; that the assessee's method — percentage of completion on the ratio of contract costs incurred to estimated total contract costs, under Accounting Standard 7 (Revised) — was disclosed in the notes to the financial statements; that AS-7 applied because s.594 of the Companies Act 1956 requires a company incorporated outside India with a place of business in India to prepare its balance sheet and profit and loss account as if it were an Indian company; that the estimated cost and declared profit percentage matched from year to year and the budgeted cost had already been furnished to and accepted by the tax office when an order under s.197 was obtained; and that the Assessing Officer's preferred milestone method was neither substantiated on merits nor shown to produce more revenue. Two cautions. The Tribunal's own decision is confined to whether the rejection was justified on these facts — it is a fact-heavy decision and a case with real book defects will be decided differently. And the wider propositions in this order about s.44BBB not being a charging section appear in the recital of the assessee's submissions at paragraphs 5.26 to 5.31, not in the Tribunal's own findings; do not cite them as the Tribunal's holding. If it applies to you, the first step is this: Satisfy the two statutory conditions in s.44BBB(2) visibly and on time: books under s.44AA(2), audit and the s.44AB report. The option is conditioned on compliance and nothing else.
The assessee is a foreign company executing fixed-price construction contracts with Adani Power Limited and Jhajjar Power Limited in connection with a turnkey power project, with its site at Village Tunda and Siracha, Taluka Mundra, Kutch. For assessment year 2009-2010 it opted to be assessed under s.44BBB(2), maintained books of account, had them audited, and recognised contract revenue and expenses on the percentage of completion method under Accounting Standard 7 (Revised) — the percentage being worked out for each year on the basis of cost incurred as per audited accounts against management estimates of cost for the entire contract — with the policy disclosed in Schedule 11 of the significant accounting policies and notes to the accounts. It had earlier furnished the details of budgeted cost to the tax office when obtaining an order under s.197, which the Department had accepted, and during the assessment it furnished a detailed break-up of the estimated profit and loss account for the whole project across financial years 2007-08 to 2011-12 together with audited financial statements for financial years 2009-10 and 2010-11 showing that costs were actually incurred nearly as estimated. The Assessing Officer held that AS-7 did not apply, contended that the assessee ought to have measured the stage of completion by the physical proportion of the contract work completed as reflected in invoices raised, rejected the books under s.145(3) and assessed the income presumptively under s.44BBB(1). The Commissioner of Income-tax (Appeals), Gandhinagar, by order dated 18 March 2013, held that the assessee had fulfilled all the conditions in s.44BBB(2), had followed a method prescribed in paragraph 29 of Accounting Standard 7, and that the rejection of the books and presumptive assessment were not justified. The Revenue appealed. The matter was decided on 2017-01-18 by the ITAT (Income Tax Appellate Tribunal, Ahmedabad — Shri R.P. Tolani, Judicial Member and Shri Amarjit Singh, Accountant Member (order by R.P. Tolani JM); date of hearing 9 January 2017). On those facts the ITAT held as follows. The Revenue's appeal was dismissed. Section 44BBB(2) gives the assessee, being a foreign company engaged in the business of civil construction, an option to be assessed under the regular provisions on fulfilment of two conditions — keeping and maintaining books of account and other documents as required under s.44AA(2), and getting the accounts audited and furnishing the report as required under s.44AB — and it was not disputed that the assessee had maintained proper books, got them audited and filed its return accordingly. Accounting Standard 7 applied to the assessee. No worthwhile defect had been pointed out in the books, the audit or the profit and loss account. The Commissioner (Appeals) was right that the assessee had fulfilled all the conditions prescribed under s.44BBB(2) and had followed a recognised method for determining the stage of completion as prescribed in paragraph 29 of Accounting Standard 7, and had followed the correct method of accounting in terms of s.44BBB(2) read with s.145(1) and (2); the Assessing Officer's action in rejecting the books under s.145(3) and assessing income under s.44BBB(1) on a presumptive basis was not justified, and the Commissioner (Appeals)' order was upheld.
At paragraph 6(i) the Tribunal set out s.44BBB(2) and read it as providing an option to a foreign company engaged in the business of civil construction to be assessed under the regular provisions on fulfilment of the two conditions it states, noting that no other specific books of account are prescribed under s.44AA and that the assessee's books, audit report, financial statements, balance sheet and profit and loss account complied with the relevant provisions of the Income-tax Act and the Companies Act. At paragraph 6(ii) it held that the Assessing Officer had wrongly held AS-7 inapplicable, ignoring s.594 of the Companies Act 1956, under which a company incorporated outside India with an established place of business in India must prepare its balance sheet and profit and loss account as per the Companies Act as if it were an Indian company; the accounting policy adopted was set out in the notes to the financial statements. At paragraph 6(iii) it noted the budgeted cost details furnished to the tax office at the s.197 stage and accepted by the Department, and the detailed estimates and audited statements furnished during the assessment. At paragraphs 6(iv) and 6(v) it rejected the Assessing Officer's preference for a milestone measure of stage of completion, observing that the milestone method may be very inappropriate where the parties agree payment terms different from the actual stage of work, that the estimated cost and declared profit percentage nearly matched from year to year, that the project was completed in 2012 so this was not a case of undue deferment of tax, and that the officer's proposition would have led to less revenue being recognised in the year. At paragraph 6(vi) it held the s.145(3) rejection unjustified, applying the Gujarat High Court's decision in CIT v. Advanced Construction Co. (P) Ltd, 275 ITR 30, that the choice of method of accounting lies with the assessee provided it is regularly followed, and that the Department is bound to accept it save where the Assessing Officer finds that true income cannot be arrived at by the method employed. In the words reproduced by the source cited on this page: "Consequently we hold that the ld. AO's action of rejecting books of accounts in terms of Section 145(3) of the IT Act and assessing income u/s 44BBB(1) of the IT Act on presumptive basis is not justified, the order of ld. CIT(A) is upheld." The decision followed or applied CIT v. Advanced Construction Co. (P) Ltd, 275 ITR 30 (Gujarat) — applied, on the assessee's choice of method of accounting under s.145.
It was decided by the ITAT on 2017-01-18 and is reported as ITA No. 1707/Ahd/2013, assessment year 2009-2010, order pronounced 18 January 2017; no law-report citation was printed on the source read. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 44BBB, section 44BBB(1), section 44BBB(2), section 44AA, section 44AA(2), section 44AB, section 145, section 145(1), section 145(2), section 145(3), section 143(3), section 197, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeal was dismissed. Section 44BBB(2) gives the assessee, being a foreign company engaged in the business of civil construction, an option to be assessed under the regular provisions on fulfilment of two conditions — keeping and maintaining books of account and other documents as required under s.44AA(2), and getting the accounts audited and furnishing the report as required under s.44AB — and it was not disputed that the assessee had maintained proper books, got them audited and filed its return accordingly. Accounting Standard 7 applied to the assessee. No worthwhile defect had been pointed out in the books, the audit or the profit and loss account. The Commissioner (Appeals) was right that the assessee had fulfilled all the conditions prescribed under s.44BBB(2) and had followed a recognised method for determining the stage of completion as prescribed in paragraph 29 of Accounting Standard 7, and had followed the correct method of accounting in terms of s.44BBB(2) read with s.145(1) and (2); the Assessing Officer's action in rejecting the books under s.145(3) and assessing income under s.44BBB(1) on a presumptive basis was not justified, and the Commissioner (Appeals)' order was upheld. It arises in Presumptive Taxation & Audit, Assessment & Scrutiny and Evidence & Burden of Proof matters, on section 44BBB, section 44BBB(1), section 44BBB(2), section 44AA, section 44AA(2), section 44AB, section 145, section 145(1), section 145(2), section 145(3), section 143(3), section 197 of the Income Tax Act 1961, and was decided by Income Tax Appellate Tribunal, Ahmedabad — Shri R.P. Tolani, Judicial Member and Shri Amarjit Singh, Accountant Member (order by R.P. Tolani JM); date of hearing 9 January 2017. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Disclose the revenue-recognition method in the notes to the accounts and follow it consistently. A method that is disclosed, recognised and regularly followed is what the officer has to displace. If the Assessing Officer rejects the books, make him identify the defect. A rejection under s.145(3) supported by no worthwhile defect in the books, audit or profit and loss account will not carry the presumption. Use the s.197 file. Where budgeted costs were furnished to the Department for a lower-deduction certificate and accepted, that is contemporaneous departmental acceptance of the very estimates the officer later disputes. If the officer prefers a different measure of stage of completion, ask what is wrong with yours and what revenue gain his produces. The Tribunal held the milestone method may be very inappropriate where the payment terms differ from the actual stage of work. Cite paragraph 6 and the concluding paragraph for the Tribunal's own findings, and do not cite paragraphs 5.26 to 5.31, which record the assessee's submissions.
Validity check could not be completed. Validity check could not be completed. I ran no search for any appeal against this order or for later treatment of it, and I make no claim that none exists. Two things a reader should weigh: this is a Tribunal decision, so it binds nobody outside the case, and its conclusion is heavily fact-dependent — it turns on there having been no worthwhile defect in the books, the audit or the profit and loss account, and on a disclosed and regularly followed AS-7 method. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
A STRUCTURAL WARNING ABOUT THIS ORDER. Paragraphs 5.26 to 5.31 are a recital of the assessee's submissions, not the Tribunal's reasoning — they open with statements such as "Assuming but not conceding", "Reliance is placed on", "Other propositions canvassed by ld. Counsel are to the effect that" and "It is vehemently contended that". The Tribunal's own findings begin at paragraph 6, "We have heard the rival contentions and perused the material available on record. We proceed to decide the issues as under", and run through sub-paragraphs (i) to (vi) to the concluding paragraph and the disposal at paragraph 7. Everything attributed to the Tribunal in this entry is taken from paragraph 6 onwards. Nested within paragraph 5.27 is a quotation from the Supreme Court in CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 and within paragraph 5.28 a quotation of paragraph 36.4 of CBDT Circular No. 7/2003 dated 5 September 2003; within paragraph 5.30 is a quotation of paragraphs from the Delhi Bench's order in Royal Jordanian Airlines v. DDIT, 25 SOT 270, on s.44BBA. Those are quotations inside a recital of submissions and are not this Tribunal's words, though the concluding paragraph does record that the Tribunal's view "is fortified by" the Royal Jordanian Airlines decision. The docfragment fetch used to corroborate the concluding sentence also returned the Commissioner (Appeals)' own reasoning in almost the same words immediately before the Tribunal's; the two are distinguishable by the opening words "I therefore, hold" as against "In view of foregoing, we, therefore, uphold", and I have quoted only the latter. This order is also the second independent route by which s.44BBB(1) and (2) were read for the statutory entry in this batch: it reproduces both sub-sections at its paragraph 5.26, marking the omitted words "and financed under any international aid programme" as "67[***]". This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal was dismissed. Section 44BBB(2) gives the assessee, being a foreign company engaged in the business of civil construction, an option to be assessed under the regular provisions on fulfilment of two conditions — keeping and maintaining books of account and other documents as required under s.44AA(2), and getting the accounts audited and furnishing the report as required under s.44AB — and it was not disputed that the assessee had maintained proper books, got them audited and filed its return accordingly. Accounting Standard 7 applied to the assessee. No worthwhile defect had been pointed out in the books, the audit or the profit and loss account. The Commissioner (Appeals) was right that the assessee had fulfilled all the conditions prescribed under s.44BBB(2) and had followed a recognised method for determining the stage of completion as prescribed in paragraph 29 of Accounting Standard 7, and had followed the correct method of accounting in terms of s.44BBB(2) read with s.145(1) and (2); the Assessing Officer's action in rejecting the books under s.145(3) and assessing income under s.44BBB(1) on a presumptive basis was not justified, and the Commissioner (Appeals)' order was upheld.
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