1988 PLP (Trib (PTD)

MANZOORUL HAQUE (MEMBER).--This departmental appeal has been filed against the order of the learned CIT (A), Zone-3, Karachi.

2. The department has impugned the orders of the learned CIT (A), releasing a part of receipts from work-in-progress from the levy of income-tax. The contention of the department is that the respondent had disclosed receipts from work-in-progress at Rs.1,86,55,540 during the year under consideration. The G.P. declared on these receipts was worked out at 2.2%. It was further observed by the assessing officer that out of the above amounts no profit was declared on work-in-progress at Rs.1,00,51,

093. The plea taken by the respondent was that the work done on these projects being less than 25% of the total estimated cost no profit on it could be worked out.

3. Mr. Muhammad Farid, the learned D.R. argued that every advance carry element of profit irrespective of the fact whether as per trading account and profit or loss has been worked out. They are, therefore, liable to tax as per Circular No.2 of 1975 of the Central Board of Revenue which reads as under:- "

2. Because of changes in the Income-tax Law in Pakistan and other factors it has become necessary to modify the instructions of 1946, Board desires that henceforth in making assessment of contractors the following procedure should be followed for computing profits of a contract which takes more than one year to complete:- (i) Profits may be computed from year to year during the currency of the contract in the normal manner on the basis of actual receipts and accounts for each year. (ii) ................ " In view of the facts stated above and the CBR's Circular No.2 of 1975 the I. T.O. applied GP rate of 15% on total receipts of Rs.2,90,61.664 from incomplete projects. Before doing this the ITO confronted the assessee with the following facts:- "

2. In the complete project you have shown work-in-progress and declared receipts from projects, but it is observed that you have not declared any contracting profit from the following 4 projects:- (1) FLF/10,Gulshan-e-Iqbal,Karachi Work-in-progress Rs.18,64,257 (2) FL 5/9, Clifton, Karachi Rs.9,13,717 (3) Aga Khan Hospital and Medical College Rs.68,13,656 Total Rs.1,00,51,093 Out of the total work-in-progress as at 30th September 1978, of Rs.3,01,95,060 you have not declared any profit on work-in-progress of 111.1, 00, 51, 093" . To this the respondent replied as under:- "You have queried as to why despite the adoption of percentage of completion" method no profit has been recognised by our client on those on going jobs where the work done as at the close of the accounting year is less than 25 percent of the total estimated value of works. In this connection, we would like to inform you that it is the consistent policy of our client not to account for profits on those ongoing jobs where the value of work done as at the date of balance-sheet is less since 25 per cent. This policy had been consistently applied the incorporation of the company. This policy has been adopted due to the uncertainty attached to the estimates of contract/job cost and revenue when the value of work done is below the level of 25 percent the value of the total estimated value of work. The level of uncertainty, produced by various factors like variation of works, problem of estimating cost and relevant revenue is so significant that it is not possible to deduce contracting profit when the work done is below the level of 25 per cent of the total estimate value of work. The fact that a reliable engineering estimate of cost and the revenue cannot be made at that stage of the contract out client do not account for any profit or loss until the work done as at the close of the accounting profits exceeded 25 per cent of the total value of work. As the policy is consistently followed both in the preceding and the subsequently years aryl more so that it is in line with the universally accepted accounting practice, it should be accepted." 3 A. The above explanation was not considered satisfactory by the Income-tax Officer and relying on Circular No.2 of 1975, he also included the amount of Rs.1,00,51,093 the total receipts of the work-in-progress and applied rate of GP at 15%.

4. Mr. Muhammad Farid, the learned D.R. supported the treatment given by the ITO and relied on ITA No.1138 of 1975-76, dated 2-6-1977. In the above case it was held by the Tribunal as under:- "

We are of the view that the Board in its circular has prescribed an ad hoc method of applying gross profits as 15% for the simple reason that each instalment collected from the customers carries on element of profit at 15%. It is well-known that the instalment in such cases are due on booking; on construction at plinth level; on laying of roof, on construction upto the finishing stage and then (finally) before handing over possession of the permises. Therefore, the activity upto the plinth level or the roof level for which the advances were received was in fact carried on during the previous year which is evident from the fact that the land was acquired, the plans were got approved and water connection installed. This clearly establishes that steps towards construction of the flats were actually taken. The expense involved in these were debitable towards the construction of the flats, hence the element of profit at flat rate of 15% was correctly applied by the assessing officer."

5. The last ground taken by the learned D.R. is in respect of direction of the learned CIT (A) to levy surcharge on the basis of decision reported as 1988 P T D (Trib)

155. This issue has since been settled by the High Court of Sind at Karachi we find ourselves in agreement with the findings given by the learned CIT(Appeals).

6. The other ground 'taken by the department was conceded by the learned authorised representative of the respondent.

7. Mr. Ebrahim Sidat, the learned counsel argued that the case cited by the assessing officer in the impugned order was incomplete. The learned Judges of Patna High Court in the case cited as Sukhdeodas Jalan v. CIT(26 ITR 617) had made the following further observation:- "....it cannot be said that merely because a "contract was completed after the accounting year, no profits arose or accrued to the assessee in the accounting year. In the case of an incomplete contract there is a well-established method of calculating profits accruing in accounting year, which is set out at page 971 of Batliboi's Advance Accounting. Mathematics certainty is not demanded in a matter of this description....". The learned counsel argued that the basis of accounting followed by the respondent remained the same. The assessing officer, therefore, should not have taken into consideration receipts of the work done, at the close of the accounting year, which were less than 25% of the total estimate value. Proper trading accounts were maintained and filed alongwith the balance-sheet. There was however, he argued, no loss and no profit on these receipts. Conceding that the principle of accountancy cannot over-rule the provisions of law, the learned council argued, how a contractor can be expected to disclose profit or could be taxed when expenses incurred on an incomplete project are more than the receipts. He, therefore, quoted at length from Batliboi's Advance Accountancy in respect of computation of profit on incomplete projects which ground was also taken before the learned C. I. T. (A) to show that he has been maintaining the same method and system of accounting as was accepted in the past. There was no justification for the ITO to make deviation from it. He also relied on CBR's Circular No.2 of 1975 which says:- "On the basis of actual receipts and accounts for each year" and stated that the receipts should be read with reference to the accounts maintained for each year and the respondent had kept the accounts which the ITO had also seen. To tax the receipts independent of the accounts maintained would be unjustified and arbitrary, he argued. The concept of tax is profit, only receipts cannot be taxed. In appeal the learned CIT(A) considered the views of the learned A.R., and gave the following findings:- "However, nowhere in the assessment order the ITO had doubted the various books of account, cards and registered that had been produced. Therefore, even on this ground I find that the ITO was not justified to reject the trading results on incomplete projects. The ITO is therefore directed to accept the trading results on the basis of method of accounting employed by the appellant which method has been accepted in the past."

8. We have heard the learned representatives. We find considerable substance in the argument of the learned counsel who stressed the following points.- (a) that books of accounts maintained by the respondent, not deviating from the method adopted in the past; were not examined at all; (b) that proper trading account was maintained for work-in progress; (c) that profit from work-in-progress is disclosed year after year. It is only the incomplete project where work even at 25% was not completed, were not taken into consideration; (d) that the case cited by the assessing officer (1954) 26 I T R 617 is in favour of the respondent which was not quoted at length in the assessment order.

9. We have gone through the above case, which was relied upon by the Income-tax Officer. What it suggests is that a contractor should not get away with the profit of any year by just saying that B its projects are still incomplete, it must therefore, declare some profit. This was supported by learned CIT(A) who also quoted from Batliboi's Advance Accountancy as under:- "It is not advisable, however, to take full credit for the whole of the profit thus ascertained, but to reserve a portion of it for contingencies, such as a likely rise in the price of materials of labour. A sound method, therefore, is to transfer to Profits and Loss account only two-thirds or three-fourth of the profit ascertained, and to carry forward the balance to the next year's account by debiting Contract Account and crediting work-in-progress Account. At the commencement of the nest year, the above entry will be reversed. No definite rule can be laid down as to at what stage of the work it would be safe to take credit for the profit on incomplete contracts, as so much would depend on the nature of the contract and the actual facts and circumstances. The general rule, however, that can safely be laid down is that no profit be ascertained unless at least one-third of the whole work has been completed."

10. Now let us turn to the last paragraph of the judgment of the Patna High Court quoted by the learned CIT (A) and also relied on by the respondent. It would also be worthwhile to quote the observation of the learned Commissioner of Income-tax (Appeals). While rejecting the Income-tax Officer's contention she observed:- In view of above quotations from the well-reputed books, it can safely be concluded that the appellant was justified in following and maintaining the same method and system of accounting as was accepted in the earlier years i.e. calculating/ computing contracting profit on percentage of completion method...." We agree with the findings of the learned CIT (Appeals) that nowhere in the assessment order the ITO doubted the books of account and other registers that were produced before him. A perusal of the assessment order also shows that the ITO summarily rejected the books of accounts, which is evident from the notice under section 621 issued by the I.T.O. The last paragraph reads as under:- 4 "In view of the discussion made above with respect to the incomplete projects and the method of accounting employed by you, the income, profits and gains cannot be properly deduced therefrom. I intend to apply a provisional GP rate on the receipts during the year under section 32 of the I.T. Ordinance, 1979." He has not pointed out a single irregularity of any nature from the books of accounts he had examined. The learned D.R. also brought to our notice the case cited as ITA Nos. 1315/KB to 1317/KB, ITA Nos.100,1318, 404, 101, all of 1980-81 dated 5-9-1985 (Rimpa Limited, Karachi) From that case what we gather is that every case has to ,,e examined on the basis of its merit. And secondly, Tribunal's girder is not binding even for the subsequent assessment years in the same case; thirdly, in that case the assessee did not offer its receipts for taxation on work-in-progress basis. Objection was taken in that case that tax should be levied only on the completion of the project. Here it is not assessee's case that the tax should be determined after the completion of the project. What the assessee objected to was the fact that the ITO took those incomplete projects also into consideration where the value of work-in-progress was not even to L the extent of 25% of the total value of the project. And lastly, in Rimpa Ltd. the assessee used to maintain the books of accounts on project basis its profits were not determinable on yearly basis. In respondent's case the books of accounts were not examined by the ITO at all to determine whether his profits are ascertainable on incomplete projects.

11. In view of above disclusion we uphold the findings of the learned Commissioner of Income-tax (Appeals). There being no merit in the departmental appeal, the same is rejected. M.B.A./475/T Appeal dismissed.