ORDER
B.L. Chhibber, Accountant Member
1. The only grievance projected by the Revenue in this appeal is that the learned CIT(Appeals) is not justified in deleting the addition of Rs. 15,62,913 made by the Assessing Officer on account of the fact that the assessee had not accounted for the total amount of bills raised during the year as income.
2. Marg Marketing & Research Group Ltd., was set up in 1983, by a group of Market research professionals who are regarded as pioneers in the field in our country and the company has been specializing in market research on various products and its main activity comprises of Market Research, Market Study, Market Survey etc. During the course of assessment proceedings, the Assessing Officer observed that the assessee had switched over to cash basis of accounting in the assessment year 1988-89 and in the assessment year 1989-90 (under appeal), it had again switched over to Mercantile system of accounting. The total amount of research and consultancy receipts credited during this year amounted to Rs. 1,36,87,324. It was observed by the Assessing Officer that some clients had paid the entire job value in advance, some had paid the advance in accordance with the bills raised, while the others had paid amounts lesser than the bills raised. The assessee had followed the method of accounting known as “Proportionate Completion Method”. The assessee was asked to explain the basis of estimating the percentage of work completed in each bill; the basis adopted while billing clients and the reason why the total value of bills raised should not be treated as the income of the assessee under the Mercantile System of Accounting being followed by the assessee. The assessee company is stated to have explained that the bills raised did not necessary represent the income inasmuch as the work actually carried out during the year may be much lesser than that. Under the circumstances, the difference in the bills raised and the actual work carried out is being shown as current liabilities in the balance sheet.
3. The Assessing Officer was not satisfied with the explanation furnished and, therefore, he made an addition of Rs. 15,62,913 as the assessee’s income for the reasons stated in para 2 of his Order. He has held that the assessee, who was hitherto following cash method of accounting has changed towards Mercantile System of accounting and, therefore, the new method ought not to be accepted. He has further held that the accounting method adopted by the assessee ought not to be accepted because the assessee has not disclosed any work-in-progress or closing stock relating to pending contracts in the profit and loss account. He further held that the assessee has not proved the basis of estimating the percentage of work done. Accordingly, the learned Assessing Officer has come to the conclusion that the method of accounting adopted by the assessee did not reflect the true profits.
4. On appeal, the learned CIT (Appeals) deleted the addition observing as under :-
I have gone through the facts of the case carefully. It is observed that the only reason why the Assessing Officer has made the addition is that the appellant has not been able to prove the basis on which they have accounted for the receipts as revenue receipts out of the total amount of bills raised during the year. The appellant’s representative produced before me complete date regarding all the projects undertaken during the year to show how much work was actually carried on during each month. The Works Manager in charge of the project gives his assessment of the work actually carried out by him every month and on those basis at the end of the year the appellant company decides what percentage of work has actually been carried on. Based on this, the appellant company accounts for consultancy receipts under a particular project. The method being followed by the appellant company appears to be quite systematic. It is further observed that invariably most of the projects remaining incomplete during one year gets completed during the subsequent year itself and the balance receipts are accounted for in the subsequent year. In cases where the actual work completed is more than the bills raised, the receipts are accounted for on the basis of actual work completed in these cases. It is clear from these facts that there is no ulterior motive on the part of the appellant company to understate the receipts during a year. As mentioned earlier, no project has lingered on beyond the subsequent year in which the remaining part of the work gets completed and gets duly accounted for. The method followed by them is also in keeping with the Accounting Standards recommended by the Institute of Chartered Accountants of India. I, therefore, find no justification for the Assessing Officer treating the entire amount of bills raised during the year as income as against thc method of proportionate completion being followed by the appellant company. In the circumstances, the addition of Rs. 15,62,913 made by the Assessing Officer is deleted.
5. Shri Gill, the learned Departmental Representative strongly supported the order of the Assessing Officer. He submitted that the assessee who was following cash method of accounting had changed to Mercantile system of accounting. Therefore, under the Mercantile system of accounting, the entire billing amount ought to have been shown as income. He further submitted that the assessee had not proved the basis of estimating the percentage of work done and accordingly, the method of accounting adopted by thc assessee was defective one inasmuch as it did not reflect the true profits. Under the circumstances, thc Assessing Officer was justified in rejecting the method of accounting adopted by the assessee and in making the impugned addition of Rs. 15,62,932. In support of his contentions, he relied upon the decision of the Hon’ble Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 : 54 Taxman 499 (SC).
6. Shri Pa1rdiwalla, the learned Counsel for the Assessee strongly sup ported the order of the learned CIT(Appeals). Explaining the procedure adopted by the assessee company, the learned Counsel for the assessee submitted that as MARG caters to the customer’s requirements, job value is first estimated and intimated to the customer. Bills are then raised on the customer in any one of the following patterns :-
1. 50 per cent as advance and 50 per cent as balance payment;
2. 40 per cent as advance, 30 per cent as part and 30 per cent as balance payment;
3. 100 per cent as advance;
4. 0 per cent as advance and 100 per cent as balance; and
5. Any other combination depending on relations of the customer with the company.
According to the learned Counsel for the Assessee, MARG raises bills on clients mainly for facilitating payments by clients. Raising of bills has no relevance to percentage of work done. According to the learned Counsel for the Assessee, typically, a job has following stages :-
(a) Compilation of Questionnaire
(b) Start of field work
(c) Completion of field work
(d) Analysis of data collected
(e) Presentation of report
(f) Report submission
He went on to explain that there is always a time lag between the starting of a job and its completion. The extent of time lag depends on complexity of the job. At any given point in time, there are plenty of jobs which are at different stages of completion as enlisted above.
7. To illustrate the above process, the learned Counsel for the Assessee drew our attention to samples of bills raised, placed at Pages 3 & 4 of the Paper Book and submitted that the income is recognized by MARG on percentage of completion method. Jobs in pipeline at the year end as on the last day of the accounting year are classified into various Stages of completion by concerned Research Executive (Works Manager) and Revenue is recognized accordingly. He submitted that this method is known as “Proportionate Completion Method” and it is recognized in Accounting Standard 9 on Revenue Recognition issued by the Institute of Chartered Accountants of India, the premier accounting body in India.
8. The learned Counsel for the Assessee admitted that undoubtedly, in the immediately preceding year, the assessee company was following the cash method of accounting, but in view of the amendment made to Section 209 of the Companies Act, 1956, by the Company Amendment Act, 1988, it perforce had to switch over to the Mercantile system of accounting. He submitted that the changed method has thereafter been consis tently followed by the assessee and in fact, from the Assessment year 1996-97 onwards, the Assessing Officer himself has accepted the method followed by the assessee, after making due enquiries. In this connection, he drew our attention to the letter written by the assessee to the Assessing Officer in the course of assessment proceedings for the Assessment year 1996-97 placed at pages 77 to 82 of the compilation. The learned Counsel for the Assessee, therefore, concluded that the method of accounting adopted by the assessee is a scientific method in accordance with the accounting standard No. 9 issued by the Institute of Chartered Accoun tants of India and accordingly, the Assessing Officer is not justified in rejecting the same.
9. We have considered the rival submissions and perused the facts on record. Section 145 of the I.T. Act recognizes the right of a trader to adopteither one or the other system of accounting, i.e., cash or Mercantile. Section 145 of the Act was amended by the Finance Act, 1995 with effect from 1-4-1997 (Assessment year 1997-98). Accordingly, income charge able under the head “profits and gains of business or profession” or”income from other sources” shall be computed only in accordance with either cash or mercantile system of accounting. Thus, the choice of the method of accounting lies with the assessee – Investment Ltd. v. CIT [1970] 77 ITR 533, 537 (SC); CIT v. A. Krishnaswami Mudaliar [l964] 53 ITR 122, 127 (SC) ; CIT v. McMillan & Co. [1958] 33 ITR 182, 188 (SC); State Bank of Patiala v. CBDT [1994] 207 ITR 190 : 73 Taxman 254, 204-05 (Punj. & Har.).
10. In this case, undoubtedly, in the immediately preceding year, the assessee company was following cash method of accounting, but in view of the amendment to Section 209 of the Companies Act, 1956, by the Company Law Amendment Act, 1988, it perforce had to switch over to the Mercantile system of accounting. Thus, the change was bona fide and no ulterior motive can be attributed to the assessee company. The reafter, the assessee has been consistently following the Mercantile system of accounting. Keeping in view the special nature of work as explained supra, the assessee has followed the Mercantile system of accounting which is known as “Proportionate Completion Method”, which is recog nized in Accounting Standard 9 on Revenue Recognition issued by theInstitute of Chartered Accountants of India, the premier accounting body. Thus, the assessee has followed a scientific method of accounting and has consistently followed the same in the subsequent years. In fact, from the Assessment year 1996-97 onwards, the Assessing Officer himself has accepted the method followed by the assessee, after making due enquiries. Under the circumstances we hold that the learned CIT (Appeals) is justified in deleting the impugned addition.
11. Now, coming to the reliance placed by the learned Departmental Representative on the Judgment of British Paints India Ltd. ‘s case (supra), in our opinion, the ratio laid down by the Hon’ble Supreme Court in the said Judgment will not apply to the facts of the present case because in that case, the system of accounting adopted by was such which excluded, for the valuation of stock-in-trade, all costs other than the cost of raw materials for the goods-in-progress and finished products and such system resulted in a distorted picture of the true state of the business for the purpose of computing the chargeable income. In the case before us, the assessee has followed a scientific method of accounting which is duly recognized by the Institute of Chartered Accountants of India for the nature of the work carried on by the assessee company.
12. In the light of the above discussion, we decline to interfere and uphold the order of the learned CIT (Appeals).
13. In the result, the appeal is allowed .(sic).
