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Tax Publishers Percentage of completion method or Completed Contract method *Facts:* Assessee was following Completed Contract Method (CCM) which was accepted by the department for the past accounting years. AO made addition of Rs. 8.42 crores citing that assessee ought to have following Percentage of Completion method (POCM) for their building contracts. On appeal CIT(A) looking at the past years dropped the addition. Revenue went in appeal to ITAT - Held against the revenue that when the assessee's completed contract method was acceptable to revenue and now revenue cannot turn around and deny the same to them. *Applied:* Bilhari Investment Pvt Ltd (2008) 299 ITR 1 (SC) : 2008 TaxPub(DT) 1709 (SC) 15. 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. Completed contract method is one such method. Similarly, percentage of completion method is another such method. 16. Under 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 P & L account. The said method determines results only when contract is completed. This method leads to objective assessment of the results of the contract. 17. On the other hand, 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. 18. The above indicates the difference between completed contract method and percentage of completion method. 19. In the judgment of the Bombay High Court in Taparia Tools Ltd. (supra) 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 AO 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 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. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessees, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from completed contract method to deferred revenue expenditure, is revenue neutral. Therefore, there was no reason to interfere with the impugned judgment of the High Court and, accordingly, the instant appeal was to be dismissed. *Ed. Note:* The decision pertains to AY 2014-15 when ICDS etc. were all not in vogue. Now POCM is forcibly applied with amendments also enacted in Section 145A. The decision of Bilahari investment of Apex court might no longer apply due to these forced statutory amendments. *Case:* Dy. CIT v. Dwarkhadhis Buildwell (P) Ltd. 2023 TaxPub(DT) 5565 (Del-Trib)

Tax Publishers

Percentage of completion method or Completed Contract method

Facts:

Assessee was following Completed Contract Method (CCM) which was accepted by the department for the past accounting years. AO made addition of Rs. 8.42 crores citing that assessee ought to have following Percentage of Completion method (POCM) for their building contracts. On appeal CIT(A) looking at the past years dropped the addition. Revenue went in appeal to ITAT -

Held against the revenue that when the assessee's completed contract method was acceptable to revenue and now revenue cannot turn around and deny the same to them.

Applied:

Bilhari Investment Pvt Ltd (2008) 299 ITR 1 (SC) : 2008 TaxPub(DT) 1709 (SC)

15. 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. Completed contract method is one such method. Similarly, percentage of completion method is another such method.

16. Under 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 P & L account. The said method determines results only when contract is completed. This method leads to objective assessment of the results of the contract.

17. On the other hand, 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.

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

19. In the judgment of the Bombay High Court in Taparia Tools Ltd. (supra) 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 AO 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 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.
In the past, the Department had accepted the completed contract method and because of such acceptance, the assessees, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier
accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of
profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various
statements produced before us, that the entire exercise, arising out of change of method from completed contract method to deferred revenue
expenditure, is revenue neutral.

Therefore, there was no reason to interfere with the impugned judgment of the High Court and, accordingly, the instant appeal was to be dismissed.

Ed. Note: The decision pertains to AY 2014-15 when ICDS etc. were all not in vogue. Now POCM is forcibly applied with amendments also enacted in Section 145A. The decision of Bilahari investment of Apex court might no longer apply due to these forced statutory amendments.

Case: Dy. CIT v. Dwarkhadhis Buildwell (P) Ltd. 2023 TaxPub(DT) 5565 (Del-Trib)