DCIT, NEW DELHI vs. M/S UOP INDIA (P) LTD., GURGAON

The only ground raised in this appeal is against the deletion of addition of Rs.3,76,16,855/- made by the Assessing Officer by applying net profit rate of 8.68% as against 2.5% shown by the assessee.

Briefly stated, the facts of the case are that the assessee is engaged in providing technical and engineering services and also execution and supply of equipments for large projects in the field of refinery for domestic and overseas projects.

Return declaring income of Rs.1.04 crore was filed. The Assessing Officer observed that the net profit rate shown by the assessee at 2.51% for the instant year was much lower than 11.03% and 12.50% of the immediately two preceding years.

We have heard the rival submissions and perused the relevant material on record. Before taking up the issue on merits, it is relevant to mention that the ld. DR strongly objected to the admission of additional evidence in contravention of rule 46A. He relied on certain decisions in support of his point. We are not inclined to accept this objection, firstly because there is no such ground taken in the memorandum of appeal, and secondly, the additional evidence accepted by the ld. CIT(A) was duly confronted to the AO, whose remand report was also obtained. As such, we cannot accept the objection of the ld. DR.

On merits, the assessee has a combined stream of revenue from projects as well as from services. There is no demarcation in the accounts indicating the incurring of expenses for a particular source of revenue. The Assessing Officer rejected the accounts and made the addition mainly because of decline in the net profit rate for the instant year as against the preceding years and then because the assessee did not maintain any stock register.

From the perusal of accounts, we find that the assessee is not carrying any inventory. Neither, there is any opening stock nor a closing stock. The assessee is booking purchase of material and spares directly to the projects upon incurring itself. As the assessee is not having any stock, there can be no question of maintaining any stock register.

The nature of business carried on by the assessee is such that there cannot be any consistency in the rate of profit over the years. The Assessing Officer objected to ‘Unbilled revenue of uncompleted contracts’ reflected by the assessee in its balance sheet at Rs.1,47,85,384/-. Such objection was taken during the course of remand proceedings. The Assessing Officer opined that this much amount should have been brought to tax. Here, it is relevant to mention that the assessee is following percentage completion method. Revenue is booked in the accounts corresponding with the percentage of completion of project. If, for example, the assessee has incurred a cost of Rs.100/- on one particular project, the assessee also recognizes revenue in respect of such cost of Rs.100/- irrespective of the fact whether such revenue has been billed or not. This amount of Rs.1.47 crore as shown in the balance sheet is unbilled revenue on uncompleted contracts which was included by the assessee in its overall figure of revenue taken to the Profit & Loss Account. In the subsequent year when the assessee will issue invoice for the amount, the corresponding amount appearing in the balance sheet for the instant year will get reversed. It, therefore, transpires that the unbilled revenue, adversely considered by the Assessing Officer is, in fact, an item of income duly offered by the assessee for taxation. 6

The Assessing Officer has, then, objected to a debit of Rs.70,39,513/- in the assessee’s Profit & Loss Account with the narration ‘Estimated loss on incomplete contract.’ The assessee is regularly following this pattern of estimating loss on incomplete contracts and booking such loss in its Profit & Loss Account. If a contract was entered into an earlier year whose execution started a little later, there is bound to be increase in the cost without there being any corresponding increase in the revenue. The assessee recognizes such estimated loss on incomplete contracts in consonance with the Accounting Standards by giving the corresponding credit in that balance sheet under the head ‘Provision for estimated loss on incomplete contracts.’ In a subsequent year, when the contract is completed, such provision is reversed and the actual profit or loss is deduced. This method of recognizing loss of incomplete contracts has been consistently followed by the assessee, which has never been objected in the past. In this view of the matter, there cannot be any objection to such 7 debit in the Profit & Loss Account. Quantum of such loss has not been disputed by the AO.

It is further relevant to note that the assessee vehemently argued before the authorities below that some of the contracts which were entered into in earlier years got concluded in the instant year and the revenues fell much short of costs. This was shown by way of a table which has been reproduced on page 7 of the impugned order as below:-

It can be seen from the above project-wise table covering nearly 75% of the total revenue of the assessee for the instant year that the project costs far exceeded the project revenues and the assessee incurred loss of Rs.23.6 million from these two projects. This loss has impacted the ultimate profit of the assessee. This position has not been controverted by the Assessing Officer even in the remand proceedings.

Apart from that, the assessee explained before the Assessing Officer that there was increase in the assets which resulted in higher depreciation and, ultimately, low net profit.

If the effect of the above extraordinary items is taken away, the net profit rate of the assessee turns out to be 18.39%, as against 2.51% as under:

It is apparent that the extraordinary items have reduced the net profit of the assessee to 2.51%. It goes without saying that when there is a genuine decline in the net profit rate for the reasons which are as obvious as are prevalent in the prevalent case, there can be no rejection of books of account.

It is pertinent to note the assessee’s net profit rate for nine years which have been tabulated on page 6 of the impugned order as under:-

It can be seen from the net profit rates that there is a wide fluctuation from as low as 1.48% to as high as 12.50%. There is no consistency in the profit rates. The assessee declared NP rate of 2.95% for the A.Y. 2008-09 which has been accepted by the Assessing Officer in assessment made u/s 143(3) of the Act. A copy of such order has been placed on record.

In view of the foregoing discussion, we are of the considered opinion that the ld. CIT(A) was fully justified in deleting the addition.

In the result, the appeal is dismissed.