IT APPEAL NO. 1707 (AHD.) OF 2013
[ASSESSMENT YEAR 2009-2010]

R.P. TOLANI, JUDICIAL MEMBER 
AND AMARJIT SINGH, ACCOUNTANT MEMBER

Hare Govind Singh, CIT-DR for the Appellant. 
Vartik Choksi, AR, and Mrunal N. Shah, AR for the Respondent.

ORDER

R.P. Tolani, Judicial Member - This appeal by the Revenue is directed against the order of the Ld Commissioner of Income-Tax (Appeals), Gandhinagar, dated 18.03.2013 for Assessment Year 2009-2010.

2. Following grounds are raised:—

(i)	The ld. CIT(A) has erred in law and on facts in holding that the AO's action of rejecting books of account in terms of section 145(3) of the Act and invoking the provisions of section 44BBB(1), is not justified, without appreciating the fact that the assessee has estimated cost taken as benchmark in absence of supporting documents.
(ii)	The ld. CIT(A) has further erred in law and on facts in not considering the fact that the assessee being a foreign company, AS-7 is not applicable in this case, and income should be offered as per the provisions of section 145 r.w.s. 44BBB of the IT. Act, 1961.

3. Brief facts are assessee is a foreign company incorporated under the laws of Republic of China and is engaged in the business of erection, testing and commissioning of power plants, it has opened a project office for the execution of projects assigned to it by power generating companies in India. In the impugned year assessee has been executing two projects on fixed price contract basis, one awarded by Adani Power Ltd for 5 x 660 MW Power plant at Mudra in Gujarat and the other by Jhajjar Power Ltd. for 2 x 660 MW Power project at Khurd village, Jhajjar, Haryana. The contract with Jhajjar Power Ltd was entered in the impugned year and was at initial stage; therefore, there is no revenue recognition this year.

3.1 For the year under consideration, assessee filed return of income declaring total income at Rs.12,31,63,640/-. During the course of assessment proceedings, the ld. AO called for various information and documents, which were duly submitted. Ld. AO was of the view that method of accounting followed by assessee as per AS–7 was not correct and proper income cannot be determined on the basis thereof. Consequently, rejecting assessee detailed submissions, ld. AO rejected assessee's books of account and invoked presumptive provisions of sec. 44BBB(1) of the Act. Ld. AO did not appreciate that the books of account were duly maintained the books of account in compliance of sec. 44AA as also audited u/s 44AB of the Act. Ld. AO thus by arbitrary application of sec.44BBB(1) ascertained the profits at Rs.232,55,33,438/- and determined income of Rs.23,25,53,344/- @ 10% of Rs.232,55,33,438/-. Aggrieved assessee preferred first appeal before ld. CIT(A).

3.2 Ld. CIT(A) upheld the assessee's contentions and allowed the appeal by following observations:

'6.5 I have gone through the assessment order, submissions, case law etc. carefully. The following pertinent observations/decisions are made after thorough consideration of all facts, submissions, evidences:

(a)	The appellant has opted for being assessed under section 44BBB(2) of the IT Act. The sub-section is reproduced hereinunder:-
	"Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his account audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee" (emphasis supplied)
	The section clearly provides an option to an assessee being a foreign company engaged in the business of civil construction, erection of plant or machinery, testing and commissioning of power project to offer to tax lower profits and gains than profit deemed of 10% of the amount receivable by the appellant under sub-section (1) of Section 44BBB of the IT Act provided following twin conditions are fulfilled:

(1)	The appellant shall keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA of the IT Act.
(2)	The appellant shall get his account audited and furnishes a report of such audit as required under section 44AB of the IT Act.

(b)	Admittedly, as claimed by appellant no specific books of account are prescribed u/s 44AA of the IT Act read with relevant IT Rules for the nature of business carried on by the appellant. It has maintained books of account and got them audited also. Besides, the appellant has submitted audit report of a chartered accountant on veracity of financial statements and audit report as per Companies (Auditor's Report), 2003 in terms of Section 227(4A) of the Companies Act.
(c)	So far as the applicability of the AS-7 is concerned, one of the objections of Id. AO was that the same is not applicable to the Appellant Company being a foreign company. I do not find it true, because as per Section 594 of the Companies Act, 1956 the company, which is incorporated outside India and has established place of a business in India, is required to prepare its Balance Sheet and Profit & Loss Account as per the various provisions of the Companies Act, as if it is a Indian Company with the meaning of the Companies Act. Consequently, it follows that the Accounting Standard AS-7 is applicable to it.
(d)	Accordingly, the Appellant has claimed to have recognized revenue and cost following the percentage completion method on the basis of proportion of cost contract costs incurred for work performed till the reporting date to the estimated total contract costs. It is further an admitted fact that the books of account of the Appellant are audited under the Companies Act and in the notes to the financial statement, the method recognized to account for revenue and expenditure has been given in Schedule - 11 of Significant Accounting Policies and Notes to the Accounts. Accounting Policy (e) with regard to revenue recognition is reproduced hereunder:
	Note (e)
	"Shandong Tiejun Electric Power Engg Co. Ltd is following the "Percentage of Completion Method" of accounting for the project as per Accounting Standard-7(Revised) Construction Contracts. Accordingly Project Revenue is recognized as under:
	The company has fixed price construction contract with Adani Power Limited and Jhajjar Power Limited. The company started recognizing revenue in the financial year 2007-2008 as the outcome of the contract can be estimated reliably. Contract Revenue and expenses are recognized as revenue and expenses are recognized as revenue and expenses up to the stage of completion as on 31.03.2009.
	The management has estimated cost for the entire contract and worked out percentage of completion for each year on the basis of cost incurred as per audited accounts. Accordingly, revenue is recognized on the basis of corresponding percentage to cost estimates given by the management for the entire project period till date i.e. 31.03.2009 as per audited accounts. Determination of Revenues under the percentage of completion method and provision for loss necessarily involves making estimates of costs to be incurred by the Management, which is being of technical nature, have been relied upon by the Auditors. The difference between billed revenue and working below is accounted as Unbilled Contract Revenue due".
(e)	The AO during the course of assessment proceedings asked the appellant to furnish basis of estimating budgeted cost. In this connection, the Appellant vide letters dated 21/12/2011 and 29/12/2011 submitted to the AO that the management has estimated total cost of the project having regard to the experience in executing the contracts, tenders and quotations from various vendors and sub-contractors. The Appellant further submitted detailed break-up of the estimated profit & loss account for entire project for five financial years 2007-08 to 2011-12. The Appellant further submitted to the AO that while obtaining order u/s 197 of the Act, the Appellant has been submitting the details of budgeted cost to the tax office, which have already been accepted by the department. The Appellant also placed on record the audited financial statements for F.Ys.2009-10 and 2010-11 and submitted and claimed that from the perusal of such financial statements, it is established that the Appellant has actually incurred the cost as estimated.
(f)	One of the objections of the AO is that the Appellant ought to have followed another method of stage of completion of the project i.e. (c) completion of a physical proportion of the contract work. The AO has further observed that as per Annexure-3 of the contract entered into by the Appellant with Adani Power Ltd., the payment to the Appellant shall be released on the basis of milestones prescribed in Annexure - 3, and till the reporting date, the Appellant has raised invoices of Rs. 130,86, 91 ,429/-, which shows that physical work of the contract is completed to that extent only. Therefore, AO was of the view that the Appellant ought to have followed method (c) completion a physical proportion of the contract work as prescribed in para 29 of AS-7, and accordingly, the difference between the actual expenditure incurred i.e. Rs.211,41,21,308/- and the invoices raised i.e. Rs.130,86,91,429/- to Adani Power Ltd. for physical work performed, ought to have been reflected in accounts as work-in-progress, the invoices for which should be raised in the next accounting year. The AO has failed to realize that this would have resulted in much lesser revenue being recognized in the year under appeal and most probably net loss being reported.

Now, to sum up, books of account have been maintained and produced, the accounts have been subjected to audit as required, and the appellant has finalized the annual accounts, on the basis of percentage completion method based on total estimated cost. As far as the estimated cost of project is concerned, I agree with the appellant that the assessee having experience in the field of work and who is taking the contract is normally the best judge. The only foul play suspected in estimation can be to initially show very high estimated cost of completion so that it may lead to deferment of tax. In the present case, I find that the figures of 3 years were made available to the AO at the assessment stage itself. There is no big difference in estimated cost and profit percentage declared from year to year, There is no reason therefore to suspect that the figures of estimated cost were deliberately tinkered with. In fact the project has been completed in 2012 itself and it is not the case that it is a long drawn project where undue deferment of tax was the motive. The AO's remark that stage of completion is a better method is not universally applicable. That is why different methods including the percentage of total estimated cost applied by the appellant have been suggested in the accounting standards. The milestone method or the stage of completion method can be very inappropriate where the contractor and the contractee agree for terms of payment much different from the actual stage of work (cost of work completed). In some cases the contractee who becomes very dependent on the contractor for completion of work once the work is given and started would like to retain substantial portion of payment till completion as a guarantee for the contractor being forced to complete the work. In other cases, the contractor may have capital deficiency/require heavy machinery to be purchased etc., and may bargain for upfront heavy payments at initial stages. In both these cases, recognizing revenue on completion of certain stages according to payment terms/raising of bills cannot be the best method. I do not find any wrong in the method adopted by the appellant. As observed earlier, there is no big difference in estimated cost and profit percentage declared from year to year. The expenses have been audited and no substantive defect has been discovered/pointed out. The rejection of books of account u/s 145(3) is not held justified in these circumstances. I have noted that the Jurisdictional Gujarat High Court decision in the case of CIT v. Advanced Construction Co. (P) Ltd reported in 275 ITR 30, wherein it has been held that "the provision, therefore, specifically provides that the choice of method of accounting lies with the assessee, the only caveat being that it has to show that the chosen method has been regularly followed. The section is couched in mandatory terms and the Department is bound to accept the assessee's choice of method and regularly employed, except for the situation, wherein the Assessing Officer is permitted to intervene, in case it is found that true income, profits and gains cannot be arrived at by the method employed by the assessee. In the present case, the Tribunal has categorically found that "the assessee has followed the standard accounting method as this being the first year of the business it was the sole choice of the assessee to adopt a particular method of accounting contemplated under sect/on 145 of the Act".

I have also noted that in the above referred case the Jurisdictional Gujarat High Court has observed on facts in Para 13 of the order that "Therefore, on facts it becomes apparent that by the time the contract was completed the total receipts had borne charge of tax and the assessee had derived no advantage as such." Same would be the case here.

I therefore, hold that the appellant has fulfilled all conditions prescribed u/s 44BBB(2) of the IT Act and also has followed one of the methods prescribed for determination of stage of completion of contract for recognizing revenue and expenses as prescribed in para 29 of the Accounting Standard-7 "Construction Contracts" as recognized by the ICAI and the Central Government, the appellant has followed correct method of accounting in terms of Section 44BBB(2) read with Section 145(1) & (2) of the IT Act. It is held that the AO's action of rejecting books of account 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 in view of the observations made earlier. The variation in the income declared by the appellant is held not sustainable and is directed to be deleted. The relevant grounds of appeal are decided accordingly.'

3.3 Aggrieved, the Revenue is now in appeal before us.
4. Ld. Departmental Representative relied on the contents of order of AO and contends that:

(i)	Assessee did not submit proper working of estimated cost of the contract of Rs. 1694,63,01,948/-, besides for a big project, there must have been deliberations and hundreds of pages of documents on the basis of which estimates were prepared. Assessee did not furnish supporting documents in this behalf and no details of schedules, materials or other expenses were submitted in support of the estimate of the cost.
(ii)	The works to be performed by the assessee were earmarked in form of milestones, the assessee should have determined the stage of completion on the basis of actual work performed. As per Annexure-3, of the contract, certain milestones have been defined against which invoices are raised. Thus the actual work performed had intrinsic link with milestones as well as part milestones as certified by a technical supervisor. The percentage of milestones completion for the project will determine the stage of completion of the project. Since the payment itself is released by the employer on the basis of milestones, this should have been the most suitable basis of determining stage of completion and hence recognizing revenue.
(iii)	As against invoices raised of Rs. 130,86,91,429/-, expenses have been incurred in excess i.e. Rs.2,114,121,308 which comes to about 60% of work performance, but no invoices were raised. No certificate of physical verification has been produced, to see and verify as to what expenses were incurred to complete a part of work. As the contract itself rests on milestones to make payment, the expenses incurred for which no invoices was raised, should correspond to milestones for which work is yet to complete or part complete. No evidence of physical activity performed against such expenses was produced.
(iv)	The estimate of cost of contract should nearly justify the estimate taken by the assessee, on this basis assessee determined only on stage of completion and offering income accordingly. Besides for following two years documentary basis have not been submitted. The charts submitted by assessee revealed for each year there is change in the cost estimated each year.
(v)	Contract income has been recognized by the assessee as per percentage completion method, and invoices have been raised for Rs.1,308,691,429/-. Though the assessee tried to show, as if it has independently calculated and arrived at the figure of Rs.890,225,026/-( 2,198,916,453 - 1,308,691,427), however before AO the figures could not be reconciled with the actual bills and invoices raised by subcontractors and for material expenses.
(vi)	The assessee should also have reconciled the unbilled revenue as derived from the first equation with the figure resulting from the second equation framed by ld. AO, which was not done.
(vii)	The list of requirements of the AS-7 are as under:

-	There should be a reliable estimate of contract cost
-	Determining stage of completion (i.e. various milestones mentioned in the contract)
-	Recognize revenue as such percentage of the contract revenue (based on stage of completion)

	Since the whole premise of determining stage of completion depends upon estimated cost assessee was not able to substantiate such estimated cost, the stage of completion determined by the assessee was not reliable as compared to correct status of completion of the contract. In that case the physical completion will be the only reliable method which in assessee's case should have been engineer's certificate or progress reports by technical staff as sent to employer as per terms of contract or as per actual milestones. For properly determining actual or part of milestones completed, again physical work completion is required to be known. In view of these inconsistencies ld. AO held that assessee's a/c book, method and contentions were not acceptable and consequently method of accounting and book results were rejected u/s 145.
(viii)	Since assessee did not determine the stage of completion as per AS-7, therefore, revenue recognized in books for the year was not acceptable. If the assessee was to follow the AS-7, it should have taken the physical work completed as a percentage of the total work to be performed as per the contract and recognizing revenue as such percentage of contract revenue. Besides in the absence of any details which capital asset WIP was referred was also not ascertainable. Assessee does not explain as to why this should not be part of project WIP of Jhajjar project i.e. Rs.61,199,983/- as per balance sheet. Also even as per AS-7, which assessee has relied upon to maintain the account, it is required to prepare accounts for each contract.
(ix)	In ledger of expenses there was no narration of the nature of expenses or TDS deducted. Therefore, expenses could not be verified as against the booked amount. Assessee could not reconcile the expenses booked under subcontractor and material expenses for the month of March 2009. Assessee had submitted that unbilled contract revenue of Rs.890,225,026/- was the difference between the physical works completed as per the milestones, and physical work completed at the end of the financial year, but not sufficient enough to raise invoice. The work that has been completed and to what extent has to be certified by some technical personnel. AO pointed out that assessee has not determined the stage of completion as well as revenue as per AS-7, it should have recognized revenue as per accrual based accounting as per Income Tax Act u/s 145 rws 44BBB. Therefore the assessee should have raised invoices for the rest of the work as against cost of Rs. 211,14,121,308/- as this cost plus profit margin on this cost was payable to the company during the year.

In view of these observations ld. AO held that assessee has not maintained books of account as required under the provisions of the Act and it is not possible to determine correct amount of profits books were rejected u/s 145 of Act. Since presumptive taxation method u/s 44BBB is prescribed by the Act itself, there is no illegality in applying presumptive rate as a better estimate. Ld. CIT(A) did not appreciate all these aspects and reversed the AOs order.

Order of ld. AO is relied on.

5. Ld. Counsel for the assessee contends that ld. AO was working under misconception and confusion. At one place it is held AS-7 is not applicable to assessee being a foreign company, at other place method of accounting is objected, another place working is objected. Each and every detail was furnished before ld. AO and before ld. CIT(A) as well. There is no reference to any additional evidence filed by the assessee before ld. CIT(A). All the objections of ld. AO have been clarified, reconciled and tabulated before ld. CIT(A) based on the same material which was available on record. In these circumstances there is no merit in the contentions of ld. DR that assessee did not reconcile, substantiate or furnish details in respect of its contentions. Ld. CIT(A) has dealt with all the AOs objections and thereafter decided the issues based on merits supported by judicial precedents. For rejecting books of account of assessee and discarding the method of accounting followed by the Appellant as per AS–7 ld. AO went on shifting his stand, objections and observations in arbitrary manner to somehow discredit assessee's contentions .

5.1 Both the contracts i.e. Mundra and Jhajjar were fixed price contracts for erection, testing and commissioning of power plants in terms of contract entered into with Adani and Jhajjar Power in India. Assessee adopted recognized method of accounting by recognizing revenue and expenses by following Accounting Standard-7 (AS-7) namely "Construction Contracts". In pursuance thereto, assessee recognized revenue and expenses by following "percentage of project completion" method as per the requirement of AS-7 which a recognized and prescribed method in this behalf. There is no dispute that assessee duly maintained books of account as per S.44AA(2) of the Act got them audited as per provisions of S.44AB of the Act. In view thereof assessee duly offered its taxable income in conformity with provisions of S.44BBB(2) of the Act. However ld. AO unduly presumed that the method of accounting followed by the assessee did not reflect correct profits for which no cogent and convincing reasons are ascribed.

5.2 It is contended that assessee in terms of section 594 of the Companies Act, 1956 is foreign company incorporated outside India and has established place of a business in India. It is required to prepare its Balance Sheet and Profit & Loss Account as per the various provisions of the Companies Act, as if it is an Indian Company within the meaning of the Companies Act. Following are the relevant provisions of S.594 of the Companies Act, 1956:
"S.594 (1) Every foreign company shall, in every calendar year, -

(a)

make out a balance sheet and profit and loss account in such form containing such particulars and including or having annexed or attached thereto such documents (including, in particular documents relating to every subsidiary of the foreign company) as under the provisions of this Act it would, if it had been a company within the meaning of this Act, have been required to make out and lay before the company in general meeting; and

(b)

deliver three copies of those documents to the Registrar :"

5.3 Sec. 211(3A) and (3C) of the Companies Act, 1956, provides that Balance Sheet and Profit & loss of the company shall comply with the accounting standards as prescribed by the Institute of Chartered Accountants (ICAI) of India. Following relevant provisions of S.211(3A)/(3C) of the Companies Act, 1956 were referred :

'[(3A) Every profit and loss account and balancesheet of the company shall comply with the accounting standards.

(3C) For the purposes of this section, the expression "accounting standards" means the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A:

Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the accounting standards until the accounting standards are prescribed by the Central Government under this sub-section.]'

5.4 These mandatory provisions of the Companies Act, 1956, obliged the assessee foreign company to prepare Balance Sheet and Profit & loss Account in compliance to the accounting standards notified by the ICAI including AS-7. Therefore, the observation and reasoning of ld. AO to hold that AS-7 is not applicable is assessee is contrary to law and without any basis. The rejection of books on such untenable reasoning is arbitrary and unsustainable. Ld. CIT(A) has elaborately dealt with these aspects and held the AO's action to be without justification.

5.5 The AS-7 is applicable to each and every construction contractor for accounting receipts of revenue and cost related to construction contract in the financial statements. The objective and scope of the AS-7 as laid indicted by ICAI is as under:
Objective

The objective of this Standard is to prescribe the accounting treatment of revenue and costs associated with construction contracts. Because of the nature of the activity undertaken in construction contracts, the date at which the contract activity is entered into and the date when the activity is completed usually fall into different accounting periods. Therefore, the primary issue in accounting for construction contracts is the allocation of contract revenue and contract costs to the accounting periods in which construction work is performed. This Standard uses the recognition criteria established in the Framework for the Preparation and Presentation of Financial Statements to determine when contract revenue and contract costs should be recognized as revenue and expenses in the statement of profit and loss. It also provides practical guidance on the application of these criteria.

Scope
1. This Standard should be applied in accounting for construction contracts in the financial statements of contractors.

Thus AS-7 was applicable to every contractor carrying out construction contract in India, irrespective of the facts whether the contractor is Indian Company or Foreign Company. Looking into all these parameters prescribed by law and applicable AS-7, the very objection of ld. AO was baseless and untenable in the eye of law and realm of accounting practices and methodology.

5.6 Apropos another objection by ld. AO that the estimated cost taken as benchmark by the assessee was not reliable in absence of supporting documents. Ld. counsel contends that both contracts were to attain completion in different accounting periods resulting in allocation of contract revenue and contract cost to respective accounting periods corresponding to execution of construction. AS – 7 is issued by the ICAI for Construction Contracts for application of these effective and practical recognition criteria to determine when contract revenue and contract costs should be recognized as revenue and expenses in the statement of Profit & Loss Account. Such legally applicable guidelines have been arbitrarily brushed aside by ld. AO to superimpose his view as to how the assessee should adopt method of accounting. Ld. CIT(A) has dealt with this aspect in objective and in terms of legal position.

5.7 The guidelines for recognition of contract revenue and cost are mentioned at paras 21 to 34 of the AS-7 as under:

"21. When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. An expected loss on the construction contract should be recognised as an expense immediately in accordance with paragraph 35.

22. In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied:

(a)	total contract revenue can be measured reliably;
(b)	it is probable that the economic benefits associated with the contract will flow to the enterprise;
(c)	both the contract costs to complete the contract and the stage of contract completion at the reporting date can be measured reliably; and
(d)	the contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates.

24. The recognition of revenue and expenses by reference to the stage of completion of a contract is often referred to as the percentage of completion method. Under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. This method provides useful information on the extent of contract activity and performance during a period.

28. An enterprise is generally able to make reliable estimates after it has agreed to a contract which establishes:

(a)	each party's enforceable rights regarding the asset to be constructed;
(b)	the consideration to be exchanged; and
(c)	the manner and terms of settlement.

It is also usually necessary for the enterprise to have an effective internal financial budgeting and reporting system. The enterprise reviews and, when necessary, revises the estimates of contract revenue and contract costs as the contract progresses. The need for such revisions does not necessarily indicate that the outcome of the contract cannot be estimated reliably.

29. The stage of completion of a contract may be determined in a variety of ways. The enterprise uses the method that measures reliably the work performed. Depending on the nature of the contract, the methods may include:

(a)	the proportion that contract costs incurred for work performed up to the reporting date bear to the estimated total contract costs;
	or
(b)	surveys of work performed; or
(c)	completion of a physical proportion of the contract work.

Progress payments and advances received from customers may not necessarily reflect the work performed."

5.8 Para 21 of AS-7 provides that when the outcome of a construction activity can be estimated reliably, revenue and contract cost thereof should be recognized as revenue and expenses respectively with reference to the stage of completion of the contract activity as on the reporting date. This is referred to as percentage of completion method (para 24). Further para 29 of AS – 7 provides that stage of completion of the contract can be determined in various ways, and depending upon the nature of contract, it may include:

(a)	the proportion that contract costs incurred for work performed up to the reporting date bear to the estimated total contract costs; or
(b)	surveys of work performed; or(c) completion of a physical proportion of the contract work.

5.9 The management of the Company estimated total cost of the project having regard to the experience in executing the contracts, tenders and quotations from various vendors and subcontractors. In view of all the facts and circumstances, the first method as given in para 29 of AS-7 was applied, being the most suitable method for recognizing revenue and cost related to the contract. Following these parameters and guidelines assessee duly recognized its revenue and cost for the impugned year following the percentage completion method on the basis of proportion of cost contract costs incurred for work performed up to the reporting date to the estimated total contract costs. It is also an admitted facts that assessees books of account are audited under the Companies Act and in the notes to the financial statement, the method recognized to account for revenue and expenditure has been given in Schedule 11 of Significant Accounting Policies and Notes to the Accounts. Copy of financial statement for F.Y.2008-09 detailing as under:

Note (s)
"Shandong Tiejun Electric Power Engg Co. Ltd is following the "Percentage of Completion Method" of accounting for the project as per Accounting Standard 7 (Revised) Construction Contracts. Accordingly Project Revenue is recognized as under:

The company has fixed price construction contract with Adani Power Limited and Jhajjar Power Limited. The company started recognizing revenue in the financial year 2007-2008 as the outcome of the contract can be estimated reliably. Contract Revenue and expenses are recognized as revenue and expenses are recognized as revenue and expenses up to the stage of completion as on 31.03.2009.

The management has estimated cost for the entire contract and worked out percentage of completion for each year on the basis of cost incurred as per audited accounts. Accordingly, revenue is recognized on the basis of corresponding percentage to cost estimates given by the management for the entire project period till date i.e. 31.03.2009 as per audited accounts. Determination of Revenues under the percentage of completion method and provision for loss necessarily involves making estimates of costs to be incurred by the Management, which is being of technical nature, have been relied upon by the Auditors. The difference between billed revenue and working below is accounted as Unbilled Contract Revenue due".

5.10 During the course of the assessment proceedings, assessee submitted the working of contract income on percentage of completion method before AO by following table :

S.N.	Particulars	Rs.
A	Cost incurred in current period	207,80,61,302/-
B	Total Budget Cost of Contract	1694,63,01,948/-
C	Contract Price	1762,60,00,000/-
D	Cumulative costs incurred prior period	3,60,66,355/-
E	Cumulative revenue recognized in prior period	Nil
F	Percentage of Completion (A+D)/B	12.48%
G	Current year's revenue (C X F)	219,89,23,057/-

5.11 Ld. AO asked to furnish basis of estimating budgeted cost, assessee vide letters dated 21/12/2011 and 29/12/2011 explained that the estimated total cost of the project was worked out on the basis of experience in executing the contracts, tenders and quotations from various vendors and subcontractors. Detailed break-up of the estimated profit & loss account for entire project for five financial years 2007-08 to 2011-12 was also furnished. Besides while obtaining order u/s 197 of the Act, it had submitted the details of budgeted cost which have already been accepted by the department. Audited financial statements for F.Ys.2009-10 and 2010-11 were also submitted a perusal thereof such demonstrated that the assessee had actually incurred the cost as estimated.

5.12 However, the ld. AO did not appreciate these details and unfortunately held that relevant details were and supporting documents for estimate of cost of contract were not filed which is contrary to record. Assessee further provided the relevant details of actual cost incurred for the entire project during the F.Ys.2007-08 to 2011-12 as under :

Financial Year	Actual Cost Incurred
2007-08	3,60,60,007/-
2008-09	210,53,13,715/-
2009-10	443,80,34,837/-
2010-11	665,68,98,166/-
2011-12	626,27,59,911/-
Total Cost Incurred	*1950,20,66,635

*The total cost incurred by the appellant includes cost incurred for the additional scope of work given through an additional contract of Rs.139,27,21,200/-.

5.13 A perusal of the above table reveals that the cost estimated for the entire project is nearly similar to actual cost incurred for the entire project. Thus the estimated cost is backed by the actual cost for which auditors also have not given any qualification thus objectively the estimated cost and recognition of revenue as per AS-7 stands fully substantiated by assessee by credible evidence. ld. AO has further erroneously observed that there is a change in the cost estimated each year and it was not possible to verify the correctness of the claim of stage of completion as offered. It was explained to ld. AO that details of revenue recognized given for F.Ys. 2008-09 and 2009-10 mentioned in the table were in respect of only one project i.e. 5 X 660 MW Power Plant for a consideration of Rs.1762,60,00,000/-; whereas, for F.Y.2010-11, figures were for both the projects resulting into higher contract cost at Rs.18,17,07,19,496/- and income at Rs.1901,87,21,200/-(Rs.1762,60,00,000/-+ Rs.139,27,21,200/-). Thus there is no change in the estimated cost for both project, ld. AO ignored this simple arithmetic. The actual cost and estimated cost being nearly same, a little bit of change neither distorts the profits of the entire project nor can lead to rejection of method of accounting.

5.14 Apropos AO's suggestion cum-objection that assessee ought to have followed another method accounting i.e. stage of completion of the project method, it was contended before ld. CIT(A) that ld. AO cannot override assessee's commercial decision which are within the framework of sec. 145 and conforming to ICAI accounting standards. It was explained to the ld. AO that as the cost incurred up to the reporting date is Rs.211,41,21,308/-and the estimated cost for the project is Rs.1694,63,01,948/-, the revenue is recognized taking into consideration both the figures as per method (a) proportion of contract cost incurred for the work performed up to the reporting date to the estimated contract cost as certified by the management, provided in para 29 of the AS-7. For the sake of convenience, a table was furnished to demonstrate how the revenue was recognized in the profit & loss account:

S. N.	Particulars	Rs.
A	Cost incurred in current period	211,41,21,309/-
B	Total Budget Cost of Contract	1694,63,01,948/-
C	Contract Price	1762,60,00,000/-
D	Cumulative costs incurred prior period	3,60 60 007/-
E	Cumulative revenue recognized in prior period	Nil
F	Percentage of Completion (A+D)/B	12.48%
G	Current year's revenue (C X F)	219,89,16,454/-

5.15 Ld. AO in order to superimpose his method of accounting was of the view that as per the contract with Adani Power Ltd., the payment should have been released Adani on the basis of milestones indicated in Annexure–3; till the reporting date, assessee has raised invoices of Rs.130,86,91,429/-indicating that physical work of the contract is completed to that extent only. Therefore, ld. AO was of the view that assessee ought to have followed method (c) completion of a physical proportion of the contract work as prescribed in para 29 of AS-7. Consequently the difference between the actual expenditure incurred i.e. Rs.211,41,21,308/- and the invoices raised i.e. Rs.130,86,91,429/- to Adani Power Ltd. for physical work performed, ought to have been reflected in accounts as work-in-progress. Assessee vide letter dated 29/12/2011 explained to ld. AO that the contract entered into with Adani Power Ltd. prescribes only milestones as a modicum to raise invoices and not determinative of profits. This is clear from following relevant para of contract:

Contract Price:
Payment for the Works shall be made on the basis of the bills submitted by the contractor from time to time in accordance with the Milestone and Payment Schedule.

Therefore, going by this stipulation, assessee was required to raise invoices on the basis of milestones prescribed in Annexure–3 to the contract, the factum of payment by Adani's depended on their satisfaction about relevant conditionality's. Besides assessee also had engaged subcontractors with whom no corresponding milestones were stipulated. Thus with subcontractors which were essential for timely execution of project the payments were to be based not looking at milestones but predominantly on the basis of physical work certified by techno-commercial employees i.e. engineers, project head and finance department. These facts and contentions have neither been disputed nor controverted by ld. AO.

5.16 Thus the revenue recognition in terms of para 29 of AS-7 was perfectly justified and the Adani milestone were only for the limited purpose of event of release of payment. This methodology of releasing payment cannot be superimposed to reject the assessee lawful method of accounting and for recognizing revenue by a method found suitable to ld. AO as it had propensity to inflate taxable profits by a fiction.

5.17 Ld. Counsel contends that assessee also demonstrated that even if methodology proposed by ld. AO of method (c) i.e. completion of a physical proportion of the contract work, was adopted, the result will be loss to revenue. on the basis of milestones prescribed in the Annexure–3, the revenue recognition will come to a lower amount than the revenue of Rs.219,89,16,453/- as recognized by the assessee as under :

S.N.	Particulars	Rs.
A	Physical completion of contract as per milestones prescribed	130,86,91,427/-
B	Markup of 10% (as suggested by AO)	13,08,69,143/-
C	Cost of physical completion of contract (A-B)	117,78,22,284/-
D	Estimated contract cost	1694,63,01,948/-
E	Percentage of completion (C/D*100)	7%
F	Contract Revenue	1762,60,00,000/-
G	Revenue to be recognized (E X F) as per method (c) of para 29 of AS -7 as suggested by AO.	122,50,63,477/-

Thus in real terms assessee's method has recognized more revenue than the method (c) completion of physical work to contract cost as proposed by the ld. AO.

5.18 Adverting to observation of ld. AO that the assessee could not reconcile unbilled contract revenue of Rs.89,02,25,026/- with the cost incurred, it is contended that unbilled contract revenue is nothing but the amount of revenue which has been recognized following the method (a) of para 29 of AS-7, for which invoices have not been raised by the assessee for notachieving the stipulated milestones. It is contended that unbilled revenue of Rs.89,02,25,026/- was duly reconciled by the assessee as under:

S.N.	Particulars	Amount in Rs.
A	Contract Income	219,89,16,454/-
B	Invoices raised till 31.03.09	130,86,91,427/-
C	Unbilled Contract Revenue	89,02,25,026/

S.N.	Particulars	Amount in Rs.
A	Cost incurred upto reporting date	211,41,21,308/-
B	Invoices raised till 31.03.09	130,86,91,427/-
C	Unbilled amount for work performed (unbilled for Adani, however, billed by subcontractors and others)	80,54,29,879/-
D	Profit Element (Contract Revenue of Rs.219,89,16,454/- Minus Contract Cost of Rs.211,41,21,309/-	8,47,95,147/-
E	Total (C + D)	89,02,25,026/-

5.19 Besides the profit element of Rs.8,47,95,147/- is further adjusted with the opening and closing WIP cost of Mudra Project, Net Project WIP of the Jhajjar Project and other income. The declared profit of Rs.6,16,93,392/- was also reconciled as under :

S.N.	Particulars	Amount in Rs.
A	Profit Element (Contract Revenue of Rs.219,89,16,454/- Minus Contract Cost of Rs.211,41,21,309/-	8,47,95,147/-
B	Less: Project WIP of Mudra project for FY 2007-08	2,72,52,413/-
C	Add: Cost of Mudra Project incurred in FY 2007-08	3,60,60,007/-
D	Less : Net Project WIP of Jhajjar Project	6,13,75,443/-
E	Profit derived at from the project (A-B+C-D)	3,22,27,928/-
F	Other Income	2,94,66,096/-
G	Net Profit before Taxation	6,16,93,392/-

5.20 These tables demonstrate that there is no merit in AO's allegation that the unbilled revenue account is not reconciled. Therefore, in these facts, circumstances and details neither the books of account can be rejected nor method of accounting be faulted nor a new method proposed by AO is superimposable.

5.21 Sec. 211(3C) of the Companies Act, 1956, which reads as under, mandatorily obliged assessee to follow the accounting standards prescribed by the ICAI:

For the purposes of this section, the expression "accounting standards" means the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A:

Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the accounting standards until the accounting standards are prescribed by the Central Government under this sub-section.

The assessee having rightly recognized the revenue and cost following the AS-7 as issued by the ICAI in conformity with statutory and regulatory mandate the action of AO is unjustified.

5.22 Besides, it is contended that proviso to S.211(3C) of the Act, provides that accounting standards specified by the ICAI shall be applicable until separate accounting standards are prescribed by the Central Government. Government vide its Notification No.G.S.R.739(E), dated 07/12/2006 has notified Companies (Accounting Standard) Rules, 2006, wherein, vide Rule 3(1), it is prescribed that Accounting Standards 1 to 7 and 9 to 29 as recommended by ICAI are applicable (refer to annexure to rules), copy thereof is placed on PB. Thus even the Central Government mandate also prescribes the stage completion method as recognized method of accounting as provided in the AS-7. Thus looking from any angle, it is clear that the method of accounting as adopted by assessee is well recognized and statutorily authenticated method of accounting. Ld. AO has no power to disregard this method in the pretext of invoking s.145 to reject a lawful method without pointing out any specific defects in the books of account or reasons for suo motu changing the regularly employed method.

5.23 Reliance is placed on Hon'ble Delhi High Court in the case of CIT v. Virtual Soft Systems Ltd. [2012] 341 ITR 593/205 Taxman 257/18 taxmann.com 119. Assessing officer rejected books of account by rejecting assessee's method of accounting in respect of lease rental which was recognized in terms of ICAI guidelines. Delhi High Court held that ICAI is recognized as body vested with authority to recommend ASs for endorsement by Central Government in consultation with National Advisory Committee of Accounting Standards, for presentation of financial statements. This being so the Assessing Officer cannot disregard the method of accounting followed by the assessee on the basis of guidelines provided by the ICAI and cannot reject books of account of the assessee. Relevant extract of which is reproduced hereunder :

'8. Having heard the learned counsels for the parties and perused the record, what emerges is as follows: However, before we proceed further, we may indicate that, we would be answering the questions of law framed; in the reverse order, inasmuch as, the second question would be answered first and then, we would take up the other question of law.

8.1. The foremost aspect which, thus arises for consideration in this case is: whether the method of accounting employed by the assessee to determine the real income evidently derived from lease of assets, could be given a go-by. In determining its income and its presentation, the assessee took recourse to the Guidance Note, issued by the ICAI, on Accounting For Leases. The ICAI's publication on the subject indicates that the Guidance Note on accounting of leases was issued by it, for the first time, in 1988, which was, then revised in 1995. The hiatus between the date when it was first issued, and its revision, appears to be on account of an interim order granted by the Madras High Court in a case, which was, disposed of on, 14.07.1995. It appears that the case was dismissed as withdrawn.

8.2 We may also note that our discussion is prefaced by the fact that on 01.04.2001, the ICAI did publish A.S.-19 in respect of leases. The said A.S.-19, is applicable, in respect of, assets leased during accounting periods commencing on or after 01.04.2001. The periods, which are under consideration, in the present appeals, are prior to 01.04.2001.

9. In this background what is required to be considered is whether the books of account could be rejected by the Assessing Officer merely for the reason that recourse to the Guidance Note was taken by the assessee. In this regard, we would be required to examine the provisions of Section 145 of the I.T. Act. Section 145 of the I.T. Act adverts to the method of accounting followed by an assessee. Sub-section (1) of Section 145 provides that income chargeable under the head "profits and gains of business or profession" or "income from other sources" shall be computed either on cash basis or on mercantile system, whichever method being regularly employed by the assessee. This provision is, however, subject to the Central Government notifying A.S. in respect of any class of assessee or class of income. Sub-section (3) of Section 145, empowers the Assessing Officers to disregard the books of account submitted by the assessee only if he is not satisfied with: the correctness or completeness of the account of the assessee or, the method of accounting employed by the assessee or on account of A.S. notified under sub-section (2), not being particularly followed by the assessee. In this particular case, the assessing officer has disregarded, in substance, the method of accounting followed by the assessee qua lease rentals without basing it on the grounds provided in Section 145 of the IT Act. The fact that the assessee justified its method of accounting, by taking recourse to the Guidance Note issued by the ICAI in that behalf, was disregarded, on what we would term as, a disjointed reading of the provisions of the said Guidance Note. Both the Assessing Officer as well as the CIT(A) have adverted to paragraph 2 of the Guidance Note to come to, what we consider an erroneous conclusion inasmuch as they have held that in determining as to whether deduction on account of lease equalization charges ought to be allowed or not, what has to be borne in mind is ultimately the provisions of the IT Act. In our view, such an observation in paragraph 2 of the Guidance Note is really saying the obvious. Therefore, even if this Guidance Note was silent on this aspect the provisions of the I.T. Act would undoubtedly still apply. Thus, as to what is the impact of provision of para 2 of the Guidance Note will be considered by us as we progress further with our judgment.

9.1 However, what is important at this stage is to first address ourselves to the aspect as to whether the Assessing Officer could have disregarded the method of accounting followed by the assessee in respect of lease rentals. In our view, the Assessing Officer could not have do so, as the method of accounting was based on a guideline commended for adoption by a professional body such as the ICAI. The Guidance Note reflects the best practices adopted by accountants the world over. The fact that, at the relevant point in time, it was not mandatory to adopt the methodology professed by the Guidance Note issued by the ICAI, is irrelevant, for the reason that, as long as there was a disclosure of the change in Accounting Policy in the account, which had a backing of a professional body such as the ICAI, it could not be discarded by the Assessing Officer. This is specially so, since the ICAI is, recognized as the body vested with the authority to recommend A.Ss for ultimate prescription by the Central Government in consultation by the National Advisory Committee of Accounting Standards, for presentation of financial statements. The provisions of section 211(3C) of the Companies Act are quite clear on this aspect. As a matter of fact, the proviso to the said sub-section, quite clearly specifies that till such time the Central Government prescribes the accounting standards the accounting standards issued by the ICAI, shall be deemed to be the relevant accounting standards. The relevant provision reads as follows:

"211(3C) For the purposes of this section, the expression "accounting standards" means the standards of accounting, recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (30 of 1949), as may be prescribed by the Central Government in consultation with the National Advisory Committee on accounting Standards established under sub-Section (1) of Section 201A. Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the accounting standards until the accounting standards are prescribed by the Central Government under this sub-section."

10. In this context it would be important to note that AS-1 pertaining to Disclosure of Accounting Policies has already been notified by the ICAI as having attained mandatory status for periods commencing on or after 01.04.1991. It is not, the Assessing Officer's case, that the accounting policy with regard to lease rentals was not disclosed by the assessee. The assessing officer seems to have taken umbrage to the change in accounting policy having been brought about only with effect from AY 1996-97. In our view, as long as there was a disclosure of the factum of change in the accounting policy and its effect, in the account, no fault could be found with the change in accounting policy merely on account of the fact that it was employed for the first time in AY 1996-97. The change in accounting policy, as noticed by us above, had the imprimatur of a duly recognized professional body, i.e., the ICAI. Therefore, notwithstanding the fact that the opinion of the ICAI was expressed in a Guidance Note which had not attained a mandatory status, would not, in our view, provide a basis to the Assessing Officer to disregard the books of account of the assessee and in effect method of accounting for leases, followed by the assessee.'

5.24 Further reliance is placed upon the following judicial precedents emphasizing that percentage of completion method prescribed in AS-7 is an appropriate and recognized method for construction contract spread over several years. The AO cannot disregard the said method of accounting to reject books of account.

?	MKB (Asia) (P.) Ltd. v. CIT [2007] 294 ITR 655/[2008] 167 Taxman 256 (Gau.)
?	CIT v. Woodward Governor India (P.) Ltd. [2007] 294 ITR 451/162 Taxman 60 (Delhi) confirmed by the Apex Court in CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326.
?	CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482/161 Taxman 191 (SC)
?	Dy. DIT (International Taxation) v. Sepco Electric Power Construction & Corpn. Ltd. [2009] 126 TTJ 539 (Bilaspur)
?	M.N. Dastur & Co. Ltd. v. Dy. CIT [1997] 61 ITD 167 (Cal.)
?	Thermax Babcock & Wilcox Ltd. v. Dy. CIT [2001] 79 ITD 63 (Pune) (TM)
?	Asstt. CIT v. Dharti Estate [2011] 129 ITD 1 (Mum.) (TM)
?	Awadhesh Builders v. ITO [2010] 37 SOT 122 (Mum.)
?	Nandi Housing (P.) Ltd. v. Dy. CIT [2004] 2 SOT 395 (Bang.)
?	Ramniklal J. Nathwani v. ITO [2009] 28 SOT 276 (Mum.)

5.25 Jurisdictional Gujarat High Court decision in the case of CIT v. Advanced Construction Co. (P.) Ltd. [2005] 275 ITR 30/143 Taxman 61, wherein it has been held that:

"the provision, therefore, specifically provides that the choice of method of accounting lies with the assessee, the only caveat being that it has to show that the chosen method has been regularly followed. The section is couched in mandatory terms and the Department is bound to accept the assessee's choice of method and regularly employed, except for the situation, wherein the Assessing Officer is permitted to intervene, in case it is found that true income, profits and gains cannot be arrived at by the method employed by the assessee. In the present case, the Tribunal has categorically found that "the assessee has followed the standard accounting method as this being the first year of the business it was the sole choice of the assessee to adopt a particular method of accounting contemplated under section 145 of the Act".

?	Dy. CIT v. Associated Petroleum Corpn. [2011] 44 SOT 45/[2010] 7 taxmann.com 42 (Ahd.)
?	CIT v. Vikram Plastics [1999] 239 ITR 161 (Guj.)

5.26 Assuming but not conceding even if rejection of books of account is upheld in this eventuality also ld. AO is not empowered to invoke provisions of S.44BBB(1) which reads as under:

'Special provision for computing profits and gains of foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects.

44BBB. [(1)] Notwithstanding anything to the contrary contained in sections 28 to 44AA, in the case of an assessee, being a foreign company, engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf 67[***], a sum equal to ten per cent of the amount paid or payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such civil construction, erection, testing or commissioning shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession".]

[(2) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his account audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143and determine the sum payable by, or refundable to, the assessee.]'

5.27 A perusal of the provisions of sub-section (2) of S. 44BBB of the Act, makes it clear that if the assessee maintains books of account and other documents under sub-section (2) of S.44AA of the Act and gets his them audited and furnishes a report of such audit as required u/s 44AB of the Act, the assessee can claim lower amount of profit than the profit at 10% as specified in sub-section (1) of S.44BBB of the Act. Ld. AO rejected books of account alleging that the assessee's method did not reflect correct profits and without justification applied summary provisions of sec. 44BBB(1) r.w.s. 145 of the Act. Hyundai Heavy Industries Co. Ltd.'s case (supra) wherein at pages 489 and 494 held as under :

"A short question which needs to be answered in the present case is what are the profits reasonably attributable to the assessee's permanent establishment in India. In order to answer the above question we are required to analyze the scheme of the Act. Under section 4 of the Act it is the total income of every "person" which is taxable. A foreign company which is not wholly controlled or managed in India is a non-resident so far as its residential status is concerned. Section 5(2) of the Act lays down that as far as a non-resident assessee is concerned the scope of total income of such an assessee is confined to income which accrues or arises in India or is deemed to accrue or arise in India and which income is received or deemed to be received by such foreign company."

"Thirdly, it is important to note that Chapter IV of the Act contains provisions for presumptive taxation of business income in certain cases as prescribed in sections 44B, 44BB, 44BBA and 44BBB of the Act. In the scheme of presumptive taxation, the assessee is presumed to have earned income at the rate of a certain percentage of his total turnover or gross receipts. If the assessee agrees to be taxed on presumed income, he is not required to maintain books of account. If, however, he claims that his income is less than the presumed figure, he is required to support his claim by producing books of account."'

5.28 Provisions of sub-section (2) to S.44BBB of the Act were inserted as beneficial provision by the Finance Act, 2003. The purpose for inserting such provision has been explained in CBDT Circular No.7/2003, dated 5-9-2003 ; 263 ITR (St.) 61, relevant para is as under :

36.4 The Act has also amended sections 44BB and 44BBB to provide that an assessee may claim lower profits and gains than the profits and gains specified under sub-section (1) of the said sections if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his account audited and furnishes a report of such audit as required under section 44AB. The Assessing Officer shall then make an assessment of the total income or loss of the assessee under sub-section (3) of section 143.

5.29 Thus when assessee has maintained proper books of account audited u/s 44AA and 44AB of the Act, as the assessee has a statutory recognition of account based lower amount of profits the rejection of books may lead to a reasonable estimation of profits. It does not give any leverage to ld. AO to automatically resort to presumptive tax, which by way of promissory estoppels is applicable to no account based foreign companies. S.44BBB provides deeming fiction to tax income @ 10% civil construction receipts. However, courts have held that this deeming fiction is not an absolute proposition and cannot override sections 28 to 43A as also provisions contained in section 4. A harmonious construction and reading of sections 2(45), 4, 5, 44AA, 44AB and 44BBB of the Act lay down a clear scheme of the Act to tax foreign companies. Section 44BBB of the Act is not a charging section but only an optional, fictional and alternative machinery provision and subservient to sec. 44AB for regular assessment. In case assessee maintains regular, audited books, the tax is to be levied in conformity of harmonious reading of ss. 2(45), 4, 5 rwss 28 to 43A by way of a regular assessment like any other Indian company. If no account are maintained then in terms of sec. 44BBB. As per legislative mandate of this scheme the option is to be exercised by the assessee and by the ld. AO. Therefore, in these facts and circumstances, the action of ld. AO in applying presumptive provisions of sec. 44BBB to assessee's receipts is contrary to legal provisions. Reliance is placed on:

?	Saipem S.P.A. v. Dy. CIT [2004] 88 ITD 213 (Delhi) (TM)
?	Dy. CIT v. Nagarjuna Investment Trust Ltd. [1998] 65 ITD 17 (Hyd.) (SB)

Other propositions canvassed by ld. Counsel are to the effect that:

(a)	Provisions of S.145 of the Act do not override provisions of S.5 of the Act, as held in Nagarjuna Investment Trust Ltd.'s case (supra)
(b)	Provisions of sub-section (1) to S.44BBB of the Act cannot be invoked in a case where proper books of account are maintained in conformity with consistent method of accounting, ICAI guidelines, Central Govt. regulations and Company Law provisions. Thus presumptive additios @ 10% of receipts against the obvious scheme of the Income Tax Act.;

5.30 Provisions of sub-section (1) to S.44BBB of the Act are not charging sections but machinery provisions Only and cannot override charging section. Reliance is placed on the Delhi Bench ITAT judgment in the case of Royal Jordanian Airlines v. Dy. DIT (International Taxation)[2008] 25 SOT 270, which is on the same issue of AO's rejection of books and discarding the losses and assessing the income by application of presumptive provisions u/s 44BBA @ 5% of receipts. ITAT Delhi, relying on catena of judgments including Hon'ble Supreme Court in Sanyasi Rao quashed the action of AO by following observations :

'17. As against the contention of the AR that where the appellant has incurred losses, section 44BBA of the Act has no application, learned DR submitted that if such submission is accepted, will render a presumptive taxation repugnant and meaningless. In the case of Lloyd Helicopters International (P.) Ltd. (supra ) at page 182, it was held as under :-

"It cannot be overlooked that though the section outlines a statutory basis of assessment, what is being assessed at the statutory rate is the "profits of the business", an expression which, as is well-settled, has to be understood in a commercial sense. The opening words of the section make no difference to this concept. In the first place, it is well-settled that in the computation of profits, all proper, outgoings have to be allowed as a deduction, irrespective of whether the statute contains a specific provision in this regard or not [ see CIT v. Chitnavis [1932] 2 Comp. Cas. 464 ; [1932] 6 ITC 453 (PC)]. Salaries paid to employees—and indeed all revenue expenditure incurred— for running a business will have to be taken into account in determining its profits, irrespective of the provisions of sections 28 to 43A. Secondly, the provisions in sections 30 to 43A are primarily intended to restrict or qualify the extent of deduction in regard to certain categories of expenses that would have been normally allowable in the computation. This is indeed clear from the omnibus nature of deductions permissible under section 37. Hence, in a commercial sense, the concept of profits determined under section 44BB or 44BBA, though arrived at on a statutory basis, cannot be considered to exclude such expenses as non-deductible merely because the statute fixes a percentage in this regard. The fixation of a rate so low as five per cent of the gross receipts as the net assessable profit indicates a statutory attempt at estimating the expenses normally likely to be incurred in such business. Shri Dastur gives the instance of a case where an assessee really makes a loss and yet is assessed at a profit rate of five per cent and argues that, surely, in such a case, at least, it cannot be said that the salaries are a deductible item. But this contention overlooks that the interpretation of a statute cannot be based on isolated possibilities and exceptional situations. The case where a person will incur a loss only by setting off the salaries paid by him is a rare one and cannot furnish a basis for interpreting the clause. The statute brings to tax only five per cent, (or ten per cent) and envisages an allowance of 95 per cent (or 90 per cent) of the expenses in computing the taxable profits under these sections and it is difficult to agree that this involves no element of deductibility of revenue expenses such as salaries and the like."

From the aforesaid, it will be seen that, commercial principles have not been overlooked. It has been held by the Authority for Advance Ruling in the case above that, opening word of section provides profits of business as understood in commercial sense has not been done away. It has been held that, in the computation of profits has to be allowed as deduction irrespective of whether statute contained no specific provisions. When there are losses incurred by the appellant, the presumptive sections cannot bring to change what is otherwise not chargeable to tax. Therefore, reliance placed upon the decision of the Authorities for Advance Ruling (AAR) on the cases of Lloyd Helicopter International (P.) Ltd. (supra ) and DHV Consultants B.V. (supra ) to contend that, in the case of presumptive taxation, income has to be computed as per provisions and all expenses incurred for earning the income have deemed to be allowed, has no application to the facts of the appellant.

18. Section 44C imposes a limit on the allowability of head office expenditure in the case of non-resident of the assessee. It provides that notwithstanding anything to the contrary contained in sections 28 to 43A, where an assessee is a non-resident, no allowance shall be made in computing the income chargeable under the head "Business income", in respect of head office expenditure to the extent it is in excess of 5 per cent of adjusted total income or the amount of expenditure in the nature of head office expenditure incurred by the assessee as is attributable to the business of assessee in India, whichever is less. Though section 44C contains a non-obstnte clause and overrides the provisions contained in sections 28 to 43A regarding computation of income, yet various courts have held that where entire business operation is carried out in India, entire head office expenditure incurred is allowable while computing income from India. The limit contained in section 44C will not apply in such a situation. This is so held in the case of Rupenjuli Tea Co. Ltd. v. CIT [1990] 186 ITR 301 (Cal.) and by Bombay High Court in the case of CIT v. Emirates Commercial Bank Ltd. [2003] 262 ITR 55. Extending the analogy it can be said that where there is no income by way of business income, section 44BBA cannot bring to charge 5 per cent of the specified sum as profits and gains of the business of operation of aircrafts. Section 44BBA cannot be pressed into service in such cases. We, therefore, hold that the income could not have been artificially computed by invoking provisions of section 44BBA particularly when the assessee has shown his book results showing loss. We, therefore, direct the Assessing Officer to compute income on the basis of books of account maintained by the assessee.'
5.31 It is vehemently contended that ld. CIT(A) has considered all the issues in details, and justifiably reversed the action of ld. AO in rejecting the books of account and arbitrarily applying presumptive provision for calculating income sec. 44BBB. There being no infirmity in the order of ld. CIT(A) his order deserves to be upheld.

6. We have heard the rival contentions and perused the material available on record. We proceed to decide the issues as under:

i.

Section 44BBB(2) which neither discounts a regular assessment nor denies the right of assessee to be assessed by way of regular provisions from sec 28 to 43A read as under:-

"Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee"

A plain provides an option to an assessee being a foreign company engaged in the business of civil construction shall be assessed under regular provisions of the Act on fulfilment of following conditions:

(1)	The appellant shall keep and maintain such books of account and other documents as required under sub-section(2) of section 44AA of the IT Act.
(2)	The appellant shall get his account audited and furnishes a report of such audit as required under section 44AB of the IT Act.

It is not disputed that assessee has maintained proper books of account and got them audited and return was filed accordingly. The financial statements and audit report comply with rules Companies (Auditor's Report), 2003 in terms of Section 227(4A) of the Companies Act. Besides no other specific books of account are prescribed u/s 44AA. Thus assessee's books, audit, financial statements, balance Sheet, P&L A/c etc. are fully compliant to relevant provisions of Income Tax and companies Acts.

ii	Ld. AO held that AS-7 is not applicable to the assessee-company ignoring the vital legal propositions of section 594 of the Companies Act, 1956 laying down a statutory mandate that a company, which is incorporated outside India and has established place of a business in India, is required to prepare its Balance Sheet and Profit & Loss account as per the various provisions of the Companies Act, as if it is a Indian Company with the meaning of the Companies Act. Consequently, ld. CIT(A) rightly held that the Accounting Standard AS-7 is applicable to it. We find no infirmity in this aspect of his order. Following AS-7, assessee has recognized revenue and cost following the percentage completion method on the basis of proportion of contract costs incurred for work performed till the reporting date to the estimated total contract costs. Undisputedly in the notes to the financial statement, the method recognized to account for revenue and expenditure has been specified by assessee in Schedule - 11 of Significant Accounting Policies and Notes to the Accounts as under:
	Note(s)
	"Shandong Tiejun Electric Power Engg Co. Ltd is following the "Percentage of Completion Method" of accounting for the project as per Accounting Standard-7 (Revised) Construction Contracts. Accordingly Project Revenue is recognized as under:
	The company has fixed price construction contract with Adani Power Limited and Jhajjar Power Limited. The company started recognizing revenue in the financial year 2007-2008 as the outcome of the contract can be estimated reliably. Contract Revenue and expenses are recognized as revenue and expenses are recognized as revenue and expenses up to the stage of completion as on 31.03.2009.
	The management has estimated cost for the entire contract and worked out percentage of completion for each year on the basis of cost incurred as per audited account. Accordingly, revenue is recognized on the basis of corresponding percentage to cost estimates given by the management for the entire project period till date i.e. 31.03.2009 as per audited account. Determination of Revenues under the percentage of completion method and provision for loss necessarily involves making estimates of costs to be incurred by the Management, which is being of technical nature, have been relied upon by the Auditors. The difference between billed revenue and working below is accounted as Unbilled Contract Revenue due".
iii.	Assessee much prior, while obtaining order u/s 197 of the Act, the submitted the details of budgeted cost to the tax office, which also stand accepted by the department. During the course assessment assessee furnished detailed break-up of the estimated profit & loss account for entire project for five financial years 2007-08 to 2011-12, audited financial statements for F.Ys. 2009-10 and 2010-11 demonstrating that it has actually incurred the cost nearly as estimated.
iv.	Ld. AO then took another line of action by objecting that assessee ought to have followed another method of 'stage of completion of the project' i.e. (c) completion of a physical proportion of the contract work. The payments of contracts should be released on the basis of milestones prescribed in Annexure – 3. Till the reporting date, the Appellant has raised invoices of Rs. 130,86, 91 ,429/-, which indicated physical work of the contract was completed to that extent only, therefore, method (c) i.e. completion a physical proportion of the contract work as prescribed in para 29 of AS-7 was applicable. Ld. AO has failed to appreciate that method followed by assessee was correct and could not be disturbed on his perception. Besides it has not be controverted that AOs proposition would have lead to lesser revenue being recognized during the impugned year. Thus even the reason of loss of revenue is not ascribable to assessee's method of accounting. In view of these facts and circumstances we see no inconsistency in the order of ld. CIT(A) which is justified and within the parameters of law.
v.	No worthwhile defect has been pointed out by ld. AO qua the books of account, audit and P & L A/c. It has been demonstrated that estimated cost and profit percentage declared from year to year nearly match, consequently we see no reason to suspect that the figures of estimated cost were distorted. The project has been completed in 2012 itself and it is not the case that it is a long drawn project where undue deferment of tax was the motive. The AO's remark that stage of completion is a better method is not substantiated either on merits or justifiable tax revenue gain. The milestone method may be very inappropriate if the contractor and the contractee agree for terms of payment much different from the actual stage of work. It becomes contingent on many uncertainties if the milestone covenants are not adhered to by contractor. The contractor may have exigencies like capital deficiency, requirement of heavy machinery, bargain for upfront heavy payments at initial stages. Viewing all these factors recognizing revenue on completion of stages according to payment terms/raising of bills cannot be the best and only method. Thus we see no wrong in the method adopted by the appellant as observed by ld. CIT(A) also.
vi.	The rejection of books of account u/s 145(3) by ld. AO was rightly held by ld. CIT(A) to be not justified in given facts and circumstances. Hon'ble Gujarat High Court decision in the case of CIT v. Advanced Construction Co. (P) Ltd 275 ITR 30, has held that "the provision, therefore, specifically provides that the choice of method of accounting lies with the assessee, the only caveat being that it has to show that the chosen method has been regularly followed. The section is couched in mandatory terms and the Department is bound to accept the assessee's choice of method and regularly employed, except for the situation, wherein the Assessing Officer is permitted to intervene, in case it is found that true income, profits and gains cannot be arrived at by the method employed by the assessee. In the present case, the Tribunal has categorically found that "the assessee has followed the standard accounting method as this being the first year of the business it was the sole choice of the assessee to adopt a particular method of accounting contemplated under sect/on 145 of the Act".

In view of foregoing, we, therefore, uphold the findings of ld. CIT(A) that the assessee fulfilled all conditions prescribed u/s 44BBB(2) of the IT Act and also has followed one of the recognized methods prescribed for determination of stage of completion of contract as prescribed in para 29 of the Accounting Standard-7 "Construction Contracts" as recognized by the ICAI and the Central Government. Assessee has followed correct method of accounting in terms of Section 44BBB(2) read with Section 145(1) & (2) of the IT Act. Consequently we hold that the ld. AO's action of rejecting books of account 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. Our view is fortified by Delhi ITAT judgment in the case of Royal Jordanian Airlines (supra) which after dwelling over all relevant aspects of charging and mechanical provisions, statutory mandate, and jurisprudence of regular assessment vis-a-vis presumptive assessment and catena of judicial precedents as detailed in this order.

7. In the result, Revenue's appeal is dismissed.