2010 (5) TMI 697 - AT - Income Tax

Tribunal affirms CIT(A)'s decision on AS-7, dismissing revenue's appeal and assessee's cross-objection.

Vraj Developers Versus Department of Income Tax

Vraj Developers Versus Department of Income Tax - TMI Issues Involved:1. Applicability of Accounting Standard-7 (AS-7) versus Accounting Standard-9 (AS-9) for revenue recognition.2. Method of accounting for work-in-progress and revenue recognition.3. Justification for the addition made by the Assessing Officer based on percentage completion method.4. Disallowance of specific expenses and levy of interest under sections 234A, 234B, and 234C of the Income Tax Act.Issue-wise Detailed Analysis:1. Applicability of AS-7 versus AS-9:The primary issue is whether AS-7, which pertains to construction contracts, applies to the assessee, who is a builder and developer. The Assessing Officer (AO) applied AS-7, asserting that the assessee should recognize revenue based on the percentage of completion method. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Tribunal found that AS-7 is applicable to contractors and not to builders or developers constructing properties on their own account. The Tribunal upheld that AS-9, which deals with revenue recognition in general, is applicable to the assessee.2. Method of Accounting for Work-in-Progress and Revenue Recognition:The AO contended that the assessee should have recognized income based on the percentage completion method, leading to an addition of Rs. 36,77,819/-. The CIT(A) observed that the assessee followed AS-2 for valuing closing inventory and AS-9 for revenue recognition, which is appropriate for a builder. The assessee recognized revenue when the sale deed was executed or possession was given, rather than on the project completion basis. The Tribunal agreed with this approach, noting that the assessee's method was consistent and not defective.3. Justification for Addition by AO Based on Percentage Completion Method:The AO's addition was based on the assumption that the project completion method was incorrect. However, the CIT(A) and the Tribunal found that the project was at an early stage, with substantial work carried out in subsequent years. The Tribunal emphasized that the AO did not provide evidence that the assessee's accounting method was inconsistent or defective. The Tribunal concluded that the AO's application of the percentage completion method and the resulting addition lacked a legal basis, as the assessee's method complied with the proper accounting standards and recognized substantial revenue in subsequent years.4. Disallowance of Specific Expenses and Levy of Interest:The assessee's cross-objection included the disallowance of Rs. 25,000 out of various expenses and the levy of interest under sections 234A, 234B, and 234C. However, during the hearing, the assessee chose not to press these grounds. Consequently, the Tribunal dismissed these grounds for want of prosecution.Conclusion:The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 36,77,819/- made by the AO, affirming that AS-7 does not apply to the assessee and that the assessee's method of accounting was consistent and appropriate. The appeal by the revenue and the cross-objection by the assessee were both dismissed.