2010 (8) TMI 964 - AT - Income Tax

Tribunal Decision: Income Recognition, Disallowance Re-computation, Expense Disallowance

The Tribunal allowed the assessee's appeal in part. It upheld the project completion method for income recognition, set aside the disallowance under ... Disallowable u/s 40(a)(ia) - expenditure - personal in nature - Method of accounting - HELD THAT:- The assessee in this case is a builders and real estate developer. The A.O’s contention, which is affirmed by the CIT(A) is that AS-7 issued by the ICAI is applicable to the builders and real estate developers. This finding in our opinion is erroneous. AS-7 prior to its revision in the year 2002 dealt with the Accounting for Construction Contracts, in the financial statements of enterprises. Therefore, it is clear from the Expert Committee of the ICAI, that the first appellate authority was not in error in upholding the view taken by the AO, that the revised AS-7 is applicable to builders and real estate developers. As mutually agreed between the parties, we respectfully follow the order of the Tribunal in the case of Savala Associates v. ITO[2009 (10) TMI 640 - ITAT MUMBAI], we set aside the matter to the file of the A.O. on the issue of disallowance u/s 40(a)(ia). As the assessee has not claimed any expenditure, the disallowance does not arise. At the same time, the work-in-progress of the assessee has to be recomputed by excluding this expenditure, which the assessee has not claimed. All the Ground is allowed for statistical purposes. Issues Involved:1. Method of accounting.2. Expenses disallowed under section 40(a)(ia).3. Disallowance of various expenses amounting to Rs. 71,880.Issue-wise Detailed Analysis:I. Method of Accounting:The primary issue revolves around whether the revised AS-7 issued by the Institute of Chartered Accountants of India (ICAI) applies to the assessee, a builder and real estate developer, and whether the project completion method consistently followed by the assessee since its inception should be accepted for income tax purposes.The assessee argued that the revised AS-7 does not apply to builders and real estate developers. The Tribunal in the case of Champion Construction had previously accepted the project completion method as appropriate for computing income. The assessee has been using this method since 1996, and the department has accepted it over the years. The assessee contended that AS-7, revised in 2002, does not apply to builders and real estate developers, as confirmed by the ICAI's Compendium of Opinion. The Tribunal agreed, noting that the revised AS-7 is not applicable to such enterprises and upheld the project completion method.The Tribunal also referenced the Bangalore Bench decision in Prestige Estate Projects (P) Ltd. v. DCIT, which supported the project completion method for real estate developers. The Tribunal concluded that the method followed by the assessee cannot be deemed unreasonable and any change would be revenue-neutral. The Tribunal cited the Supreme Court's decision in CIT v. Bill Hari Investment Ltd., which emphasized that the department must prove the existing method distorts profits before insisting on a change. The Tribunal allowed the assessee's ground, affirming the project completion method.II. Expenses Disallowed Under Section 40(a)(ia):The assessee did not press grounds II(1) and II(2) regarding the disallowance of expenses under section 40(a)(ia). The Tribunal, following the Mumbai Bench decision in Savala Associates v. ITO, set aside the matter to the Assessing Officer (AO) to recompute the work-in-progress by excluding the disallowed expenditure. Since the assessee had not claimed any expenditure, the disallowance does not arise. Ground No. II(1) and (2) were allowed for statistical purposes.III. Disallowance of Various Expenses Amounting to Rs. 71,880:The assessee did not press this ground. Therefore, the Tribunal dismissed ground No. III.Conclusion:The appeal of the assessee was allowed in part. The Tribunal upheld the project completion method for recognizing income, set aside the disallowance under section 40(a)(ia) for recomputation, and dismissed the ground related to the disallowance of various expenses. The overall decision emphasized the consistency and reasonableness of the accounting method followed by the assessee and the revenue-neutral nature of any changes proposed by the department.