2012 (7) TMI 1061 - AT - Income Tax

Tribunal upholds builder's project completion method for assessment year 2008-09

The ACIT Versus M/s. Sheth Developers Pvt. Ltd.,

The Tribunal dismissed the Revenue's appeal and upheld the decision allowing the builder/developer to use the project completion method for assessment ... - ISSUES PRESENTED AND CONSIDERED 1. Whether the percentage completion method of accounting is the correct and mandatory method for taxing income from ongoing real estate projects for the assessment year in question, as applied by the Assessing Officer. 2. Whether the assessee was entitled to continue to follow the project completion method of accounting for income from real estate projects, having consistently followed and obtained acceptance of that method in earlier assessment years. 3. Whether the Institute of Chartered Accountants of India's accounting standards (AS-7 / AS-9) mandated deviation from the assessee's established project completion method for the facts of the present year. 4. Whether the Assessing Officer's additions computed by adopting percentage completion method in respect of specific projects (Beaumonde, Savannah, Pampas, Paramos) were justified in light of the facts, prior assessments, and applicable accounting standards. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Legality and applicability of percentage completion method Legal framework: Recognised accounting principles allow adoption of any method of accounting so long as it is a recognised method and applied consistently. For construction/real estate, AS-7 (earlier) and subsequently AS-9 govern accounting for revenue recognition; AS-7 permitted either percentage completion or project completion methods depending on nature of project, whereas revised AS-9 confines recognition to completion/when title/possession passes. Precedent treatment: The Tribunal relied on the appellant's prior Tribunal decision (assessee's own case for earlier year) that accepted project completion method; no contrary higher-court authority was invoked overruling the permissibility of percentage completion where appropriate. Interpretation and reasoning: The Tribunal recognized that AS-7 permitted choice between percentage completion and project completion methods depending on project nature. The Assessing Officer's unilateral imposition of percentage completion method was not automatically justified; applicability depends on project facts such as stage of completion, existence of sale/transfer of title, occupation certificates, and whether projects were completed/sold in the relevant year. Ratio vs. Obiter: Ratio - An AO cannot compel a change from a consistently applied, recognised accounting method unless facts and applicable accounting standards justify such change; AS-7 permits choice of method, AS-9 narrows recognition to completion/transfer. Obiter - General commentary on freedom to choose recognised methods where AS-7 applies. Conclusion: The percentage completion method was not mandatorily applicable on the facts; its imposition by the AO required justification which was not established. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Entitlement to continue project completion method based on consistency and past acceptance Legal framework: Principle of consistency in accounting methods: a taxpayer may follow any recognised method provided it is consistently applied. Administrative acceptance in prior assessments is relevant to determine established practice and expectations of continuity. Precedent treatment: Tribunal relied upon the assessee's long history of acceptance of project completion method across multiple prior assessment years, including an earlier ITAT decision in the assessee's favour for a subsequent year. Interpretation and reasoning: The Tribunal examined the historical assessment record showing repeated acceptance of the project completion method (multiple years up to A.Y. 2007-08) and noted that projects relevant to the year under consideration were not completed during that year (dates of commencement, occupation certificates, and declared completion years demonstrated completion occurred later). Given the consistent application and acceptance, and absence of facts warranting change, the AO's change of method was unjustified. Ratio vs. Obiter: Ratio - Consistent past acceptance of a project completion method creates entitlement to continue that method absent cogent reasons/facts requiring change; prior acceptance is a relevant and persuasive factor. Obiter - Emphasis on fairness/expectation from repeated administrative acceptance. Conclusion: The assessee was entitled to continue the project completion method; the CIT(A)'s deletion of AO additions was correctly affirmed. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Impact and interpretation of AS-7 and AS-9 on revenue recognition for real estate developers Legal framework: AS-7 (originally applicable to contractors and real estate projects) allowed either percentage completion or project completion depending on project nature; subsequent revision led to AS-9 which addresses revenue recognition for real estate developers and generally requires recognition on completion/transfer of legal title or possession. Precedent treatment: The Tribunal noted the shift from AS-7 to AS-9 but applied the standards contextually to determine the appropriate timing of revenue recognition for the projects in question. Interpretation and reasoning: The Tribunal observed that AS-9's requirement to recognise income on completion or on transfer/possession supports the project completion approach for projects not completed in the relevant year. Because the projects were not completed during the year under consideration and completion/transfer occurred later, early recognition under percentage completion was not compelled by the accounting standard as applied to these facts. Ratio vs. Obiter: Ratio - Where AS-9 applies and projects are not complete and title/possession has not passed, revenue recognition upon completion supports project completion accounting; hence, AO's application of percentage completion is not consistent with AS-9 facts. Obiter - General observation on the evolution from AS-7 to AS-9 and their differing scopes. Conclusion: AS-9 reinforces that for the projects not completed in the year, income need not be recognized under percentage completion; project completion method was appropriate on these facts. ISSUE-WISE DETAILED ANALYSIS - Issue 4: Validity of specific additions made by the Assessing Officer Legal framework: Tax computation adjustments based on chosen accounting method must be grounded in applicable accounting standards and factual record (e.g., project completion status, occupation certificates, dates of transfer/possession). Precedent treatment: The Tribunal relied on documentary evidence of commencement and occupation certificates, dates of declared project completion in later assessment years, and prior acceptance of project completion accounting in multiple earlier years. Interpretation and reasoning: Detailed facts for the projects (Beaumonde, Savannah, Paramos, Pampas) showed that completion and income declaration occurred in later assessment years; occupation/commencement certificate dates and declared completion years demonstrated projects were not complete in the assessment year in dispute. In view of the assessee's consistent application of project completion method and absence of circumstances mandating percentage completion, the AO's additions (specific sums for each project) were unsustainable. Ratio vs. Obiter: Ratio - Additions computed by the AO adopting percentage completion method were unjustified because factual records showed projects were incomplete and the assessee's project completion accounting was consistently accepted; such additions must be deleted. Obiter - No broader holding that percentage completion can never be applied; context-specific determination remains necessary. Conclusion: The Tribunal confirmed the CIT(A)'s deletion of the AO's additions for the specified projects and dismissed Revenue's appeal. CROSS-REFERENCES AND INTERRELATION All issues are interrelated: the permissibility of percentage completion (Issue 1) depends on accounting standards (Issue 3) and factual project completion status; the assessee's right to continue project completion method (Issue 2) is strengthened by consistent prior acceptance and by AS-9's requirements (Issue 3); the invalidity of the AO's numeric additions (Issue 4) follows from resolving Issues 1-3 in favour of the assessee.