2013 (10) TMI 833 - AT - Income Tax

Assessee wins accounting method dispute, emphasizing consistency and choice.

Haware Infrastructure Pvt. Ltd. Versus Asst. Commissioner of Income Tax

The Tribunal ruled in favor of the assessee, a Builders and Developer, upholding the validity of the project completion method of accounting over the ... Change in method of accounting from ‘Project completion method’ to ‘Percentage completion method’ for the assessee, who is in the business of real-estate – Held that:- Assessee has to construct the complete building as per specification over a period of time and receive the purchase consideration from time to time from the purchasers and hand over the possession of the building when the building is fully completed, occupancy certificate is received and it is Only at that time the risks and rewards are transferred to the purchaser - Project completion method followed by the assessee is in order and the action of the department to reject the same and to estimate the income by applying project percentage completion method is not justified – Decided in favor of Assessee. Issues involved:1. Rejection of project completion method of accounting by the CIT(A).2. Interpretation of Revised Accounting Standard-9.3. Estimation of business profits by adopting the percentage completion method.Issue 1: Rejection of project completion method of accounting by the CIT(A):The assessee, a Builders and Developer, challenged the CIT(A)'s order rejecting the project completion method of accounting. The AO determined the income of the assessee at Rs. 2.29 Crores, disagreeing with the project completion method followed by the assessee. The AO noted that the assessee had deferred tax liability and claimed booking advances exceeding stock and WIP. The CIT(A) estimated the business profits at Rs. 1.43 Crores, applying the percentage completion method. However, the Tribunal observed that the revenue failed to demonstrate that the method of accounting under Accounting Standards had not been consistently followed by the assessee. The Tribunal held that the revenue could not change the accounting method without just cause, and the completion contract method was a valid approach for the assessee. The Tribunal found in favor of the assessee, emphasizing the consistency in the method of accounting.Issue 2: Interpretation of Revised Accounting Standard-9:The CIT(A) incorrectly interpreted the Revised Accounting Standard-9, stating that ownership risks transferred to the buyer upon entering a sale agreement, without waiting for building completion. The Tribunal disagreed, highlighting that the completion method was acceptable for builders and developers. It referenced previous judgments and the Supreme Court's stance on income recognition methods, emphasizing that the choice of accounting method lies with the assessee. The Tribunal cited a similar case where the project completion method was upheld, rejecting the revenue's attempt to switch to the percentage completion method. The Tribunal concluded that the CIT(A)'s interpretation was incorrect, and the assessee's method was valid.Issue 3: Estimation of business profits by adopting the percentage completion method:The effective ground of appeal revolved around the AO's adoption of the percentage completion method for tax liability determination. The FAA upheld the AO's estimation of profits at Rs. 1.43 Crores. However, the Tribunal, considering precedents and the assessee's consistent method, ruled in favor of the assessee. It emphasized that the revenue could not arbitrarily change the accounting method and must respect the assessee's chosen approach. By aligning with previous decisions and the assessee's accounting practice, the Tribunal allowed the appeal, rejecting the estimation based on the percentage completion method.In conclusion, the Tribunal's judgment favored the assessee, upholding the validity of the project completion method of accounting for builders and developers. The decision emphasized the importance of consistency in accounting practices and rejected the revenue's attempt to impose the percentage completion method. The Tribunal's detailed analysis highlighted the assessee's right to choose an accepted accounting method and the revenue's obligation to respect that choice.