ITAT directs AO to reframe assessment using percentage completion method & allow compensation as revenue expenses

The ITAT allowed the assessee's appeals in part, directing the AO to reframe the assessment for both years using the percentage completion method for revenue recognition. The ITAT instructed the AO to allow compensation expenditure as revenue expenses, emphasizing the need for consistency in accounting methods and recognizing the commercial nature of the compensation paid by the assessee.

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Issues Involved:

1. Rejection of Books of Accounts and Estimation of Business Income
2. Method of Revenue Recognition for Completed and Ongoing Projects
3. Disallowance of Business Expenditure

Issue-Wise Detailed Analysis:

1. Rejection of Books of Accounts and Estimation of Business Income:

The Assessing Officer (AO) rejected the books of accounts of the assessee for the assessment years 2008-09 and 2009-10 by invoking provisions of Section 145(3) of the Income Tax Act. The AO estimated the business income based on the actual sale of flats, observing that the assessee did not declare any profit on work-in-progress and was following the project completion method instead of the percentage completion method mandated by the revised AS-7. The AO estimated the profit at 10% of the work done during the year, which was challenged by the assessee.

2. Method of Revenue Recognition for Completed and Ongoing Projects:

The CIT(A) deleted the addition made by the AO for three completed projects (Woods, Meadows, and Hermitage) but upheld the addition for two ongoing projects (Costarica and Iraisaa). The CIT(A) reasoned that applying the new method to completed projects would result in double taxation since profits had already been declared in previous years. However, for new projects, the CIT(A) agreed with the AO that the percentage completion method should be applied, noting inconsistencies in the profit percentages declared by the assessee for Iraisaa (3.74%) and Costarica (24.48%).

The ITAT found that the assessee had consistently followed the percentage completion method, which was accepted by the department in previous years. The AO's estimation of profit without rejecting the method of accounting and the books of accounts was deemed incorrect. The ITAT noted that the assessee had declared profits for both Iraisaa and Costarica projects based on the percentage completion method, and the AO's allegation of non-declaration of profit was factually incorrect. The ITAT directed the AO to reframe the assessment, considering the percentage completion method followed by the assessee.

3. Disallowance of Business Expenditure:

The AO disallowed business expenditure of Rs. 65,68,500/- claimed by the assessee for compensation paid to purchasers who opted out of deals due to non-performance. The AO treated this expenditure as capital in nature, and the CIT(A) confirmed this disallowance. The ITAT, however, found that the compensation was paid for commercial expediency and was part of the regular business. The ITAT directed the AO to allow the expenditure as revenue expenses, noting that the assessee did not claim the refund of sale consideration but only the compensation amount.

Conclusion:

The ITAT allowed the appeals of the assessee in part. The AO was directed to reframe the assessment for both years, considering the percentage completion method for revenue recognition. Additionally, the AO was instructed to allow the compensation expenditure as revenue expenses. The ITAT emphasized the need for consistency in the method of accounting and recognized the commercial nature of the compensation paid by the assessee.

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