2018 (8) TMI 440 - AT - Income Tax

Tribunal rules in favor of taxpayer, rejecting revenue authorities' method change.

Ashoka Hi-Tech Builders P. Ltd. Versus Dy. Commissioner of Income Tax (Central) -I, Indore

Ashoka Hi-Tech Builders P. Ltd. Versus Dy. Commissioner of Income Tax (Central) -I, Indore - TMI Issues Involved:1. Method of Accounting: Percentage Completion Method vs. Project Completion Method.2. Consistency and Acceptance of Accounting Methods by Revenue Authorities.3. Legal Justification for Substitution of Accounting Methods.Issue-wise Detailed Analysis:1. Method of Accounting: Percentage Completion Method vs. Project Completion MethodThe primary issue revolves around whether the assessee should follow the percentage completion method, as adopted by JSM Devcon Pvt. Ltd., or continue with the project completion method, which it has consistently used. The assessee argued that it is the landowner, not the developer, and thus its income should be recognized only upon the completion of the project and the execution and registration of sale deeds. The revenue authorities, however, applied the percentage completion method, calculating the income based on the developer's progress and the agreed ratio of 68:32. The Tribunal emphasized that the assessee’s right to 32% of the constructed area would crystallize only upon completion of the entire construction, as per the agreement.2. Consistency and Acceptance of Accounting Methods by Revenue AuthoritiesThe Tribunal noted that the assessee consistently followed the project completion method and recognized revenue only upon the completion of sales, i.e., upon execution and registration of sale deeds. This method was accepted by the revenue authorities for the assessment years 2010-11 and 2011-12. The Tribunal highlighted that the revenue authorities had accepted the assessee's method of accounting in the past, and there was no justification for changing the method mid-way without pointing out any defects in the books of accounts.3. Legal Justification for Substitution of Accounting MethodsThe Tribunal referred to several legal precedents, including decisions by the Supreme Court and High Courts, which establish that the assessee has the right to choose its method of accounting, provided it is consistently followed and reflects true profits. The Tribunal emphasized that the revenue authorities could not impose a different method of accounting unless the chosen method distorts the profits. It was noted that the project completion method is a recognized method and has been consistently followed by the assessee. The Tribunal also referred to the retrospective amendment by inserting Section 43CB, which mandates the percentage completion method for construction contracts from 1.4.2017, indicating that before this insertion, there was no legal obligation to follow the percentage completion method.Conclusion:The Tribunal concluded that the revenue authorities were not justified in applying the percentage completion method on the assessee, as it had consistently followed the project completion method, which was accepted in previous years. The Tribunal set aside the findings of the lower authorities and deleted the additions made for the assessment years 2012-13 and 2013-14, allowing the appeals of the assessee.