Project completion method accepted for landowner under development agreement; income cannot be forced on percentage completion basis.

An assessee following the project completion method under a development agreement could not be compelled to adopt the developer's percentage completion method where its accounting treatment was consistently applied and revenue accrued only on execution and registration of sale deeds. The assessee had treated advances as liabilities, and the development terms showed that its right to receive the constructed-area share arose only on completion of construction or expiry of the stipulated period. In the absence of defects in the accounts or any basis to reject the method regularly employed, the additions made by recomputing income on percentage completion were unsustainable.

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Issues: Whether the assessee, a land owner under a development agreement, was required to recognize income on the percentage completion method adopted by the developer or could continue to follow the project completion method and recognize revenue only on execution and registration of sale deeds.

Analysis: The assessee had consistently maintained its accounts on the mercantile system and treated advances received against flats as liabilities, recognizing revenue only when sale deeds were executed and registered. The development agreement showed that the assessee's right to receive its 32% share of constructed area would accrue only on completion of the entire construction or on expiry of the stipulated period, and not during the years in question. The Court noted that section 145 of the Income-tax Act permits computation of income according to the method of accounting regularly employed, and does not authorize the Assessing Officer to force upon an assessee the accounting method followed by another entity. It further held that project completion method is a recognized method of accounting, and that the department had accepted the assessee's method in earlier years without any finding under section 145(3) that the accounts were incorrect, incomplete, or that income could not properly be deduced therefrom. The insertion of section 43CB was also noticed as indicating that, prior to that provision, percentage completion was not the only permissible method.

Conclusion: The assessee was entitled to follow the project completion method, and the additions made by applying the percentage completion method were unsustainable. The issue was decided in favour of the assessee.

Ratio Decidendi: Where an assessee has consistently followed a recognized method of accounting and the revenue has not shown defects warranting rejection under section 145(3), income cannot be recomputed by compelling adoption of another method merely because another participant in the transaction follows that method.

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