Real estate developer wins on income recognition method as ITAT upholds consistency principle over ICAI standards

The ITAT Delhi ruled in favor of the assessee regarding income recognition for real estate projects. The AO applied Percentage of Completion Method (POCM) based on ICAI accounting standards effective from April 1, 2012, making additions to income. However, the tribunal held that the Rule of Consistency applied since the assessee's accounting method was accepted in previous assessment years. The tribunal noted that ICAI guidance notes were not notified by the Central Government under section 145(2) of the Income Tax Act. The CIT(A)'s deletion of the addition was upheld, with the tribunal ruling against the revenue department.

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Issues Involved:
The appeal pertains to the deletion of an addition of Rs. 8.42 crores by applying Percentage of Completion Method (POCM) for Assessment Year 2014-15.

Summary:
The Revenue appealed against the order of the CIT(A) which deleted the addition of Rs. 8.42 crores by applying POCM. The Assessing Officer believed that POCM was applicable based on field enquiries revealing discrepancies in stock in trade and booking amounts. The CIT(A) accepted the assessee's contention that Project Completion Method (PCM) was applicable, citing consistency in accounting methods accepted in previous assessments. The Tribunal upheld the CIT(A)'s decision, emphasizing the Rule of Consistency and lack of statutory recognition for the Accounting Standard Guidance Note under Section 145(2) of the Act. Referring to legal precedents, including the Supreme Court's ruling on choice of accounting methods, the Tribunal found no reason to interfere with the CIT(A)'s findings, ultimately dismissing the Revenue's appeal.

The Tribunal noted that the assessee consistently followed PCM, which had been accepted in previous assessments. The absence of statutory recognition for the Accounting Standard Guidance Note under Section 145(2) precluded adverse inferences. Legal precedents highlighted that the Assessing Officer cannot reject an assessee's accounts based on unnotified accounting standards unless it distorts profits. The Supreme Court's ruling emphasized that different accounting methods can achieve the same result, with completed contract method delaying revenue recognition until project completion, while POCM recognizes income periodically based on project completion stage. The Tribunal found the assessee's method to be valid and revenue-neutral, in line with past practices accepted by the Department.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition of Rs. 8.42 crores based on the application of PCM over POCM. The judgment was pronounced on 16.08.2023.

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