2023 (12) TMI 393 - AT - Income Tax

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) ... Percentage of Completion Method - Project Completion / Completed Contract Method - Rule of Consistency and res judicata - prospective application of income computation and disclosure standards under section 145(2) - statutory recognition of Accounting Standards for income computation - burden on Department to prove that change of accounting method distorts profitsPercentage of Completion Method - Project Completion / Completed Contract Method - Rule of Consistency and res judicata - statutory recognition of Accounting Standards for income computation - burden on Department to prove that change of accounting method distorts profits - Validity of Assessing Officer's application of Percentage of Completion Method and resulting addition, vis-a -vis assessee's continuing use of Project Completion Method - HELD THAT: - The Tribunal upheld the CIT(A)'s deletion of the addition made by the AO on application of POCM. The Tribunal accepted that the assessee had consistently followed the Project Completion Method in preceding assessment years and that those methods had been accepted by Assessing Officers after scrutiny; accordingly, the Rule of Consistency and principles of res judicata apply. The Tribunal further held that the Accounting Standards/Guidance Note relied upon by the AO did not have statutory recognition under the Income-tax Act for the relevant period because such standards had not been notified by the Central Government under the prospective provision of Section 145(2), and therefore the AO could not reject the assessee's accounts on that ground. The Tribunal placed on the Department the burden to demonstrate that the assessee's adopted method distorted profits for the year in question; absent such a finding by the AO, substitution of the method was not warranted. Reliance was placed on precedents treating completed contract/project-completion and percentage of completion as recognised alternative accounting methods and on authority that a method accepted in prior scrutiny assessments cannot be lightly displaced. Applying these principles to the facts, the Tribunal found no justification to interfere with the CIT(A)'s deletion of the addition. [Paras 12, 13, 15, 16]Addition made by applying POCM set aside; assessee's Project Completion Method accepted and revenue appeal dismissed.Final Conclusion: Revenue's appeal dismissed; the Assessing Officer's re-computation under Percentage of Completion Method and the consequent addition were not sustained because the assessee consistently followed and had prior acceptance for Project Completion Method, the Accounting Standard relied upon lacked statutory recognition for the relevant period, and the Department did not establish distortion of profits. 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.