2023 (12) TMI 536 - AT - Income Tax

Revenue department cannot force accounting method change without proving profit distortion under established precedent

ITAT Pune ruled in favor of the assessee regarding revenue recognition methods. The AO applied percentage completion method based on assessee's statement ... Methods of accounting for recognizing the revenue - assessee has been following “Project Completion Method” adopted by the assessee BUT in search admitted that company will adopt “Percentage Completion Method” then-onwards - AO applied the percentage completion method on the ground that the appellant firm through its managing partner had agreed to follow the said method during search operation and had filed its return of income for A.Y. 2016-17 by following percentage completion method - HELD THAT:- As decided in Bilahari Investment (P) Ltd [2008 (2) TMI 23 - SUPREME COURT] the rule of law in adopting the accounting standard in case of builder and developer is absolutely clear and precise, so that it is only in those case where the Department records a finding that the method adopted by the assessee results in distortion of profit, the Department can insist on substitution of the existing method. Reverting to the facts of the present case before us there is no reason recorded by the AO nor the ld. CIT(A) that the Project Completion Method which the assessee has adopted for recognition of revenue and the profit elements distorts the profits for the year under consideration. In absence of any such finding either by the AO or by the ld. CIT(A), the Department therefore cannot insist the assessee to substitute the Percentage Completion Method in place of Project Completion Method which the assessee has adopted for the year under consideration. There is another decision in M/s. Prestige Estate Projects Pvt. Ltd. [2020 (5) TMI 239 - KARNATAKA HIGH COURT] where their Lordships have observed when the Department has accepted in the previous years, in the light of guidance note applicable to developers a certain method of accounting and the profit arrived at is revenue neutral, then in such scenario, the substantive question of law has to be answered in favour of the assessee and against the Revenue. Therefore, in the case of the assessee for A.Y. 2015-16 when the Department has not pointed out any distortion in the profit arrived at for the year under consideration by adopting Project Completion Method, then the Revenue arrived at has to be revenue neutral and the Department cannot insist on the assessee to adopt Percentage Completion Method. More so, because the Revenue has already accepted Project Completion Method for the assessee for the previous consecutive A.Ys. 2013-14 & 2014-15. Thus addition made in the case of the assessee is unjustified unwarranted and invalid in the eyes of law. Decided in favour of assessee. Issues Involved:1. Legality of assessment under Section 143(3) read with Section 153A without incriminating documents.2. Application of Percentage Completion Method for revenue recognition.3. Validity of applying the same accounting method for different assessment years.4. Taxability of advances received from flat owners.5. Timing of income accrual and treatment of contingent receipts.Summary:Issue 1: Legality of Assessment under Section 143(3) read with Section 153AThe assessee's ground regarding the illegality of the assessment under Section 143(3) read with Section 153A was dismissed as not pressed.Issue 2: Application of Percentage Completion Method for Revenue RecognitionThe assessee, a builder and developer, traditionally followed the Project Completion Method. During a search, the Managing Partner admitted to adopting the Percentage Completion Method from FY 2015-16 relevant to AY 2016-17. However, the AO applied this method to AY 2015-16, adding Rs. 1,12,43,693 to the assessee's income. The Tribunal found discrepancies in the AO's findings, noting that the Managing Partner had agreed to adopt the new method only from AY 2016-17, not AY 2015-16.Issue 3: Validity of Applying the Same Accounting Method for Different Assessment YearsThe CIT(A) upheld the AO's decision, but the Tribunal observed that the Department had accepted the Project Completion Method for AYs 2013-14 and 2014-15. Without any distortion or ambiguity in the profits for AY 2015-16, the Department's insistence on the Percentage Completion Method was deemed unjustified. The Tribunal referenced the Supreme Court's ruling in CIT v. Bilahari Investment (P) Ltd., emphasizing that a change in method requires proof of profit distortion.Issue 4: Taxability of Advances Received from Flat OwnersThe assessee argued that advances from flat owners should not be treated as taxable income until the transaction is complete. The Tribunal noted that the Department had not demonstrated any distortion in profits using the Project Completion Method, thus supporting the assessee's stance.Issue 5: Timing of Income Accrual and Treatment of Contingent ReceiptsThe Tribunal agreed with the assessee that income accrues upon the possession of flats being handed over to buyers. The Department's failure to show any profit distortion under the Project Completion Method led the Tribunal to rule in favor of the assessee.Conclusion:The Tribunal set aside the CIT(A)'s order, directing the AO to delete the addition of Rs. 1,12,43,693. The appeal was partly allowed, with ground Nos. 2 to 5 answered in favor of the assessee and against the Revenue.