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 during search operations, despite previously following project completion method. The tribunal held that absent any finding of profit distortion, the department cannot force substitution of accounting methods. Citing SC precedent in Bilahari Investment, the tribunal emphasized that only when adopted methods distort profits can departments insist on alternative methods. Since revenue accepted project completion method in previous years and found no distortion, the addition was deemed unjustified and invalid.

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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 153A
The 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 Recognition
The 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 Years
The 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 Owners
The 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 Receipts
The 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.

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