2024 (11) TMI 218 - AT - Income Tax

Assessee entitled to continue project completion method over ICDS III percentage completion method for pre-2016 projects

Mayfair Properties Versus DCIT, Circle-32, Kolkata

ITAT Kolkata held that the assessee was entitled to continue using the project completion method for income recognition instead of the percentage ... Income recognition method - Assessment of the income of the assessee applying percentage completion method OR project completion method - HELD THAT:- Transitional provisions which state that for the projects, which commenced on or before 31.03.2016 but not completed by the said date, the revenue shall be recognized based on the method regularly followed by the person prior to the previous year beginning from the 1st day of April 2016. It is unrebutted on the record that the assessee since its inception has been following project completion method. In view of the aforesaid transitional provisions, the action of the AO in applying the percentage completion method on the basis of ICDS III by part-reading the same, cannot be held to be justified. The impugned addition made by the AO for the year under consideration by applying percentage completion method of accounting is not justified and the same is accordingly set aside. Appeal of the assessee stands allowed. Issues:1. Appeal against the order of the National Faceless Appeal Centre confirming addition to income by Assessing Officer.2. Dispute regarding method of accounting - project completion method vs. percentage completion method.3. Interpretation of Income Computation and Disclosure Standards (ICDS) III by Assessing Officer.4. Application of transitional provisions under ICDS III.5. Assessment of income based on percentage completion method.Analysis:The appeal was filed against the order of the National Faceless Appeal Centre confirming the addition to income by the Assessing Officer. The dispute revolved around the method of accounting used by the assessee, with the Assessing Officer applying the percentage completion method instead of the project completion method claimed by the assessee. The Assessing Officer relied on Income Computation and Disclosure Standards (ICDS) III, which recommended revenue recognition on a percentage completion basis for construction contracts. The Assessing Officer noted that the assessee had met the conditions for revenue disclosure under ICDS III, based on the percentage of completion and sale consideration received for the projects. The assessee contended that it had consistently followed the project completion method since its inception in 1995 and challenged the Assessing Officer's interpretation of ICDS III.The assessee argued that the Assessing Officer had overlooked the transitional provisions in ICDS III, which allowed revenue recognition based on the method regularly followed by the assessee prior to April 1, 2016, for projects initiated before March 31, 2016. The projects in question, Mayfair Greenwood and Mayfair Elite, had commenced before the specified dates, and the assessee had historically used the project completion method. Therefore, the assessee asserted that the Assessing Officer's application of the percentage completion method based on ICDS III was unjustified. The Tribunal agreed with the assessee's argument, emphasizing that the Assessing Officer's reliance on ICDS III without considering the transitional provisions was erroneous.Consequently, the Tribunal allowed the appeal, setting aside the addition made by the Assessing Officer using the percentage completion method. The decision was based on the assessee's consistent use of the project completion method, in line with the transitional provisions of ICDS III. The judgment highlighted the importance of correctly interpreting accounting standards and transitional provisions to determine the appropriate method of revenue recognition for construction contracts.