TaxTMI 
TaxTMI 
2010 (8) TMI 964
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.... assessment year 2005-06 disclosing the total income of Rs. 56,974/-. The Assessing Officer, during the course of scrutiny proceedings asked the assessee to explain why the income should not be assessed on percentage/progressive completion method as per revised AS-7 issued by the Institute of Chartered Accountants of India. After considering the reply of the assessee, the Assessing Officer rejected the assessee's contention and estimated that the assessee has completed 59.86 per cent of the project and after finding out the final sale value given by the assessee at 57.86% of 3.33 crores as the sale for the assessment year 2005-06. He deducted from the sale value so arrived, the total cost of the project upto assessment year 2005-06 and also certain administrative expenses during the year and arrived at the net profit of ` 19,88,391/-. He further made certain disallowances on the ground that certain expenditure was personal in nature and also on account of differences in the list of purchases received from creditors as well on the ground that expenses are not allowable under section 40(a)(ia) of the Act. 4. Aggrieved, assessee carried the matter in appeal. 5. The first appella....
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....ion as expenses in A.Y. 2006-07 in terms of proviso to section 40(a)(ia) as the TDS has been deposited in the subsequent year. III. Disallowance of various expenses amounting to Rs. 71,880/- 1. On the facts and circumstances of the case and in law the CIT(A) has erred in disallowing various expenses of Rs. 71,880/-. 8. Shri Yogesh Thar, learned counsel for the assessee submitted that he is not pressing ground II(1) and II(2) with regard to disallowance under section 40a(ia)of the Act, as well as the disallowance of various expenses amounting to Rs. 71,880/- , which is ground No. III. He wishes to agree on Ground No. I and ground No. II(3) and (4). 9. On ground No. I, the learned counsel for the assessee submitted that before AS-7 was issued by the Institute of Chartered Accountants of India , the Tribunal in the case of Champion Construction (5 ITD ) has accepted the completion of contract method as an appropriate method of computing income. He relied on para 18 at page 507 of that order. He further drew our attention to AS- 7, as it exist prior to its revision in the year 2002 as well as the AS-7 issued in the year 2002 by the Institute of Chartered Accountants of Indi....
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....ench of the Tribunal in the case of Savala Associates v. ITO (2010) 35 SOT 148(Mum). On a query from the bench, he submitted that the Assessing Officer may be directed to re-work the work-in-progress, after deleting the expenditure on which no deduction of tax was made. 11. The learned Departmental Representative, Shri R.M. Tiwari, on the other hand, opposed the contention of the assessee and submitted that the AS-7 is applicable to builders and contractors. He relied on the order of the first appellate authority and argued that revenue recognition has to be done as per AS-7 read with AS-9. He referred to para 2.1.3 of the order of the CIT(A) and submitted that opinion given by the Institute of Chartered Accountants of India clearly shows that the opinion was specific, to the queries and the facts of that case. Even otherwise, he submitted that as per the Guidance Note of the Institute of Chartered Accountants of India, the assessee is bound to declare income during the year. He took this Bench through the Guidance Note and submitted that, even if there is an Agreement of Sale, the income should be offered. He made these submission after drawing the attention of the Bench to var....
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....ction contract is defined as follows: "A construction contract is a contract specifically negotiated for the construction of an asset or a combination of asset that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use." From reading of the above makes it clear that revised AS-7 issued in the year 2002, does not apply to builders and real estate consultants. The Institute of Chartered Accountants of India has in reply to a query given in the Compendium of Opinions - Vol.XXIII - 95 Query No. 15 as stated as follows: "B. Query 5. In the light of the above, the querist has sought the opinion of the Expert Advisory Committee on the following issues: (a) Whether the revised AS-7 would be applicable t the company for accounting for new housing projects, which may be undertaken by the company on or after 01.04.2003 on the same business model as mentioned in the facts of the case. (b) In case revised As-7 is not applicable to the company, whether the company can value its inventories in accordance with Accounting Standard (AAS)2, "Valuation of Inventories', issued by the Institute of Chartered ....
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....as under bona fide belief that it was adopting a method of accounting which was applicable to it as per the report of the Expert Committee of the ICAI - Therefore, revised AS-7 cannot be applied in the case of the assessee - Even otherwise, in case revised AS-7 is to be applied, the opening inventories are to be valued as per revised AS-7- That apart, on the principle of consistency, Revenue should have accepted the method of accounting adopted by the assessee as the same was being followed for many years - Hence AO is directed to accept the project completion method of accounting. 16. Moreover, the Institute of Chartered Accountants of India has issued Guidance Note on Recognition of Revenue by Real Estate Developers. The recommendations are at para 6, which is extracted for ready reference : "Revenue in case of real estate sales should be recognized when all the following conditions are satisfied: (i) The seller has transferred t the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with ownership; (ii) No significant uncertainty exists regarding the amount of the c....
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....ection with the completion of the project or otherwise, the unsold portion comprising of 12,331/- sq.ft. and the difference between the net receipts and the total expenditure and the amount actually treated as the assessee's income are more than sufficient to take care of any such contingency." Thus, the methodology followed by the assessee in recognizing the income from the project under project completion method in the next year is in accordance with the propositions laid down by the Tribunal in the case of Champion Construction Co. (supra). 20. In any event, the method followed by the assessee cannot by any stretch of imagination be called as an unreasonable method. Any change in the method is revenue neutral. The revenue cannot change the method of accounting, as is sought to be done in the facts and circumstances of the case. 21. Coming to the case laws, the case of CIT v. Bill Hari Investment Ltd. (299 ITR 1, the Hon'ble Supreme Court has held as follows: "15. Recognition/identification of income under the 1961 Act, is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. Completed....
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...., which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present case, we find from the various statements produced before us, that the entire exercise, arising out of change of method from completed contract method to deferred revenue expenditure, is revenue neutral. Therefore, we do not wish to interfere with the impugned judgment of the High Court. 21. Before concluding, we may point out that under s.211(2) of the Companies Act, Accounting Standards ("AS") enacted by the Institute of Chartered Accountants have now been adopted [see: judgment of this Court in J.K. Industries case (supra)]. Shri Tripathi, learned counsel for the Department, has placed reliance on AS 22 as the basis of his argument that the completed contract method should be substituted by deferred revenue expenditure (spreading the said expenditure on proportionate basis over a period of time). He also relied upon the concept of timing difference introduced by As 22. It may be stated that all these develo....