TaxTMI 
TaxTMI 
2024 (2) TMI 637
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....er section 132 of the Income Tax Act, 1961 (the "Act") was conducted on 05.02.2014 at the business and residential premise of the assessee and its group cases. The assessee e-filed its return for AY 2014-15 on 31.03.2015 declaring loss of Rs. 17,07,932/-. Statutory notices under section 153A/143(2)/142(1) along with questionnaire were served upon the assessee which were duly complied with. The Ld. Assessing Officer ("AO") found that the assessee has not shown any income from the Project. In the notes to the account of the assessee it is mentioned that sale of land/flat is recognised when the possession of the land/flat is handed over to the buyer and company has adopted Project Completion Method for revenue recognition. In his statement recorded on 07.03.2014 under section 132(4) of the Act Shri Shiv Kumar Garg, main promoter of the Group stated that though substantial booking have been received in respect of the project but the income will be accrued on the basis of final sale of project on Project Completion Method. 4.1 During assessment proceedings the assessee was show caused as to why income be not determined on the basis of Percentage of Completion Method. The assessee fil....
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.... 5.1.2 The following judicial pronouncements dwell upon the issue under consideration and are reproduced as under:- (i) The Hon'ble Delhi High Court had examined the applicability of the Completed Contract Method vis-à-vis POCM method in the case of Paras Buildtech India Pvt. Ltd. reported in 382 ITR 630 and held as under:- "4. The background to the filing of the present appeals is that the Appellant Assessee is engaged in the business of real estate as a developer. The Assessee either purchases land in its own name or gets the power of attorney from the land owner in case the property is owned by another party so as to carry out activities of development on the land in terms of a collaboration agreement. The Assessee enters into agreements to develop and sell overall projects in terms of sharing with the owner. It enters into contracts with various buyers and receives sums by way advance for booking or reserving flats/shops/areas. On completion of the project, the Assessee hands over the possession of the flats booked to the respective customers/buyers along with the execution of the sale/conveyance deed. 5. It is stated that the Asse....
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....veyance deed has been executed or possession has not been handed over. The Assessee's balance sheet dated 31st March, 2005 discloses under the sub-head 'Inventory' under the head Current loans and advances' a sum of Rs. 7,09,93,957. The explanatory Schedule 4 describes the said figure as 'Stock and inventory, It is also stated in Item No. 1 (b) of Schedule 19 in the Notes to the Accounts forming part of the final audit statement as under:- "(b) Revenue Recognition Sale of building: (i) When building is ready to be delivered - Sale is booked in the books of accounts on the date of possession agreed upon or on the date of sale if the sale deed is executed before the date of possession agreed. (ii) When the building is not ready to be delivered- Sale is booked on the date of the building transferred and possession handed over. The income and expenditure are accounted for on accrual basis revenue of sale of offices/shops etc is recognized on signing of title deeds. All sums received till then for the construction project are treated as advances and shown as liability." 18. Section 145 (1) of the Act stat....
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....tage of completion of the contract. The stage of completion can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract. The above indicates the difference between the completed contract method and the percentage of completion method." 21. In the present case, there was therefore no good reason for the ITAT to have reversed the finding of the CIT (A). The only reason given in the impugned order of the ITAT is that 'risks and rewards' of ownership were transferred to the buyers who had paid the booking advance amounts and in some cases these rights were transferred to third parties. However, this does not in any manner affect the treatment of the said amounts in the books of the Assessee. As noted hereinbefore, the expenses of construction were not debited to the P & L account of the Assessee. It was shown as cost of construction or block of buildings. It is only as and when a conveyance deed was executed or possession delivered that the receipt was shown as income. The explanation added by way of Notes to the Accounts was not taken note of by the ITAT when it came....
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.... method of accounting. In this regard, assessee has placed reliance upon the following cases laws which are also relevant (1) C.I.T. vs. Manish Buildwell Pvt. Ltd., Delhi High Court, in ITA No. 928/2011 dated 15.11.2011. In para 8& 9 of this decision, the Hon'ble Jurisdictional High Court has expounded as under:- "8. It is well settled that the project completion method is one of the recognized methods of accounting. In Commissioner of Income Tax and Another vs. Hyundai Heavy Industries Co. Ltd. (2007) 291 ITR 482 (SC) the Supreme Court held as follows:- "Lastly, there is a concept in accounts which is called the concept of contract accounts. Under that concept, two methods exist for ascertaining profit for contracts, namely "completed contract method" and "percentage of completion method". To know the results of his operations, the contractor prepares what is called a contract account which is debited with various costs and which is credited with revenue associated with a particular contract. However, the rules of recognition of cost and revenue depend on the method of accounting. Two methods are prescribed in Accounting Standard No. 7. They are "completed co....
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....completion method for one year (the year under appeal) on selective basis. This will distort the computation of the true profits and gains of the business. For these reasons, we are of the view that no substantial question of law arises. We, therefore, decline to admit question nos. 2 and 3." 9.1 Assessee has further placed reliance upon the decision of the ITAT, Mumbai Bench in the case of ACIT vs. Sheth Developers Pvt. Ltd. in ITA No. 3777/Mum/2010 dated 16th December, 2011. In this case Tribunal has held that it is established legal position that the asessee can follow any recognized method of accounting on the condition that the same method is to be followed consistently. The assessee in this case has followed project completion method which is one of the prescribed methods. The assessee was offering incomes on the completion of building itself whether the flats are sold or not completely. We do not find any reason to disturb the assessee's method of accounting which was being consistently followed from assessment year 2000-01 onwards and was also accepted in other years. 9.2 Assessee has further placed reliance upon the ITAT, Mumbai Bench decision in the case of H....
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....ears in question in these appeals, considered the decision of the ITAT for those years (ITA Nos. 4572/del/09 and 2813/del/2010 dated 20.4.2012. In the said decision of the ITAT, the previous judgment of this Court in CIT v. Manish Buildwell Pvt. Ltd. (ITA 928/2011) decided on 15.11.2011, was relied upon. Likewise, the Supreme Court ruling in CIT v. Belahari Investments Pvt. Ltd., (2008) 299 ITR 1, to this effect which discussed both the percentage completion and the project completion methods, and noted its difference were considered. In Manish Buildwell (supra) it was held that it cannot be said that project completion method would result in deferment in payment of taxes which are to be assessed annually. The ITAT in these circumstances held in relation to the assessee/respondent that the adoption of the project completion method is an established method of accounting. In these circumstances, without there being any rationale or new development, the Revenue could not have concluded that the project completion method was not appropriate for the assessee. Consequently, it is held that no substantial question of law arises for consideration. The appeals are accordingly dismissed." (E....
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....een that percentage completion method as sought to be applied by the A.O. for computing the income of the assessee by not accepting the method of accounting of income declared by the assessee, is also not prescribed u/s 145/145A of the Income Tax Act, 1961 and therefore also there is no justification for the Assessing Officer to insist that the assessee ought to have applied only percentage completion method. For this proposition we derive further support from the orders of Delhi Bench of ITAT in the cases of Sabh Infrastructure Limited for assessment year 2006-07 to assessment year 2009-10 decided by the Co-ordinate 'G' Bench at Delhi. It has been held in the case of the above company for assessment year 2006-07 and 2007-08 in ITA No. 4572/Del/2009 and 2813/Del/ 2010 that where the assessee was a Real Estate Developer and not a construction contractor, AS7 was not applicable. Even in the case of Sabh Infrastructure Limited (supra) the assessee recognised revenue at the time of execution of sale deed through which significant risks and rewards of owner of the property were transferred to the buyer and the same was stated to be in accordance with AS-9 issued by ICAI and that....
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....ad "Profits and gains of business or profession" or "Income from other sources shall subject to the provisions of subsection (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144." Section 145 of the Act prescribes that business income shall be computed in accordance with "cash or mercantile system of accounting regularly employed by the assessee". The choice of method of accounting is with the assessee and unless conditions prescribed in section 145(3) are satisfied, profits have to be computed in accordance with the method of accounting followed ....
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.... such companies shall disclose in its P&L. a/c and balance sheet, the following, namely (a)the deviation from the Accounting Standards; (b) the reasons for such deviation; and (c)the financial effect, if any, arising due to such deviation. Thus the Companies Act provided for the deviation from the Accounting Standard also. When the assessee company is required to follow the Accounting Standard as prescribed by ICAI, then naturally it has to take into account the replies given by the Institute for the expert committee on the queries raised by the companies. We had already pointed out that the learned Authorised Representative has filed opinion of the expert committee in respect of applicability of revised AS-7 to an enterprise undertaking construction activities on their own account as a venture of commercial nature. The assessee undertakes construction activity for those persons to whom it intends to sell the super-built area along with undivided share of land in a project which it is developing as a developer. Hence, the assessee is not a construction contractor and revised AS-7 was considered as not applicable. The assessee in view of the opinion given ....
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....Business or Profession' shall be computed in accordance with either cash or mercantile system of accounting 'regularly employed by the assessee'. It is only with effect from 1 April 2015 that a change has been brought about in section 145(2) which permits the Central govt. To notify in the official Gazette from time to time the income computation and disclosure standards to be followed by any class of assesses or in respect of any class of income that change in prospective and in any event does not apply to the case in hand. (ii) The settled legal position as far as section 145 of the Act is concerned is that it is not open to an AO to reject the accounts of an assessee unless he comes to a determination that notified accounting standards have not been regularly Vollowed by the assessee. iii) The Accounting Standards of ICAI did not have any statutory recognition under the Act although it was binding under the Companies Act, 1956. (iv) The method of accounting followed by assessee in the present case, i.e. Project Completion Method was certainly one of the recognised methods and has been consistently followed by it. Considering the fa....
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....nsactions (Revised 2012) duly recognizes application of AS-9 in respect of real estate developer also ICDS-III is not applicable in respect of real estate developer. vi) Income Computation and Disclosure standards' (ICDS) notified by Central Government in exercise of power under section 145(2) cannot override binding judicial precedents of provisions of Act or Rules framed thereunder. vii) Reliance on Accounting Standard-7 is misconceived. viii) That guidance note on recognition of revenue by real estate developers is not binding." In support of each of the proposition several precedents have been relied upon. 9. We have given careful thought to the submission of the parties and perused the records. It is not in dispute that the assessee company is in the business of real estate as stated by the Ld. AO in the last sentence of para 2 of the assessment order. It is also admitted by the Ld. AO that notes to the account of the assessee mentioned that sale of land/flat is recognised when the possession of the land/flat is handed over to the buyer and company has adopted Project Completion Method for revenue recognition. In his statement recorded unde....