TaxTMI 
TaxTMI 
2023 (1) TMI 1511
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....es itself liable to be assessed on an income of Rs.1,69,22,940/- as against the returned income of Rs.1,34,26,747/- before set off of brought forward losses under the facts and circumstances of the case. 2.(a) The learned CIT(A) erred in confirming the addition made by the assessing officer of Rs.34,96,193/- by changing the accounting policy regularly followed by the appellant under the facts and circumstances of the case. (b) The learned CIT(A) grossly erred in upholding the 'percentage completion method' applied by the assessing officer as against the 'project completion method' of accounting consistently followed by the appellant for recognizing revenue under the facts and circumstances of the case. (c) The authorities below failed to appreciate that the Accounting Standard - 7 'Construction Contracts' issued by the Institute of Chartered Accountants of India is not applicable to the appellant and consequently the addition made by applying said Accounting Standard needs to be deleted under the facts and circumstances of the case. (d) The learned CIT(A) failed to appreciate that as per the 'Guidance Note on Accounting for Real Estate Transactio....
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....ove and other grounds that may be urged at the time of the hearing of the appeal, the Appellant prays that the appeal may be allowed in the interest of justice and equity." 3. From the perusal of above grounds, essentially, the issue involved in the present appeal relates to addition made for the income from business by computing it based on percentage of completion method of accounting for recognizing the revenue and that the said addition has resulted in double taxation, not permissible in the law. 4. Brief facts of the case as culled out from records are that assessee is a company engaged in the business of real estate development and construction of residential apartments. Assessee filed its original return on 12.11.2014, which was revised on 28.11.2014 reporting 'Nil' income after setting off brought forward losses. Case of the assessee was selected under CASS for scrutiny assessment. For the same, statutory notices were issued and served on the assessee which were duly complied with by furnishing relevant details and documents, placed on record. In the course of assessment proceedings, ld. AO observed that assessee is following project completion method as against perce....
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.... (iii) DCIT v. Esteem Classic ITA No.842 of 2018 dated 22.03.2021 (Kar.) (iv) CIT v. Varun Developers (2022) 440 ITR 354 (Kar.) (v) CIT v. S.N. Builders & Developers (2021) 431 ITR 241 (Kar.) 7.1. Ld. Counsel also strongly relied on the decision of the Co-ordinate Bench of ITAT Bangalore Bench in the case of Trishul Buildtech & Infrastructures Pvt. Ltd. v. DCIT in ITA Nos.107 to 109/Bang/2022 dated 14.11.2022 and asserted that the present issue is squarely covered by the elaborate findings given by the Co-ordinate Bench. 7.2. Ld. Counsel further referred to the audited financial statements of the assessee placed in the paper book, both for the preceding years as well as the subsequent years to demonstrate that the method of accounting consistently followed by the assessee for revenue recognition has been based on completion of respective blocks and on their transfer of title through registration of sale deed. He referred to the summary of significant accounting policies forming part of the notes to the financial statements for the year ended 31.03.2014 for revenue recognition, wherein it is reported as "Revenue from sale of flats: Reve....
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....in double taxation, which is not permissible in the law. Assessee has recognized the revenue and paid taxes in various assessment years with respect to income arising from sale of flats in the respective years upon execution and registration of their sale deeds. He thus contended that presumption of ld. AO that income offered in the subsequent years is income of the impugned assessment year has resulted in double taxation. 7.5. It was further contended that project completion method applied by the assessee is the correct method for determining its income as the assessee is a builder and developer to which the revised Accounting Standard-9 applies and not the provisions of Accounting Stanards-7. The effect of following project completion method or percentage of completion method for recognizing revenue is of revenue neutral method and therefore no addition is called for. 7.6. Ld. Counsel also placed reliance on the assessment order passed u/s 143(3) of the Act dated 25.03.2014 for A.Y. 2011-12 and for A.Y. 2012-13 dated 23.03.2015 as well as for A.Y. 2017-18 dated 31.12.2019, all placed in the paper book, to demonstrate that no such presumption has been made by the ld. AO in t....
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....ue recognition from project completion method to percentage of completion method. It is in this impugned assessment year, i.e., A.Y. 2014-2015 alone that the ld. AO has resorted to adoption of percentage of completion method which has been challenged by the assessee. 9.3. We also observe that ld. Counsel could demonstrate that revenue recognition by the ld. AO by adopting method of percentage of completion method in the impugned year on the flats / work in progress has in fact been offered to tax by duly reporting the revenue from sale of flats in subsequent years when they got completed and transferred to the respective buyers under registered sale deed. In this respect a detailed reconciliation is placed on record in the paper book to demonstrate that revenue from sale of flats is being recognized in the audited profits and loss account. 9.4. From the perusal of the decision of the Co-ordinate Bench of the Bangalore Tribunal in the case of Trishul Buildtech & Infrastructures Pvt. Ltd. (supra) relied upon by the ld. Counsel, we find that its elaborate findings covers the issue in hand before us under similar facts and circumstances. The operative part of the said decision is....
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....e or possession until then and consequently the decision of the Hon'ble Supreme Court in Mysore Minerals Limited v. CIT (1999) 239 ITR 775 (SC) is not applicable on the facts and circumstances of the case. 16.25 In so far as some of the decisions at Page 37 of 44 of the CIT(A) order, there is a general statement that these cases are rendered on different facts. No thought process or application of mind is evident in this regard. The decision of the Hon'ble Supreme Court in the case of Mysore Minerals has been relied upon. It is absolutely not applicable as the CIT(A) himself held that a person in possession of the property in his own right would be the owner and the CIT(A) says that registration of land is a mere formality which is contradictory with the agreement with the purchasers. 16.26 Another decision referred to by the CIT(A) is the decision of the Mumbai Tribunal in DCIT v. Sudhir V. Shetty (2014) 50 taxmann.com 372 (Mum. - Trib.). In fact, the said decision is not against the assessee. The entire decision stems of out of right to seek specific performance. The assessee submits that as held by the Hon'ble Supreme Court in K.S. Vidyanadam v. Vai....
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....ructed in the initial years, however it may have been booked by a customer. Consequently, percentage completion method is not an appropriate method to determine the income. Thus, it is not at all correct to tax land when a particular flat has not even commenced when agreement of construction is co-terminus with that of the land and consequently the application of percentage completion method does not arise. 16.31 The authorities below have erred in as much as merely because the developer has followed the percentage completion method the land owner need not follow the same as each of them are independent assessable entities under the scheme of Act and are entitled to choose the method that is preferred by them. It is relevant to point out that the developer has entered into a construction contract with prospective purchasers which is at Pages 213 - 237 of the paper book and consequently AS-7 is applicable and he might have rightly applied percentage completion method. In so far as the assessee is concerned, it does not get into any construction activity, therefore the question of applicability of AS-7 does not arise and consequently percentage completion method is not appli....
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....me legal title is validly transferred to the buyer. The relevant extract of the guidance note is reproduced below - 4.3 Where transfer of legal title is a condition precedent to the buyer taking on the significant risks and rewards of ownership and accepting significant completion of the seller's obligation, revenue should not be recognised till such time legal title is validly transferred to the buyer. 16.37 It is clear from the Guidance Note that the application for a real estate project can happen when the four conditions precedents are cumulatively. In our opinion, the conditions have not been complied with and consequently it cannot be applied. 16.38 It is also noted that as per Accounting Standard - 9, for applicability of proportionate completion method there should more than one act and for applicability of completed contract method there should be only orra act. In the instant case, there is only one act involved which sale of the property and consequently completed contract method is applicable. 16.39 Further, section 145(2) of the Act has been amended w.e.f 01.04.2015 to substitute the word accounting standards to income computatio....
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....t is clear that percentage completion method and completed contract method are recognized methods of construction project only and not applicable to assessee who receives his consideration due to him on entering into JDA. Further, the Hon'ble Supreme Court in the case of CIT Vs. Hyundai Heavy Industries Company Ltd. (291 ITR 482), wherein held as follows:- "24. From the above it is clear that percentage completion method and compete contract method are both recognised method of construction project. Similar proposition was laid down by Hon'ble Supreme Court in the case of CIT v Hyundai Heavy Industries Co. Ltd (2007) 291 ITR 482 wherein Hon'ble. Apex 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 ....
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....nly revenue neutral as revenue shall collect necessary taxation when the assessee sold its share of constructed area by way of Registered Deed. At this point of time, it is appropriate to place reliance on the judgement of Hon'ble Supreme Court in the case of UOI & Ors. Vs. Exide Industries & Anr. In Civil appeal No.3545/2009 dated 24.4.2020 wherein held that "Accordingly, we hold that on the facts and circumstances of the case, thrusting of percentage completion method upon by the revenue on assessee is not sustainable. Hence, computation of gains adopting the said percentage completion method is not sustainable." 16.46 The Assessee has adopted the project completion method of recognition of revenue and has been consistently following it over the years. In fact, the, same was queried during the course of assessment proceedings for the AY 2014-15 and 2015-16 and assessment orders were passed without making any addition on this count. It is observed that it is not open to the revenue to reject the method which has been consistently followed by the Assessee merely because the learned assessing officer is of the opinion that another method is preferable. The following judgeme....
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....d method determines results only when the contract is completed. This method leads to objective assessment of the results of the contract. On the other hand, the percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under this method is determined by reference to the stage of completion of the contract. The stage of completion can be looked at undies 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." (underlining ours) After the above judgments of the Supreme Court it cannot be said that the project completion method followed by the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the Income Tax Act. Accounting Standards 7 (AS7) issued by the Institute of Chartered Accountants of India also recognize the position that in the case of construction contracts, the assessee can follow either the project compl....
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.... is a principle of law that this cannot be permitted, and there is abundant authority reiterating that principle. Thirdly, the same principle - namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light -or ingenuity might suggest some traverse which had not been taken." These observations were made in a case where taxation was in issue. 12. This Court in Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 stated: ". . . At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity...." (p. 10) Assessments are certainly quasi-judicial and these observations equally apply. 13. We are aware of t....
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....ount, cannot by any stretch of imagination held to be a completed transaction. It is well settled law that agreement does not confer absolute title and merely enables the parties to pursue remedies available in law as per the contract. Thus, the offering of income on the conclusion of the transaction regularly is the correct and only method for computing the income in respect of the assessee. The assessee also gives an example in normal business transaction for other than property will it be income answer is no. For example, if the product is a machinery and the purchaser pays an advance of 50% of the agreed value and no work has started and remains an advance. Can at the amount be treated as proportionate income? The answer is an emphatic no. Any number of such examples is possible to demonstrate that a transaction of this nature especially when the contractual obligation contemplates termination of contract on failure of pay the consideration is clear indication that the computation and accrual of income takes place only on the completion of the transaction. It is not the case of the department that that assessee has received 100% money of the land and the department itself even ....
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....tter before us. 10. Further, Hon'ble jurisdictional High Court of Karnataka in the case of CIT v. Banjara Developers & Constructions P. Ltd. (supra) and other judgments listed above have dealt with similar issue, holding that "where assessee engaged in construction of flats so consistently follow completed contract method of accounting and said method had been accepted by the revenue authorities in past, there was no justification of part of the Assessing Officer to change the same and to determine the income of assessee on estimate basis in assessment year in question." 10.1. Also, Hon'ble jurisdictional High Court of Karnataka in the case of DCIT v. Esteem Classic (supra) while holding in favour of the assessee held after taking into account the fact that the revenue itself has recognized the completed contract method for computation of subsequent assessment years based on which substantial question of law is answered against the Revenue and in favour of the assessee. 10.2. Also in the case of CIT v. Varun Developers (supra), the Hon'ble jurisdictional High Court of Karnataka noted that u/s 145(1) of the Act, income chargeable under the head profits and gains of business....