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Income Tax Appellate Tribunal, DELHI BENCH ‘B’ : NEW DELHI
Before: SHRI A.T. VARKEY & SHRI PRASHANT MAHARISHI
PER A.T. VARKEY, JUDICIAL MEMBER :
This is an appeal preferred by the revenue against the order of the CIT (Appeals)-XIII, New Delhi dated 29.02.2012 for the assessment year 2008-09.
The sole ground taken by the revenue is against the deletion of addition of Rs.55,37,847/- made on account of recognizing the income by applying the percentage of completion method as per Accounting Standard-7 issued by ICAI.
Brief facts of the case are that during the course of assessment proceedings, the AO observed that the assessee company is engaged in the business of real estate. The assessee filed its return of income on 22.09.2008 declaring the total income at loss of Rs.(-) 24,58,790/-. The case was selected for scrutiny and notice was issued and served on the assessee. In response to the notice, the AR of the assessee attended and furnished the details called for. The AO observed that as per Profit & Loss Account, no sales were declared during the year, however, the assessee had carried out construction work and collected advances against sales from customer. The AO further observed that the same was discussed in detail in the last assessment order for AY 2007-08. He observed that the profit of the assessee from the project was estimated by applying AS-7. The AO, therefore, asked the assessee to furnish the working of the profit as applied in the last year. The assessee’s representative attended the assessment proceedings and submitted the following working of percentage completion method:-
Total estimated sales Rs.8,38,92,000/- Total estimated cost Rs.7,29,63,555/- Estimated Profit Rs.1,09,28,445/-
Percentage Completion
Total cost incurred up to 31.03.2008 Rs.3,17,82,480/- Total cost of land Rs.l,15,13,006/- Land development charges Rs. 28,70,738/- Sub Total Rs.4,61,66,224/-
Percentage completed up to 31.03.2008 63.27%
Gross Profit (Net) to be recognized up to 31.03.2008 (as per calculation given by the assessee) Rs. 55,37,847/- The AO noted that as percentage completion method, profit of Rs.55,37,847/- was estimated and completed the assessment determining the total income at Rs.30,79,057/- as against the returned loss of Rs.24,58,790/-.
Aggrieved, the assessee filed an appeal before the CIT (A) and the CIT (A) deleted the addition made by the AO by applying percentage completion method.
Ld. DR for the revenue relied on the order of the AO.
Ld. AR for the assessee, while reiterating the submissions made before the ld. CIT (A), submitted the following arguments for deleting the addition :-
(i) That the ICAI issued Accounting Standard (AS) 7 - 'Construction Contract' in the year 1983 which was later on revised in the year 2002. The AS-7 laid down the principles of accounting for 'construction contracts' in the financial statements of the Contractors. As per the revised AS-7, the accounting was to be done as per percentage/progressive completion method. The revised AS-7 is applicable only to Contractors. (ii) That Recognition/identification of income under the Act is attainable by several methods of accounting including the completed contract method or the percentage of completion method. (iii) Every assessee is entitled to arrange its affairs and follow either the completed contract method of accounting or the percentage completion method of accounting and the same is binding on the department unless it is shown the chosen method distorts the profits. (iv) Under the mercantile system of accounting, the matching of expenses and revenue (matching concept) is required to be done on accrual basis. (Taparia Tools vs. JCIT 260 ITR 102 (Bom)) (v) That the method followed by the assessee company cannot be called as an unreasonable method and any change in the method is revenue neutral. Further, the tax department cannot change the method of accounting which was accepted by it over the years.
(vi) That the Government has not specified AS-7 in Section 145 of the Act and the taxpayer developer had been regularly, under a bonafide belief, employing Project Completion Method which is an accepted method of accounting. Accordingly, the AO cannot reject the accounts of the taxpayer under Section 145(3) of the Act. (vii) That the Mumbai Tribunal in the case of Champion Construction Co. and held that it would be appropriate to offer income tax in the year in which 80 percent of the construction was completed. Since the taxpayer admittedly completed only 53.95 percent of the construction it cannot be said that the taxpayer has substantially completed the project so as to recognize income under the Project Completion Method of accounting. (viii) That Bombay High Court in the case of CIT v. Tata Iron & Steel Co. Ltd., where it was held that the method of accounting followed by the taxpayer company cannot be said to be unreasonable, and that in such a case, even if a better method could be visualized, the method consistently followed should be accepted. (ix) That the Supreme Court in the case of CIT v. Realest Builders & Services Ltd.[200B] 170 TAXMAN 218 (SC) has held that the tax department needs to provide facts and figures that the impugned method of accounting adopted by the taxpayer results in underestimation of profits for changing the method of accounting under section 145 of the Act. Otherwise, it will be presumed that the entire exercise is revenue neutral. (LATEST JUDGEMENT - Unique Enterprises v. ITO [2010-TIOL-737-ITAT-MUM). (x) That recently, the Mumbai Bench of the Tribunal in the case of Unique Enterprises has held that the Accounting Standard (AS)-7 - 'Construction Contract' (revised) issued by the Institute of Chartered Accountants of India (ICAI) is applicable only to contractors and not to builders and real estate developers. Accordingly, the Project Completion Method followed by the taxpayer for recognizing revenue in the books of accounts cannot be regarded as an unreasonable. Further, the tax department cannot change the method of accounting as any change would be a tax neutral.
In view of the above, ld. AR for the assessee wants us not to interfere with the order of the ld. CIT (A).
We have heard both the sides and perused the material on record. We note that assessee was following project completion method from the beginning for calculating its income from the projects and the department was accepting the same throughout, however, this year only the AO has not accepted this method without spelling out how this method distorts the projects. Admittedly, the assessee is not a contractor so revised AS-7 need not be followed by the assessee who is Real Estate Developer. We have also gone through the following judicial pronouncements relied upon by the assessee :-
(i) Champion Construction Co. vs. First ITO – (1983) 5 ITD 495 (Bom.);
(ii) CIT, New Delhi vs. Realest Builders & Services Ltd. (2008) 170 taxman 218 (SC);
(iii) M/s. Unique Enterprises vs. ITO – 2010-TIOL-737-ITAT-Mum.
We concur with the CIT (A) that the ratio of the aforesaid judgments are applicable to the facts of the assessee’s case as the construction is completed up to 53.95%, therefore, the project was not complete and real profits cannot be estimated from the same. The ld. CIT (A) has rightly held that the AO has not pointed out any discrepancy that method followed regularly by the assessee was distorting or under estimating the profits and since no such facts and figures have been brought on record by the AO, therefore, the method regularly followed by the assessee cannot be interfered with. Therefore, the percentage completion method applied by the AO cannot be applied in the case of the assessee. Therefore, in view of the above, we do not find any infirmity in the order of the CIT (A) and accordingly, we uphold the same.
In the result, the appeal of the revenue is dismissed.
Order pronounced in open court on this 11th day of March, 2016.