2010 (5) TMI 697 - AT - Income Tax

Computation of business income - choosing the system of accounting - Addition made on the basis of percentage of completion method as per revised Accounting Standard-7 (AS-7), the assessee is engaged in the business of builder and developer - CIT(A) held that it is AS-9 that is applicable to the case of the assessee HELD THAT - As undisputed appellant is a developer and not a contractor. A reading of section 145 of the Act shows that the business income which is assessable under the income Tax Act is to be computed in accordance with the consistent system of accounting followed by the assessee unless such system of accounting is defective and /or from such system of accounting, profit cannot be deduced. Thus, in our considered opinion, the option for choosing the system of account is with the assessee and not with the Learned Assessing Officer provided the system chosen by the assessee is consistently followed by him and such system is not a defective system Provisions of AS-7 cannot override the provisions of section 145 in so far as the computation of business income under the Income Tax Act for the purpose of determining assessable income is concerned. A reading of section 145 of the Act shows that the business income which is assessable under the income Tax Act is to be computed in accordance with the consistent system of accounting followed by the assessee unless such system of accounting is defective and /or from such system of accounting, profit cannot be deduced. We find that AO has brought no material on record to show that the system of accounting adopted by the assessee for the year under appeal was not consistently followed by the assessee or the system adopted was a defective system. In our considered view, even a project completion method is also a recognised system of accounting. Simply, The Institute of Chartered Accountants of India has recommended percentage completion method does not mean that project completion method if consistently followed by the assessee, the same is not a bonafide system of accounting or the same is a defective system of accounting. The CIT (A) has recorded a finding after perusing the assessment records of the subsequent years that the assessee has offered for taxation its income in the subsequent year as per the consistent system of accounting followed by the assessee. Therefore, we do not find any error in the order of the CIT (A) and therefore, the same is upheld and the appeal of the revenue is dismissed.

Issues Involved:
1. Applicability of Accounting Standard-7 (AS-7) versus Accounting Standard-9 (AS-9) for revenue recognition.
2. Method of accounting for work-in-progress and revenue recognition.
3. Justification for the addition made by the Assessing Officer based on percentage completion method.
4. Disallowance of specific expenses and levy of interest under sections 234A, 234B, and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Applicability of AS-7 versus AS-9:
The primary issue is whether AS-7, which pertains to construction contracts, applies to the assessee, who is a builder and developer. The Assessing Officer (AO) applied AS-7, asserting that the assessee should recognize revenue based on the percentage of completion method. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Tribunal found that AS-7 is applicable to contractors and not to builders or developers constructing properties on their own account. The Tribunal upheld that AS-9, which deals with revenue recognition in general, is applicable to the assessee.

2. Method of Accounting for Work-in-Progress and Revenue Recognition:
The AO contended that the assessee should have recognized income based on the percentage completion method, leading to an addition of Rs. 36,77,819/-. The CIT(A) observed that the assessee followed AS-2 for valuing closing inventory and AS-9 for revenue recognition, which is appropriate for a builder. The assessee recognized revenue when the sale deed was executed or possession was given, rather than on the project completion basis. The Tribunal agreed with this approach, noting that the assessee's method was consistent and not defective.

3. Justification for Addition by AO Based on Percentage Completion Method:
The AO's addition was based on the assumption that the project completion method was incorrect. However, the CIT(A) and the Tribunal found that the project was at an early stage, with substantial work carried out in subsequent years. The Tribunal emphasized that the AO did not provide evidence that the assessee's accounting method was inconsistent or defective. The Tribunal concluded that the AO's application of the percentage completion method and the resulting addition lacked a legal basis, as the assessee's method complied with the proper accounting standards and recognized substantial revenue in subsequent years.

4. Disallowance of Specific Expenses and Levy of Interest:
The assessee's cross-objection included the disallowance of Rs. 25,000 out of various expenses and the levy of interest under sections 234A, 234B, and 234C. However, during the hearing, the assessee chose not to press these grounds. Consequently, the Tribunal dismissed these grounds for want of prosecution.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 36,77,819/- made by the AO, affirming that AS-7 does not apply to the assessee and that the assessee's method of accounting was consistent and appropriate. The appeal by the revenue and the cross-objection by the assessee were both dismissed.

← Previous Next →