2012 (4) TMI 621 - AT - Income Tax

Established method of accounting - Held that - It is apparent that project completion method is established method of accounting which the assessee has been following consistently from the preceding so many years and the same has never been disturbed by the Revenue. Under the circumstances no infirmity in the order of the Ld. Commissioner of Income Tax (Appeals). Accordingly, we uphold the same.

Summary

Issues:
1. Revenue recognition policy of the assessee company.
2. Applicability of Accounting Standards -9 and AS-7.
3. Method of accounting adopted by the assessee company.
4. Consistency in following the accepted method of accounting.

Issue 1: Revenue recognition policy of the assessee company

The assessee company, engaged in property development, recognized revenue at the time of execution of sale deeds, following the method of debiting expenses under Work in Progress (WIP) until flats were completed for sale. The Assessing Officer contended that revenue should be recognized based on AS-7, the Construction Contracts standard, using the Percentage Completion Method. The additions made by the Assessing Officer were challenged by the assessee before the Ld. Commissioner of Income Tax (Appeals).

Issue 2: Applicability of Accounting Standards -9 and AS-7

The Ld. Commissioner of Income Tax (Appeals) observed that the assessee fell under the category of a real estate developer, not a construction contractor, thus making AS-9 applicable to the assessee. The Ld. Commissioner noted that the method of revenue recognition adopted by the assessee was consistent with AS-9 and the ICAI guidance note for real estate developers. The distinction between a construction contractor and a real estate developer was crucial in determining the applicable accounting standard.

Issue 3: Method of accounting adopted by the assessee company

The ITAT considered the submissions and records, acknowledging the consistent application of the revenue recognition method by the assessee as an accepted practice. The ITAT referenced legal precedents, including the Supreme Court judgments, supporting the project completion method as a recognized accounting practice. The ITAT emphasized the importance of following a consistent method of accounting, which was upheld in various tribunal decisions.

Issue 4: Consistency in following the accepted method of accounting

The ITAT highlighted the importance of consistency in accounting practices, as demonstrated by the assessee's adherence to the project completion method over several years. The ITAT cited tribunal decisions supporting the assessee's method of accounting, emphasizing that the Revenue had not challenged the method in previous years. The ITAT upheld the Ld. Commissioner of Income Tax (Appeals) decision in favor of the assessee, dismissing the appeals filed by the Revenue.

In conclusion, the judgment focused on the proper application of accounting standards, the distinction between real estate developers and construction contractors, and the significance of consistency in following accepted accounting methods. The ITAT's decision upheld the assessee's method of revenue recognition, emphasizing the legality and appropriateness of the project completion method in the context of property development businesses.