1996 (10) TMI 495 - AT - Income Tax

Summary

Issues Involved:
1. Method of accounting and addition of Rs. 41,060.
2. Disallowance of interest of Rs. 4,95,000.

Summary:

1. Method of Accounting and Addition of Rs. 41,060:
The first dispute concerns the method of accounting followed by the assessee and the addition of Rs. 41,060 by rejecting the assessee's 'Project Completion Method'. The assessee entered into an agreement with M/s. Unique Estates Development Company Limited for constructing three buildings. The assessee treated each building as a separate project and offered income for one building, while the other two were completed but no income was offered, citing pending sales and additional amenities. The Assessing Officer (AO) disagreed, stating the income accrues with the completion of the building and added Rs. 41,060 (5% profit on the construction costs of Rs. 2,61,256 for Panchvati I and Rs. 5,59,936 for Panchsheel II) to the income. The AO rejected the 'Project Completion Method' for reasons including non-acceptance by the department in the past, change in the method of accounting, non-conformity with Income-tax Law, and the principle that each year is a self-contained unit. The CIT (Appeals) upheld the AO's order, noting the arrangement with M/s. Unique Estates Development Co. Ltd. was to bypass the U.L.C.R. Act provisions. The Tribunal agreed, stating the assessee, being a contractor, cannot apply the project completion method, and the income accrues on completion of the work. The sum of Rs. 41,060 was rightly added to the income.

2. Disallowance of Interest of Rs. 4,95,000:
The second dispute involves the disallowance of interest of Rs. 4,95,000 related to the 'Girnar Apartments Project', which was under completion, and the assessee was following the 'Completion of Project' method. The assessee claimed the interest as an annual revenue expenditure. The AO and CIT (Appeals) disallowed the interest, arguing it should be accumulated and allowed only on project completion. The Tribunal referred to the Accounting Standards (AS-7) which categorizes finance charges as indirect costs to be accumulated and allowed in the year the project is completed. The Tribunal found no merit in the assessee's claim, stating the interest expenditure related to the project should be accumulated and allowed in the year the project is completed, consistent with the 'Project Completion Method'. The appeal was dismissed.