2013 (11) TMI 1711 - HC - Income Tax

Accrual of Income - Addition of amount in business income by computed percentage completion method - Question of applicability of AS-7 by ICAI - HELD THAT - the income in the instant case is to be computed as per system of accounting followed by the assessee or as per accounting followed by the assessee or as per accounting standard AS-7 for charging of income tax. Therefore, as per the provisions of section 145 of the Act the business income is assessable under the Income Tax Act to be computed according to the consistent system of accounting followed by the assessee unless such system is defective and / or from such system of accounting, profit cannot be deduced. The option for choosing the system of account lies with assessee provided the system is consistently followed and non-defective system. Thus, provisions of AS-7 cannot override the provisions of Section 145 so far as the computation of business income for the determination of income is concerned. In Court's view, even a project completion method is also a recognized system of accounting. Simply the Institute of Chartered Accountants of India has recommended percentage completion method does not mean that project accounting or the same is a defective system of accounting. Therefore, the same is upheld and the appeal of the Revenue is dismissed. Thus it has been found that the assessee is consistently following accounting system of percentage completion method, which is permissible and accepted by ICAI and CBDT with respect to construction work The decision in the case of Nandi Housing (P.) Ltd. v. Dy. CIT 2003 80 TTJ (Bang) 750 2003 (4) TMI 224 - ITAT BANGALORE-C followed. Hence, present appeal is dismissed - Decided against the Revenue.

Summary

Issues:
1. Whether the Appellate Tribunal correctly deleted the addition of Rs. 1,66,70,811 made on account of business income by the computed percentage completion method?
2. Whether the Appellate Tribunal correctly held that the Accounting Standard 7 as prescribed by ICAI is not applicable to the assessee?

Analysis:

Issue 1:
The appellant, a construction business owner, filed income for AY 2006-07. The Assessing Officer found discrepancies in income offered against projects undertaken by the appellant. The AO assessed the total income at Rs. 2,00,01,137, including an addition of Rs. 1,66,70,811 using the percentage completion method. The CIT(A) directed deletion of this addition as the appellant consistently followed the project completion method, which was recognized by CBDT. The ITAT upheld the CIT(A)'s decision. The appellant argued that both accounting systems cannot be used for the same income source. However, the High Court noted that the appellant regularly followed the project completion method, and the ITAT's decision was based on the Vraj Developers case, which was not challenged further. The High Court upheld the ITAT's decision, stating no error was found, and dismissed the appeal.

Issue 2:
The High Court emphasized that the appellant consistently followed the project completion method, which was recognized and approved by the CBDT. The CIT(A) observed that the Assessing Officer's decision was not justified as the appellant reported substantial profits in subsequent years using the same method. The ITAT also relied on the Vraj Developers case, stating that the choice of accounting method lies with the assessee if consistently followed. The High Court agreed with the ITAT and CIT(A) that the appellant's method was valid, and no error was found in their decisions. As the appellant's accounting system was not defective and consistently followed, the High Court upheld the deletion of the addition of Rs. 1,66,70,811. The High Court concluded that no substantial question of law arose, and the appeal was dismissed.