2011 (5) TMI 647 - AT - Income Tax

Completion of the project method of declaring profits - return of income the assessee showed work-in-progress relating to is the project. The assessee had also received advances in respect of the project - AO noticed that neither in this year nor in the assessment years 2005-06 and 2007-08 had the assessee declared any profit from the said project - AO said that buyer has made full payment of the price of the flat the assessee is bound to declare the profit on the sale of the flat notwithstanding that possession was not handed over to the buyer - Assesse contended that assessee is following the project completion method In accordance with the method adopted by the assessee he has shown the profit from the said project - completion certificate was submitted on 24-4-2006 which date falls within the year ended 3 1-3-2007 - all cases possession has been handed over after 3 1-3-2006 mostly in the months of May - Hence assesse claim was accepted - Thus appeal is allowed.

Summary

Issues:
Assessment of business income - Profit declaration from project - Application of AS-7 - Completion of project method - Recognition of revenue - Project completion timeline - Assessment criteria - Registration of flats for income accrual - Project completion confirmation - Possession handover timeline.

Analysis:

Assessment of Business Income:
The appeal pertains to the assessment of business income for the assessment year 2006-07 by an assessee, a partnership firm engaged in building development activities in Mumbai. The primary issue revolves around the declaration of profit from a specific project, Matunga, undertaken by the assessee during the relevant period.

Profit Declaration from Project:
The dispute arises from the Assessing Officer's observation that the assessee did not declare any profit from the Matunga project for the assessment year 2006-07 despite incurring a significant portion of the project cost and receiving advances during that period. The Assessing Officer sought justification from the assessee for not recognizing the profit from the project in the relevant year.

Application of AS-7 - Completion of Project Method:
The Assessing Officer contended that the assessee, being a builder-developer, is akin to a contractor and thus subject to Accounting Standard-7 (AS-7) for profit declaration. The Assessing Officer emphasized that delaying possession handover to buyers to postpone profit recognition is not permissible under accounting principles.

Recognition of Revenue - Project Completion Timeline:
The CIT (A) upheld the assessment, emphasizing that the project was substantially complete during the assessment year 2006-07, with significant progress and full payments received from buyers. The completion certificate submission and project approval further supported the contention that revenue recognition was warranted.

Assessment Criteria - Registration of Flats for Income Accrual:
The Tribunal considered the completion timeline, possession handover details, and registration of flats to determine the appropriate assessment year for profit recognition. The Tribunal highlighted that registration alone is not conclusive for income assessability, emphasizing the project completion method or percentage completion method for profit declaration.

Project Completion Confirmation - Possession Handover Timeline:
The Tribunal analyzed project accounts, material purchases, and sale prices to ascertain the completion status of the project. Considering possession handover dates and financial transactions, the Tribunal concluded that the project was completed in the subsequent assessment year, leading to the allowance of the assessee's appeal against profit addition.

This comprehensive analysis of the legal judgment highlights the key issues, arguments, and decisions made regarding the assessment of business income and profit declaration from a specific project by a builder-developer firm.