2013 (4) TMI 259 - AT - Income Tax

Addition on account of business income by computed percentage Completion Method - CIT (A) deleted the addition - whether the A.O. is justified in changing the method of accounting of its profits in the year under consideration particularly when profits have been accounted for by appellant on the basis of project completion method in the subsequent year i.e. A.Y. 2007-08? - D.R. submitted assessee was following two separate methods for income taxable under one head following the percentage completion method in one and project completion method in other - Held that - CIT (A) has given a finding that assessee has disclosed in A.Y. 2007-08 profits on the basis of project completion method. He has further given a finding that the system of accounting which has been followed by the assessee has been accepted in A.Y. 2005-06 in the scrutiny assessment. He has further noted that the assessee is acting as developer of property and therefore Accounting Standard 7 as prescribed by ICAI are not applicable to the assessee. The assessee has been consistently and regularly employing the project completion method and the Department has also accepted the said method in the past. Further the Revenue has not pointed out any defect in the system of accounting followed by assessee. As decided in Vraj Developers 2010 (5) TMI 697 - ITAT AHMEDABAD the option for choosing the system of account is with the assessee and not with the A.O. 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 income is concerned. Thus as A.O. 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. 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. As the Revenue could not controvert the findings of CIT (A)no reason to interfere with the order of CIT (A) - appeal of the Revenue is dismissed.

Summary

Issues:
- Dispute over the method of accounting for business income
- Applicability of Accounting Standard 7 (A.S.7) in construction contracts
- Consistency in the method of accounting chosen by the assessee
- Acceptance of the method of accounting by the Revenue in previous assessments

Analysis:
1. Dispute over the method of accounting for business income:
- The Revenue challenged the deletion of an addition made on account of business income using the percentage completion method.
- The assessee had used project completion method for some concerns and percentage completion method for others.
- The Assessing Officer (A.O.) contended that the income had accrued to the assessee and should be recognized using the percentage completion method.
- The CIT (A) deleted the addition, stating that the assessee's consistent use of project completion method was acceptable.

2. Applicability of Accounting Standard 7 (A.S.7) in construction contracts:
- The A.O. relied on A.S.7 and a Delhi High Court judgment, arguing for the use of the percentage completion method.
- However, the CIT (A) found that A.S.7 did not apply as the assessee was a developer, not a contractor under a construction contract.
- The CIT (A) highlighted that the Supreme Court emphasized deriving real income from the chosen method, and the department should respect the assessee's regular method unless it distorts the assessment.

3. Consistency in the method of accounting chosen by the assessee:
- The CIT (A) noted that the assessee consistently employed the project completion method, which was accepted in previous assessments.
- The co-ordinate Bench cited that the choice of accounting method lies with the assessee if consistently followed and not defective.
- The Tribunal upheld the CIT (A)'s decision, emphasizing that the Revenue failed to show any error in the chosen method.

4. Acceptance of the method of accounting by the Revenue in previous assessments:
- The CIT (A) and the co-ordinate Bench highlighted the Revenue's acceptance of the assessee's method in prior assessments.
- The Revenue could not challenge the findings, leading to the dismissal of the appeal.

In conclusion, the dispute revolved around the method of accounting for business income, with the Revenue advocating for the percentage completion method while the assessee consistently used the project completion method. The judgment emphasized the assessee's right to choose a method as long as it was consistent and not defective, ultimately leading to the dismissal of the Revenue's appeal.