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2015 (2) TMI 439 - AT - Income TaxMethod of accounting - While the assessee admittedly follows project completion method which it claims to do so consistently the Revenue s stand is that the percentage completion method is to be adopted - Held that - The first is the transfer of all significant risks and rewards of ownership. Income arises on exchange. Risk and reward are incidents of ownership. Income thus can be said to have accrued when there has been i.e. given the binding legal contract transfer of these incidents wholly or substantially so. It is only then that the consideration received in exchange i.e. the compensation for the release/transfer of ownership can be said to have been so in one s own right and the income embedded therein accrued to the recipient. In fact it matters little even if the consideration stands not actually received inasmuch as a debt has inured in favour of the transferor. Then again income cannot be said to have arisen if uncertainty to any significant extent exists as to the ultimate realization of income so that the existence of a legal debt or a civil liability is itself not sufficient to hold of accrual of income. The Standard is thus set in terms broader than the legal concept of accrual though is principally in agreement therewith. ICAI has also issued a Guidance Note on recognition of income for real estate developers. The matter would thus stand to be decided on the basis of the entirety of the terms and the conditions of the contract/s to determine the question if there has been transfer of all significant risks and rewards of ownership coupled with the absence of the uncertainty associated with the realization of the revenue so that sale can be said to have taken place. The exercise having not been undertaken at any stage we only consider it fit and proper under the circumstances to restore the matter back to the file of the A.O. for the purpose to adjudicate the same per a speaking order qua each project after allowing proper opportunity to the assessee to state its case. We may clarify that in doing so we have in effect only sought to determine if the conditions of accrual of income as legally defined stand satisfied. AS-9 only articulates the antecedent conditions thereof and is in conformity with the legal concept of accrual of income. - Decided in favour of revenue allowed for statistical purposes.
Issues Involved:
1. Method of accounting for computing the assessee's income from construction projects. 2. Applicability of revised Accounting Standard (AS)-7 versus AS-9 for builders. 3. Consistency of the assessee's method of accounting with AS-9. 4. Determination of income accrual and recognition under AS-9. Issue-wise Detailed Analysis: 1. Method of Accounting for Computing the Assessee's Income from Construction Projects: The primary issue in this appeal is whether the assessee, a builder, should use the project completion method or the percentage completion method for accounting its income from various construction projects. The assessee has consistently used the project completion method, while the Revenue argues for the percentage completion method based on the revised AS-7 issued by the ICAI. 2. Applicability of Revised Accounting Standard (AS)-7 versus AS-9 for Builders: The Revenue's stance is that AS-7, applicable to all construction contracts, mandates the percentage completion method. However, the assessee, supported by the Expert Advisory Committee of the ICAI, contends that AS-7 applies only to contractors, not to builders who develop housing projects on their own account. Instead, builders should follow AS-2 for inventory valuation and AS-9 for income recognition. The CIT(A) accepted this view, noting that AS-9 recognizes both the project completion and percentage completion methods. 3. Consistency of the Assessee's Method of Accounting with AS-9: The Tribunal emphasized that each assessment year is an independent unit, and the correct income for that year must be taxed. The consistency of the assessee's past method of accounting is irrelevant if it does not comply with the accepted principles of cost determination. The Tribunal noted that AS-9, which applies to builders, allows both methods but emphasized that the method used must result in the correct reporting of operating profit and the state of affairs of the business entity. 4. Determination of Income Accrual and Recognition under AS-9: The Tribunal clarified that the key issue is whether the assessee's accounts are consistent with AS-9, which lays down principles for income recognition. The accrual of income is a matter of fact, and income can be said to have accrued when the right to receive it has arisen. The Tribunal highlighted that the transfer of significant risks and rewards of ownership is crucial for income recognition. The Tribunal found that the authorities below had not examined whether income had accrued under the relevant agreements. The matter was remanded to the Assessing Officer (A.O.) to determine if the conditions of income accrual, as per AS-9, were satisfied for each project. Conclusion: The Tribunal summarized that the income arising to the assessee during a particular period must be taxed for that period alone. Both the project completion and percentage completion methods could be valid, depending on the facts and circumstances. The Tribunal remanded the matter to the A.O. to adjudicate if the conditions of income accrual under AS-9 were met for each project, emphasizing that AS-9 applies to both methods but does not allow recognition of income that has not accrued. The Revenue's appeal was allowed for statistical purposes. Order Pronounced: The order was pronounced in the open court on August 28, 2014.
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