2015 (3) TMI 143 - AT - Income Tax

Income recognition - timing of the accrual of income - assessee claimed that the income is chargeable to tax at the time of registration of sale deeds to the buyers, the AO held such income to be taxable during the progress of contract itself, that is, on the basis of Percentage completion method - Held that - Assessee categorically stated before the AO during the course of assessment proceeding for the A.Y. 2005-06 that the construction stood completed in the year in question and the AO has recorded the same on page 3 of the assessment order. Similar position about the completion of the construction during the year can be seen from para 2.1 of the impugned order for this year, which has not been controverted by the ld. AR. Further, it is apparent from the agreements to sell between the assessee and buyers that risks and rewards of ownership were initially transferred, which is manifest from the terms and get corroboration from the fact that some of the buyers actually transferred their rights in construction to the third parties during the currency of construction. In such a situation and going by the afore-discussed jurisprudence, the assessee has an option to choose between the Percentage completion and the Project completion method. Since the assessee did not offer income under the Percentage completion method, and giving the benefit of choice to the assessee, we hold that the assessee ought to have shown income from the project Paras Down Town Centre in its return for the A.Y. 2005-06. As the AO has bifurcated the income from this project in two years, namely, the A.Y.s 2005-06 and 2004-05, we hold that the addition made by the AO in respect of income from this project for the A.Y. 2004-05 be deleted. It appears that the ld. CIT(A), while disposing of the appeal for the A.Y. 2004-05, lost sight of the fact that the AO determined total income for such year at ₹ 5.23 crore. The deletion of addition of ₹ 5.23 crore has resulted into the obliteration of even the returned income at ₹ 3,13,414, which is not correct and cannot be sustained. The components of the returned income need verification. If it is unrelated with the project, then it should be charged to tax. Further, the direction given by the ld. CIT(A) for including income from this project in the later years, at the time of execution of registered sale deeds, is also vacated because once income has been directed to be chargeable to tax in one year, then it cannot be charged to tax in a later or earlier years as well. The AO should also ensure that no income from this project, whether included by the assessee voluntarily or added by him, should form subject matter of assessment for any year other than the A.Y. 2005-06. If it is so included, then the same should be eliminated. The end result is that the income of the assessee from this project is chargeable to tax in entirety in the assessment year 2005-06. Appeal of the Revenue for the A.Y. 2006-07 is also tagged with the present set of appeals, which, we are disposing by a separate order. Ex consequenti, the impugned orders are set aside and the matter is sent back to the AO for framing the assessments afresh in conformity with our above directions. - Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Classification of the assessee as a Developer/Builder or Contractor.
2. Applicability of Accounting Standards (AS) and Guidance Notes.
3. Determination of the timing of income accrual.
4. Method of accounting for income recognition (Percentage completion vs. Project completion method).
5. Correct year of income taxation.

Detailed Analysis:

1. Classification of the Assessee:
The primary issue was whether the assessee should be classified as a Developer/Builder or a Contractor. The assessee entered into an agreement with landowners to develop a commercial complex and acquired ownership rights over the land for construction and sale. The agreement stipulated that the assessee had full rights to develop, construct, and market the property, indicating that the assessee was a Developer/Builder and not a Contractor. The distinction is crucial as it determines the method of income recognition.

2. Applicability of Accounting Standards and Guidance Notes:
The AO relied on the revised AS-7 (2002) and AS-9, which mandate the Percentage completion method for Contractors. However, the CIT(A) held that the revised AS-7 applied only to Contractors and not to Developers. The Guidance Note issued in 2006, which also applied to Developers, suggested recognizing revenue when significant risks and rewards of ownership were transferred to the buyer. The Tribunal noted that accounting standards and guidance notes issued by the Institute of Chartered Accountants of India (ICAI) do not determine taxability under the Income-tax Act, 1961, which is governed by statutory provisions.

3. Determination of the Timing of Income Accrual:
The core issue was the timing of income recognition. The AO argued that income should be recognized during the progress of construction (Percentage completion method), while the assessee contended that income should be recognized upon the registration of sale deeds (Project completion method). The Tribunal emphasized that income must be taxed in the year it accrues, which is when the right to receive it is finally acquired, typically when significant risks and rewards of ownership are transferred to the buyer.

4. Method of Accounting for Income Recognition:
The Tribunal reviewed whether the assessee could consistently follow either the Percentage completion method or the Project completion method. The Tribunal acknowledged that both methods have been judicially accepted, provided they are consistently followed. The Tribunal noted that the Project completion method allows income recognition upon completion or substantial completion of the project, while the Percentage completion method aligns income recognition with the progress of construction.

5. Correct Year of Income Taxation:
The Tribunal concluded that the assessee, having transferred significant risks and rewards to the buyers at the initial stage, should have recognized income in the year of project completion (A.Y. 2005-06). The AO's bifurcation of income into two years (A.Y. 2004-05 and A.Y. 2005-06) was incorrect. The Tribunal directed that the entire income from the project should be taxed in A.Y. 2005-06, and any income from this project included in other years should be eliminated. The Tribunal set aside the orders of the CIT(A) and remanded the matter to the AO for reassessment in accordance with these directions.

Conclusion:
The Tribunal held that the assessee was a Developer/Builder and not a Contractor, and income should be recognized in the year of project completion (A.Y. 2005-06) using the Project completion method. The Tribunal emphasized that accounting standards do not override statutory provisions for income determination under the Income-tax Act. The AO was directed to reassess the income accordingly, ensuring no income from the project is taxed in other years.

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