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2015 (11) TMI 1217 - HC - Income TaxRejection of books of accounts - AO held that AS-7 is applicable to the Assessee confirmed by ITAT - ITAT setting aside the order of the CIT (A) deleting the addition of the sum received by the Assessee on account of advance from bookings and restoring the case to the file of the AO for a fresh decision - Held that - The settled legal position as far as Section 145 of the Act is concerned is that it is not open to an AO to reject the accounts of an Assessee unless he comes to a determination that notified accounting standards have not been regularly followed by the Assessee. As pointed out by the CIT (A) in the order dated 2nd July, 2010, the AS of the ICAI did not have any statutory recognition under the Act although it was binding under the Companies Act, 1956. The method of accounting followed by the Assessee in the present case i.e. project completion method was certainly one of the recognized methods and has been consistently followed by it. In the present case, there was therefore no good reason for the ITAT to have reversed the finding of the CIT (A). The only reason given in the impugned order of the ITAT is that risks and rewards of ownership were transferred to the buyers who had paid the booking advance amounts and in some cases these rights were transferred to third parties. However, this does not in any manner affect the treatment of the said amounts in the books of the Assessee. As noted hereinbefore, the expenses of construction were not debited to the P & L account of the Assessee. It was shown as cost of construction or block of buildings. It is only as and when a conveyance deed was executed or possession delivered that the receipt was shown as income. The explanation added by way of Notes to the Accounts was not taken note of by the ITAT when it came to the conclusion that the percentage completion method should apply to the Assessee. The other aspect that appears to have escaped the attention of the ITAT is that the Assessee offered to tax in the subsequent FY the amounts received and therefore there was no actual loss to the revenue. - Decided in favour of assessee. As far as AY 2006-07 is concerned, it is apparent that the ITAT in the impugned order lost sight of the fact that the advances received by the Assessee were in respect of a project that never took off. A part of the advance amount was returned in the following FY since the transaction itself fell through. In the circumstances the question of treating the amounts as income in the hands of the Assessee did not arise. No purpose was going to be served in remanding the matter to the AO for a fresh determination - Decided in favour of assessee.
Issues Involved:
1. Applicability of AS-7 (percentage completion method) versus AS-9 (project completion method) for AY 2005-06. 2. Treatment of advance booking amounts as income for AY 2006-07. 3. Rejection of books of accounts under Section 145 of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Applicability of AS-7 (percentage completion method) versus AS-9 (project completion method) for AY 2005-06: The primary issue was whether the ITAT was justified in applying AS-7 (percentage completion method) to the Assessee for AY 2005-06. The Assessee, engaged in real estate development, followed AS-9, recognizing revenue when significant risks and rewards of ownership were transferred. The AO applied AS-7, treating the Assessee as a contractor, and added Rs. 1,56,88,100 to the declared income using the percentage completion method. The CIT (A) reversed this, holding the Assessee as a developer and not a contractor, and directed the AO to compute income based on the Assessee's method. The ITAT, however, set aside the CIT (A)'s order, agreeing with the AO that risks and rewards were transferred upon receiving booking advances, and thus AS-7 should apply. The High Court noted that the Assessee consistently followed the project completion method, which is a recognized method under accounting standards. The Court emphasized that Section 145 (1) of the Act allows income computation in accordance with the regular accounting method employed by the Assessee. The Court cited the Supreme Court's decision in Commissioner of Income Tax v. Bilahari Investment P Ltd., which recognized both the completed contract method and the percentage completion method as valid. The Court found no reason for the ITAT to reverse the CIT (A)'s finding, as the Assessee's method was consistent and recognized. It was also noted that the amounts received were treated as advances in the Assessee's books, and the expenses were not debited to the P & L account. 2. Treatment of advance booking amounts as income for AY 2006-07: For AY 2006-07, the issue was whether the advance booking amounts should be treated as income. The AO added Rs. 10,76,70,521 to the Assessee's income, applying the percentage completion method. The CIT (A) allowed the Assessee's appeal, noting that construction had not started and no expenses were booked against the advances. The ITAT remanded the matter to the AO for fresh determination. The High Court observed that the advances were for a project that never commenced, and part of the advance was refunded in the following year. Therefore, treating these amounts as income was unjustified. The Court held that remanding the matter served no purpose, as the transaction fell through, and the amounts could not be treated as income. The Court ruled in favor of the Assessee, setting aside the ITAT's order for AY 2006-07. 3. Rejection of books of accounts under Section 145 of the Income Tax Act, 1961: The AO rejected the Assessee's books under Section 145, claiming the Assessee did not follow AS-7. The CIT (A) held that the Assessee's method was valid and recognized, and the rejection of books was not justified. The High Court reiterated that the Assessee's method was consistent with recognized accounting standards and that the AO could only reject the books if notified accounting standards were not followed. Since the Assessee's method was valid and consistently applied, the rejection of books was unwarranted. Conclusion: The High Court ruled in favor of the Assessee for both AY 2005-06 and 2006-07, setting aside the ITAT's orders. The Court held that the Assessee's method of accounting was valid and recognized, and the advances received could not be treated as income until the completion of the project or the execution of conveyance deeds. The appeals were allowed, with no order as to costs.
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