2016 (9) TMI 1494 - AT - Income Tax

Income recognition - percentage completion method OR project completion method - AO adopting percentage completion method for recognizing the income of the assessee instead of project completion method chosen by the assessee - case of the Revenue is that Accounting Standard 7 (A.S. 7) is mandatory and hence the assessee should have adopted percentage completion method - HELD THAT - We find that the assessee is a real estate developer and not a contractor as held by the Ld.CIT(A). A.O. in both the Assessment Years (A.Y.) has accepted the claim of the assessee that it is in the real estate business. On these facts we respectfully follow the decision of the Mumbai Bench of the ITAT in the case of Haware Constructions P.Ltd. vs. ITO 2011 (8) TMI 1080 - ITAT MUMBAI . Respectfully following the same we hold that A.S.-7 does not apply to the facts of the case. Hence the system of accounting followed by the assessee consistently over the years has to be upheld. - Decided against revenue.

Summary

Issues: Whether the Assessing Officer was correct in adopting the percentage completion method instead of the project completion method chosen by the assessee for recognizing income.

Analysis:

1. Nature of Business: The assessee, a company engaged in real estate, construction, and development of commercial complexes, was the subject of consideration for Assessment Years 2007-08 and 2009-10.

2. Disputed Issue: The primary issue revolved around the choice of accounting method for recognizing income. The Revenue contended that the assessee should adopt the percentage completion method as per Accounting Standard 7 (AS-7), while the assessee argued that AS-7 did not apply as it was a builder and developer, not a contractor.

3. Judicial Precedent: The Tribunal examined the nature of the assessee's business and found it to be a real estate developer, not a contractor as held by the lower authority. Citing a precedent from the Mumbai Bench, the Tribunal emphasized that the project completion method was acceptable for builders, and the assessee had consistently followed this method, offering income in the year of project completion.

4. Legal Position: The Tribunal concluded that AS-7 did not apply to the assessee's case, affirming the validity of the accounting system consistently followed by the assessee over the years. The decision highlighted the importance of following a recognized accounting method consistently and rejected the Revenue's argument in favor of the percentage completion method.

5. Outcome: Consequently, the Tribunal dismissed the Revenue's appeal for Assessment Year 2007-08 and allowed the assessee's appeal for Assessment Year 2009-10, upholding the project completion method for income recognition in line with the assessee's business as a real estate developer.

This detailed analysis of the judgment showcases the Tribunal's thorough examination of the issues involved, the legal principles applied, and the ultimate decision reached in favor of the assessee's chosen method of recognizing income in the context of its business activities.