2016 (3) TMI 1440 - AT - Income Tax

Correct method of accounting - Addition on account of recognizing the income by applying the percentage of completion method as per Accounting Standard-7 issued by ICAI - HELD THAT - We note that assessee was following project completion method from the beginning for calculating its income from the projects and the department was accepting the same throughout, however, this year only the AO has not accepted this method without spelling out how this method distorts the projects. Admittedly, the assessee is not a contractor so revised AS-7 need not be followed by the assessee who is Real Estate Developer. As the construction is completed up to 53.95%, therefore, the project was not complete and real profits cannot be estimated from the same. The ld. CIT (A) has rightly held that the AO has not pointed out any discrepancy that method followed regularly by the assessee was distorting or under estimating the profits and since no such facts and figures have been brought on record by the AO, therefore, the method regularly followed by the assessee cannot be interfered with. Therefore, the percentage completion method applied by the AO cannot be applied in the case of the assessee. Therefore, in view of the above, we do not find any infirmity in the order of the CIT (A) and accordingly, we uphold the same. - Decided against revenue.

Summary

Issues:
Revenue's appeal against deletion of addition based on percentage completion method.

Analysis:
The revenue appealed against the deletion of an addition of Rs.55,37,847 made by the AO based on the percentage of completion method. The AO observed that the assessee, engaged in real estate, had estimated a profit of Rs.55,37,847 using this method. The CIT (A) deleted this addition, leading to the revenue's appeal.

During the assessment proceedings, the AO noted that the assessee had not declared any sales but had carried out construction work and collected advances against sales. The AO asked for the profit calculation using the percentage completion method, which the assessee provided. The AO then estimated the profit at Rs.55,37,847 and determined the total income at Rs.30,79,057.

The CIT (A) deleted the addition, and the revenue's DR relied on the AO's order. The assessee's AR argued that the ICAI's AS-7 applies to contractors, not real estate developers, and the assessee had consistently followed the project completion method. The AR cited various legal precedents supporting the method followed by the assessee.

The ITAT noted that the assessee had consistently used the project completion method for income calculation, which the department had accepted. The ITAT agreed with the CIT (A) that the AO did not show how this method distorted profits. Since the assessee was not a contractor, revised AS-7 need not apply. The ITAT upheld the CIT (A)'s decision, citing relevant judicial pronouncements and concluding that the percentage completion method applied by the AO was not suitable for the assessee.

In conclusion, the ITAT dismissed the revenue's appeal, affirming the CIT (A)'s decision to delete the addition based on the percentage completion method.