2016 (7) TMI 9 - AT - Income Tax

Adoption of method of accounting - adoption of 8% of the construction cost under work-in-progress method - whether Project Completion Method adopted by the assessee is correct or Percentage of Completion Method adopted by the Assessing Officer is correct to determine the revenue and costs of a project? - Held that - The mere fact that there does exist a method of accounting for profits of each year is no justification for rejecting an equally recognized method of accounting whereby the profits of the adventure/project are determined when the whole adventure/project is completed; being consistently followed by an assessee, without suffering from an infirmity/ defect calling for a rejection of the same for the reason that true/fair profits of the adventure/project being not deducible thereby. The Assessing Officer having not drawn any finding that the accounts of assessee suffer from any defect nor that from the method of accounting followed by assessee, true/correct profits of assessee cannot be deduced and the assessee having been following the completed project method consistently, which being a recognized method of accounting, the assessee s method of accounting cannot be rejected nor is there any justification for estimating assessee s profits of the year from the assessee s business activity of building construction by resorting to applying of percentage of profit to the work-in-progress of the year. In view of the above discussion, we set aside the orders of authorities below and direct the Assessing Officer to accept the method adopted by the assessee for all the assessment years. - Decided in favour of assessee Charging of interest under section 234A - Held that - The interest under section 234A is chargeable from the date of expiry of the notice period given under section 153A to the date of completing the assessment under section 143(3) r.w.s. 153A of the Act.The interest under section 234B is to be levied only on the additional tax levied on the enhanced income determined under section 143(3) r.w.s. 153A of the Act. Therefore, the period of charging of interest should be from the date of determination of income under section 143(1) or 143(3) to the determination of enhanced income under section 143(3) r.w.s. 153A of the Act. Accordingly, the Assessing Officer is directed to verify the period of charging interest and decide the issue afresh. Accordingly, this ground of appeals filed by the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Adoption of 8% of the construction cost under work-in-progress method.
2. Validity and applicability of the "Project Completion Method" versus the "Percentage of Completion Method" for revenue recognition.
3. Levy of interest under sections 234A and 234B of the Income Tax Act, 1961.

Detailed Analysis:

1. Adoption of 8% of the Construction Cost Under Work-in-Progress Method:
The assessee, engaged in real estate, was subject to a search on 02.07.2010. The original return filed showed a total loss, but the assessment concluded with a significant addition to the income. The assessee contested this, arguing that the additions were not based on any incriminating evidence found during the search. The Tribunal noted that both the Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)] had adopted an 8% construction cost under the work-in-progress method, which the assessee disputed, citing the "Project Completion Method" as their consistent accounting practice.

2. Validity and Applicability of the "Project Completion Method" Versus the "Percentage of Completion Method":
The main contention was whether the "Project Completion Method" adopted by the assessee was correct or if the "Percentage of Completion Method" adopted by the A.O. was appropriate for determining revenue and costs. The Tribunal referred to the case of Unique Enterprises v. ITO, where it was held that the Accounting Standards (AS) 7 issued by the Institute of Chartered Accountants of India (ICAI) applied only to contractors and not to builders and real estate developers. The Tribunal emphasized that the project completion method is a recognized method of accounting that the assessee had consistently followed. The Tribunal found no evidence that the assessee's method resulted in an underestimation of profit. Additionally, the Tribunal referenced the case of Awadhesh Builders v. ITO, which supported the project completion method for real estate developers, distinguishing it from contractors.

3. Levy of Interest Under Sections 234A and 234B of the Income Tax Act, 1961:
Regarding the levy of interest under section 234A, the Tribunal noted that the interest should be charged from the date of expiry of the notice period under section 153A to the date of assessment completion under section 143(3) read with section 153A. For interest under section 234B, it should be levied on the additional tax from the date of determination of income under section 143(1) or 143(3) to the determination of enhanced income under section 143(3) read with section 153A. The Tribunal directed the A.O. to verify and decide the period of charging interest afresh.

Conclusion:
The Tribunal set aside the orders of the lower authorities, directing the A.O. to accept the project completion method adopted by the assessee for all relevant assessment years. The Tribunal also provided specific directions regarding the levy of interest under sections 234A and 234B, allowing the appeals filed by the assessee for statistical purposes.

Order Pronouncement:
The order was pronounced on 29th April 2016 at Chennai, allowing all the appeals filed by the assessee for statistical purposes.