2016 (12) TMI 1538 - AT - Income Tax

Addition of 10% of work in Progress - Method of accounting - AO following percentage completion method as against the project completion method adopted by the assessee - postponement of tax liability - assessee submitted that Accounting Standard AS-7 issued by the Institute of Chartered Accountants of India(ICAI) is applicable to contractor and not to builder - Held that - It is not shown by learned DR that Government has prescribed adoption of Percentage completion method of accounting for builders u/s 145 and the builders cannot follow project completion method of accounting within the mandate of Section 145 of the Act. It is also not shown that project completion method followed by the assessee is in infringement of cash or mercantile method of accounting as stipulated u/s 145 of the Act. The Revenue has accepted the project completion method in the immediately preceding two years i.e. assessment year 2009-10 and 2010-11. It is also not shown by learned DR that the project completion method of computing income is not allowed by the provisions of the Act or it does not yield in computing correct income of the assessee. It is well settled that project completion method is one of recognized method of accounting. After considering the various case laws cited by the assessee based on peculiar facts of the case, we are of the considered view that consistency has to be followed as the Revenue has accepted the project completion method in the past . The entire profit from this project is stated to have been offered for taxation and due taxes are stated to have been paid to the Revenue albeit in assessment year 2014-15. In our considered view in order to render substantial justice and fair play in the instant case keeping in view peculiar facts and circumstances of the case, we are inclined to accept the appellate order of the ld. CIT(A) subject to verification by the A.O. that the entire profits earned by the assessee from this project Quantum Tower in totality has been offered for taxation and due taxes on this project were duly paid to Revenue as contended by the assessee , albeit in the succeeding years by following project completion method , (including, inter-alia, profit earned on sales of ₹ 42.10 crores as well on closing stock of ₹ 29.50 crores) for which the assessee is directed to produce relevant evidence before the AO to substantiate that entire income from this project in totality has suffered tax and no prejudice is caused to the Revenue . In view of our detailed discussion and reasoning as detailed above, the appeal filed by the Revenue is dismissed subject to verification by the A.O. that the entire profits from this project has been offered for taxation by the assessee albeit in succeeding years and due taxes have been paid by the assessee to the Revenue with respect to the project Quantum Tower , on Rambaug, S.V. Road, Malad (W), Mumbai. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the CIT(A) was justified in deleting the addition of 10% of work in progress made by the AO by following the percentage completion method instead of the project completion method adopted by the assessee.

Issue-Wise Detailed Analysis:

1. Deletion of Addition by CIT(A):

The primary issue revolves around the method of accounting for income from the construction project 'Quantum Tower' undertaken by the assessee. The assessee followed the 'project completion method,' offering income for taxation upon project completion. The Revenue, however, contended that the 'percentage completion method' should be used, which would result in the assessee’s income being taxed annually based on the work completed during the year.

The AO, relying on the decision in Champion Construction Company v. ITO, added 10% of the closing work-in-progress to the assessee's income, arguing that this method prevents indefinite postponement of tax liability. The AO computed the income at ?3,99,34,225 and added it to the assessee's income. The assessee argued that the 'project completion method' was consistently followed and accepted by the Revenue in preceding years (2009-10 and 2010-11), and no income was offered for taxation in those years as the project was incomplete.

The CIT(A) accepted the assessee's contention, emphasizing the principle of consistency. Since the Revenue had accepted the 'project completion method' in previous years, it could not change the method in the impugned year. The CIT(A) held that the assessee, being a builder, could follow the 'project completion method' and offer income for taxation upon project completion. The appellate order dated 23-07-2014 by the CIT(A) thus deleted the addition made by the AO.

2. Revenue's Appeal to the Tribunal:

Aggrieved by the CIT(A)'s order, the Revenue appealed to the Tribunal. The Revenue's DR argued that the 'percentage completion method' should be used for accurate income computation and relied on the AO's assessment order. The assessee's counsel reiterated that the 'project completion method' was consistently followed and accepted by the Revenue in earlier years, and all due taxes were paid to the Revenue in subsequent years upon project completion.

The Tribunal noted that the assessee consistently followed the 'project completion method,' which was accepted by the Revenue in preceding years. The Tribunal observed that the assessee paid all due taxes on the project income, albeit in subsequent years. The Tribunal referenced various case laws supporting the 'project completion method' for builders, including CIT v. Manish Build Well (P) Ltd. and Awadhesh Builders v. ITO, which recognized the method as a legitimate accounting practice for builders.

The Tribunal emphasized that the Revenue did not provide evidence that the 'project completion method' was used to evade taxes or postpone tax liability indefinitely. It was not shown that the Government prescribed the 'percentage completion method' for builders under Section 145 of the Act. The Tribunal concluded that consistency should be maintained, and the 'project completion method' followed by the assessee in earlier years should be accepted.

3. Tribunal's Final Decision:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order. However, the Tribunal directed the AO to verify that the entire profits from the project 'Quantum Tower' were offered for taxation and due taxes were paid in subsequent years. The assessee was instructed to provide relevant evidence to substantiate its claims before the AO. The AO was directed to grant the assessee a proper opportunity of being heard in accordance with the principles of natural justice.

In conclusion, the Tribunal affirmed the CIT(A)'s decision to delete the addition made by the AO, subject to verification by the AO that the entire profits from the project were duly taxed in subsequent years.

Order Pronounced:

The appeal filed by the Revenue in ITA No. 6178/Mum/2014 for the assessment year 2011-12 was dismissed, as indicated above. The order was pronounced in the open court on 19th December 2016.