2017 (1) TMI 942 - AT - Income Tax

Method of account - project completion method - Addition of relatable to the reversal of the excess profits recognised as income in the post period - Mentioning that 16% is a higher side, the assessee proceeded to rectify the same by reducing 4% and offering in the return only 12% of profit. - Held that - There is no dispute on the fact of completion of the assessments of the earlier years to which the said amount of ₹ 20,46,764/- belongs. In our view, this kind of rectification / reversal of entries constitutes the amendment to the account unauthorizedly done by the management and it is outside the Accounting Standard (AS)-7, relied upon by the assessee. In the scheme of percentage completion method adopted by the assessee and the adjustments of this in the earlier assessment years is not proper as the final assessments, if any, can be done in the year in which the project is conclusively completed ie AY 2005-06. We find no mistake in the order of the CIT on this issue. Therefore, in our opinion, the CIT (A) s order on this issue is fair and reasonable and it does not call for any interference. Accordingly, grounds raised by the assessee are dismissed. - Decided against assessee

Issues:
1. Addition of excess profit recognized in past period
2. Adjustment to income from project on account of changes in accounting estimate
3. Double taxation issue
4. Enhancement of profit percentage from 12% to 16%

Analysis:
1. Addition of Excess Profit Recognized in Past Period:
The appellant contested the addition of ?20,46,734 representing reversal of excess profit recognized as income in the past period on the Pusalkar Project for the assessment year 2006-07. The appellant argued that the adjustment in profit percentage from 16% to 12% was justified due to unexpected demands from BMC. The Assessing Officer (AO) rejected the rectification attempts and disallowed the loss, stating that changing the profit percentage deviated from the consistent accounting method. The AO also highlighted that BMC's demand related to the next assessment year, thus the adjustment was not permissible. The CIT (A) upheld the AO's decision, emphasizing that rectifying entries in closed accounts was unauthorized and not in line with accounting standards. The ITAT agreed with the CIT (A) and dismissed the appeal, stating that the rectification was improper and outside the permissible scope.

2. Adjustment to Income from Project on Account of Changes in Accounting Estimate:
The appellant argued that adjustments to income from the project based on changes in accounting estimates should be allowed during the construction period, not only upon project completion. The AO, however, maintained that such adjustments should only be made upon project completion. The CIT (A) concurred with the AO's view, stating that adjustments related to events like BMC's demand should be reflected in the year when the event occurred, i.e., AY 2007-2008. The ITAT upheld the CIT (A)'s decision, emphasizing that rectifications should align with accounting standards and be done in the appropriate assessment year.

3. Double Taxation Issue:
Regarding the double taxation issue arising from BMC's demand of ?55,51,600, the CIT (A) acknowledged the potential for double taxation and directed the AO to allow corresponding relief. However, the CIT (A) only granted partial relief due to lack of evidence. The appellant raised concerns about the CIT (A)'s decision, but the ITAT did not find any fault with the CIT (A)'s order on this issue.

4. Enhancement of Profit Percentage from 12% to 16%:
The appellant contested the enhancement of profit percentage from 12% to 16%, citing BMC's demand as a reason for the adjustment. The CIT (A) held that BMC's demand should not impact the profits for the current year and should only affect the subsequent assessment year. The ITAT agreed with the CIT (A) and dismissed the appeal, stating that the adjustment was not justified and deviated from the consistent accounting method followed by the appellant.

In conclusion, the ITAT upheld the CIT (A)'s decision on all issues, dismissing the appeal of the assessee. The judgment emphasized the importance of adhering to consistent accounting methods and making adjustments in accordance with relevant accounting standards and the appropriate assessment year.

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