2017 (5) TMI 730 - AT - Income Tax

Method of accounting - development agreement - Adhoc addition of 3% of work in progress - assessee is regularly following project completion method of accounting for computation of its income - Held that - AO tried to invoke AS-7 of the accounting standard which is applicable to the contracts entered into during accounting period commencing on or after 01-04-2003. In the present case the contract was entered in 1993 by way of development agreement and the assessee has returned the working progress from AY 1999-2000 and department has accepted consistently. In view of these facts we direct the AO to compute the income on the basis of completed project method and not on percentage completion method of accounting. The appeal of the assessee is allowed.

Issues:
1. Adhoc addition of work in progress for assessment.
2. Application of completed project method vs. percentage completion method.
3. Interpretation of accounting standards for contracts entered into before 01-04-2003.

Issue 1: Adhoc addition of work in progress for assessment:
The assessee challenged the adhoc addition of 3% of work in progress at ?2,63,44,750 as confirmed by the CIT(A). The AO applied the percentage completion method despite the assessee consistently following the project completion method. The AO justified the adhoc estimation of income based on the completion status of the project and industry profit percentages. The CIT(A) upheld the AO's decision, citing the completion stage of the project and substantial sale proceeds received. The Tribunal noted the completion method followed by the assessee, the incomplete status of the project, and the consistency in accounting methods. Relying on relevant case law, the Tribunal directed the AO to compute income based on the completed project method, overturning the percentage completion method applied by the AO and CIT(A).

Issue 2: Application of completed project method vs. percentage completion method:
The Tribunal analyzed the consistency of the assessee in following the completed project method for income computation. The assessee had completed the project in subsequent years, disclosing profits accordingly. The Tribunal referred to a Bombay High Court decision supporting the completed contract method based on consistency. Additionally, the Tribunal cited a Supreme Court ruling emphasizing that the completed contract method need not be substituted by the percentage completion method, especially when the method was consistently followed. The Tribunal directed the AO to compute income based on the completed project method, considering the project's incomplete status during the assessment years.

Issue 3: Interpretation of accounting standards for contracts entered into before 01-04-2003:
The AO attempted to apply AS-7, applicable to contracts after 01-04-2003, to the assessee's contract from 1993. However, the assessee had consistently reported work in progress using the completed project method, which was accepted by the department in previous assessments. The Tribunal directed the AO to compute income based on the completed project method, aligning with the assessee's accounting practices and the historical acceptance of the method by the department. The Tribunal allowed the assessee's appeal, emphasizing the importance of consistency in accounting methods and rejecting the application of the percentage completion method based on the project's incomplete status during the assessment years.

In conclusion, the Tribunal allowed the assessee's appeals, directing the AO to compute income based on the completed project method and overturning the adhoc addition of work in progress based on the percentage completion method. The Tribunal's decision highlighted the significance of consistency in accounting methods and the inapplicability of certain accounting standards to contracts entered into before their effective dates.

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