2012 (10) TMI 173 - AT - Income Tax

Applicability of Accounting Standards - revised AS-7 prescribing percentage completion method OR AS-9 which provides for project completion method - assessee is a real estate developer - Held that - As decided in Awadhesh Builders Versus Income-tax Officer, Ward 15(2)(4), Mumbai 2009 (12) TMI 665 - ITAT MUMBAI in terms of revised guidelines described in AS-7, the income could be accounted only on completion of the project when the flats were sold. It was observed that since the assessee had followed one of the prescribed methods and the same method had been accepted in the earlier years, the method could not be changed by the AO in the subsequent year - as in the present case the undisputed facts in the case remain that project is completed only upto 16% & also the assessee has option to adopt work completion method( as decided in case supra) the income could not be assessed even with reference to AS-7. Moreover, the other undisputed fact is also not controverted that assessee did not sell any portion of the impugned project and has started earning lease rental from the said project on long term basis. Therefore, keeping in view all these facts, CIT(A) has rightly deleted the addition - against revenue. Interest received on FDR - Held that - CIT(A) has rightly decided that since the assessee has capitalized all the cost of the project, the interest earned by it from FDR cannot be set off against interest paid - against assessee

Summary

Issues involved:
1. Application of Accounting Standards - AS-7 and AS-9 in real estate development.
2. Treatment of stock in trade as capital asset for long-term lease income.
3. Assessment of interest income separately under Income from other sources.

Issue 1: Application of Accounting Standards - AS-7 and AS-9 in real estate development.
The case involved a real estate developer's appeal against the assessing officer's addition of income based on percentage completion method under AS-7. The developer argued that AS-7 was not applicable as it was not a contractor for others but constructing buildings on its own. The developer contended that income should be recognized only on project completion, citing a Tribunal decision. The developer also converted stock in trade into a capital asset for long-term lease income, following a Supreme Court decision. The CIT(A) accepted the developer's method and deleted the addition, emphasizing the completed contract method. The Tribunal upheld the CIT(A)'s decision, considering the project's 16% completion and lease rental earnings, concluding that the addition was rightly deleted.

Issue 2: Treatment of stock in trade as capital asset for long-term lease income.
The assessing officer added interest income separately under Income from other sources, as the developer did not pay interest on the FDR amount from borrowed funds. The CIT(A) upheld this addition, stating that interest earned could not be set off against interest paid on borrowed funds, as the FDRs were from the developer's surplus funds. The Tribunal affirmed the CIT(A)'s decision, noting that interest on loans for asset creation was no longer revenue expenditure once rental income was earned, thus disallowing netting of interest amounts.

Issue 3: Assessment of interest income separately under Income from other sources.
The developer's appeal against the CIT(A)'s decision on interest income was dismissed by the Tribunal. The Tribunal agreed with the CIT(A) that interest earned from FDR, when the project's costs were capitalized, could not be set off against interest paid, resulting in the dismissal of the developer's appeal. Ultimately, both cross-appeals were dismissed by the Tribunal, affirming the decisions on the application of accounting standards, treatment of stock in trade, and assessment of interest income separately.