2013 (11) TMI 721 - AT - Income Tax

Rejection of Books of accounts - Method of accounting - Percentage completion method or project completion method - Held that - The Assessing Officer in this case rejected the accounts on the sole ground that the assessee has not followed Accounting Standard-7 and AS-9 for recognition of revenue which required him to deduce income on the basis of Percentage Completion Method by working out the profits at the end of each financial year as the projects are spread over in the series of financial years. The assessee admittedly is engaged in the business of construction as a builder/real estate developer. He has also maintained complete books of account, which are duly audited by duly qualified Chartered Accountants. The assessee has also maintained its account on mercantile basis by regularly applying Project Completion Method. The assessee in assessment for assessment year 2009-10 has also consistently followed the same method as was applied for assessment year 2009-10. The auditors have reported no change in method of accounting adopted by the assessee. The assessee has clearly demonstrated that it has regularly employed the project completion method of accounting - Accounting Standard-7 issued by the Institute of Chartered Accountants of India recognizes the position that in the case of construction contracts the assessee can follow either the project completion method or percentage completion method. It is the option of the assessee to follow either the completed contract method or the percentage completed method. The completed contract method in the present case in appeal followed by the appellant, therefore, could not be faulted with by the revenue authorities and on that basis it is neither correct nor justified to say that the accounts did not present correct and complete picture of its profits. The accounts rejected by the Assessing Officer on the basis adopted by him are thus not found tenable - recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. The Completion Contract method is one of such methods. Under the Completed contract method, the revenue is not recognized until the contract is completed. Under the said method, costs are accumulated during the course of the contract. The profit and Loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the contract is completed. The method leads to objective assessment of the results of the contract. On the other hand the Percentage of Completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under this method is determined by reference to the stage of completion and can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract - Decided in favour of Assessee.

Issues Involved:
1. Confirmation of income by adopting the "percentage completion method."
2. Rejection of the "project completion method" and audited figures of loss returned.
3. Eligibility for deduction under section 80IB of the Income Tax Act.
4. Non-adjudication of penalty proceedings under section 271AAA of the Income Tax Act.

Detailed Analysis:

Issue 1: Confirmation of Income by Adopting the "Percentage Completion Method"
The Ld. CIT (Appeals) confirmed the income of Rs. 90,43,690/- against the loss of Rs. 20,80,021/- by adopting the "percentage completion method" for the housing projects of the assessee company. The Assessing Officer issued a show cause notice under section 142(1) of the Act, stating that the assessee had not followed accounting standards AS-7 and AS-9 as required under sections 145(2) and 145(3). Consequently, the Assessing Officer invoked section 145(3) to reject the books of account and computed the profit using the percentage completion method. The Ld. CIT(A) upheld this approach, agreeing that the assessee should have followed AS-7 and AS-9 for a true and fair presentation of its accounts. However, the Tribunal found that the assessee had consistently followed the project completion method, which is an accepted accounting method as per the Supreme Court's rulings in CIT v. Bilahari Investment Pvt. Ltd. and CIT v. Hyundai Heavy Industries Co. Ltd. Thus, the Tribunal set aside the decision to adopt the percentage completion method and allowed the ground raised by the assessee.

Issue 2: Rejection of the "Project Completion Method" and Audited Figures of Loss Returned
The Ld. CIT (Appeals) rejected the project completion method adopted by the assessee and the audited figures of loss returned. The assessee argued that it had consistently followed the project completion method, which is permissible under accounting standards. The Tribunal noted that the project completion method was regularly employed by the assessee and that the real estate developer is not a pure contractor but a seller of flats/goods. The Tribunal found no justification for the revenue authorities to reject the project completion method and concluded that the accounts presented a true and complete picture of the profits. Therefore, the Tribunal set aside the rejection of the project completion method and the audited figures of loss returned.

Issue 3: Eligibility for Deduction Under Section 80IB of the Income Tax Act
The Ld. CIT (Appeals) held that the assessee was not eligible for deduction under section 80IB of the Income Tax Act while confirming the assessable income. However, since the Tribunal allowed the ground related to the adoption of the project completion method, it did not consider it necessary to render a decision on the eligibility and allowability of the deduction under section 80IB. The Tribunal noted that this issue should be considered in the year of completion of the project.

Issue 4: Non-Adjudication of Penalty Proceedings Under Section 271AAA of the Income Tax Act
The learned CIT (Appeals) did not adjudicate upon the initiation of penalty proceedings under section 271AAA of the Income Tax Act. The Tribunal treated the last ground in appeal as infructuous in these proceedings and dismissed it.

Conclusion:
The Tribunal allowed both appeals of the assessee, setting aside the decisions of the Ld. CIT (Appeals) and the Assessing Officer regarding the adoption of the percentage completion method and the rejection of the project completion method. The Tribunal upheld the assessee's consistent use of the project completion method and dismissed the grounds related to penalty proceedings as infructuous. The order was pronounced in the open court on 25/04/2013.

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