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2014 (1) TMI 1182 - AT - Income TaxMethod of Assessment Held that - The assessment of subsequent assessment years also is done in accordance with the supplementary agreements - The Department cannot thrust the additional tax liability on the assessee by not recognising the supplementary agreements - The apparent agreement should be considered as true and correct unless there is an evidence to show that it is a device followed by the assessee to defer the taxability - Once the AO accepted the supplementary agreement in assessing the assessee s income in subsequent assessment years, for the assessment year under consideration it cannot be overlooked - The reason given by the AO for not considering the supplementary agreements is that the supplementary agreements are entered at the far end of the year - It is a business decision to enter into supplementary agreements in the interest of business of the assessee, the AO cannot thrust upon the assessee to pay tax though there is a valid agreement which was submitted before him - the assessee is following the same method of accounting consistently - The AO cannot thrust upon the assessee to pay tax in accordance with the original agreement without recognising the supplementary agreement. Rejection of method of accounting As per AS 7 Computation of profits Held that - The CIT(A) was of the opinion that the AO simply by rejecting the method of accounting followed by the assessee is not proper since assessments have been completed in other assessment years cases based on the same accounting method there was force in the finding of the ClT(A) for the reason that since the assessing officer rejected the method of accounting followed by the assessee but he accepted the same method of accounting followed by assessee in subsequent assessment year - The assessing officer has not given a clear finding mandated under section 145(3) of the Act and yet re computed the profit from the projects done by the assessee company - The additions made by the assessing officer are not supported by any facts and figures which can demonstrate that the impugned method of accounting policy adopted by the assessee company resulted in under estimation of profit - Although the assessing officer discussed in detail about the accounting aspects in his order, however no conclusion has been reached by the assessing officer. The assessing officer has taken estimated revenue from the projects without considering the fact that whether the units are sold or not. In other words, profit is being estimated on unsold stock also as pre revised AS 7 issued by the ICAI in the year 1983 specifically included companies undertaking construction activities on their own, builders and developers - As per revised AS 7 in the year 2002, such specific inclusion was missing thus, AS 7 does not apply to the builders and real estate developers. The method followed by the assessee company cannot be called as an unreasonable method and any change in the method would only be tax neutral. Validity of order u/s 143(3) of the Act Additions made Consistent accounting policy followed by assessee Held that - CIT(A)) found flaws in the computation and he has made the revised computation - he cannot substitute one more computation in place of assessee s computation as well as AO s computation - The assessee has recognised the income in accordance with the true terms of the agreement and if there is any inconsistency in recognising the income then only revenue authorities can disturb the same - Once the assessee recognised the income in accordance with the supplementary agreements, the CIT(A) cannot substitute his assessment to say that the assessee has postponed the tax liability - The CIT(A) observed that there is no basic deviation in the method followed by the assessee regarding recognising of income - However, he observed in the same breath that there is basic flaw in the method followed by the assessee to have threshold limit of 30% as the threshold limit can be differed by various means - When there is no deviation in recognising the income by the assessee, the CIT(A) cannot recompute the profit of the assessee by observing that there is basic flaw in the method followed by the assessee to have threshold limit of 30% as the said threshold limit can be differed by various means, which is unwarranted the order of the CIT(A) for the additions made is set aside decided in favour of Assessee.
Issues Involved:
1. Validity of the supplementary agreement for revenue recognition. 2. Correctness of the revenue recognition method employed by the assessee. 3. Justification of the additions made by the Assessing Officer (AO). 4. Legitimacy of the CIT(A)'s recomputation of profit. Detailed Analysis: 1. Validity of the Supplementary Agreement for Revenue Recognition: The Revenue contended that the supplementary agreement should not form the basis for revenue recognition for the A.Y. 2008-09, arguing that the figures adopted during search proceedings should hold. They claimed that the supplementary agreements were submitted to the Andhra Pradesh Housing Board (APHB) after 31-03-2008 and thus lacked legal force until approved by APHB. The assessee, however, argued that the supplementary agreements were valid, entered into on 18-03-2008 for Bit III and 10-03-2008 for Bit IV, and should be considered for revenue recognition. The CIT(A) observed that the supplementary agreements were in line with commercial thinking and aimed at maximizing revenue, thus rejecting the AO's dismissal of these agreements as an afterthought. 2. Correctness of the Revenue Recognition Method Employed by the Assessee: The assessee followed a revenue recognition method based on achieving a threshold limit of 30% of the estimated cost and sales. The AO rejected this method, claiming it allowed the assessee to manipulate profits and defer tax liabilities. The CIT(A) also found flaws in the 30% threshold method, suggesting it did not accurately reflect the profits accrued. However, the assessee argued that this method was consistent with the guidelines prescribed by the Institute of Chartered Accountants of India (ICAI) and had been accepted in previous assessment years. 3. Justification of the Additions Made by the AO: The AO made significant additions to the assessee's income based on the original agreements, rejecting the supplementary agreements and the revised cost estimates. The AO computed the profit of the assessee as follows: - Bit III: Estimated revenue - Rs. 29.25 crores, estimated cost - Rs. 17.33 crores, WIP costs incurred - Rs. 6.37 crores, resulting in an estimated profit of Rs. 4.37 crores. - Bit IV: Estimated revenue - Rs. 105.45 crores, estimated cost - Rs. 35.63 crores, WIP costs incurred - Rs. 24.37 crores, resulting in an estimated profit of Rs. 47.15 crores. 4. Legitimacy of the CIT(A)'s Recomputation of Profit: The CIT(A) recomputed the profit by accepting the supplementary agreements and removing the 30% threshold limit, calculating the profits as follows: - Bit III: Estimated revenue - Rs. 59.40 crores, estimated cost - Rs. 51.42 crores, WIP costs incurred - Rs. 6.37 crores, resulting in an estimated profit of Rs. 98.81 lakhs. - Bit IV: Estimated revenue - Rs. 169.68 crores, estimated cost - Rs. 149.32 crores, WIP costs incurred - Rs. 28.07 crores, resulting in an estimated profit of Rs. 3.29 crores. The CIT(A) justified the recomputation by stating that the supplementary agreements were legitimate and that the assessee's method of recognizing revenue based on a 30% threshold was flawed. However, the tribunal found that the CIT(A) could not substitute his computation for the assessee's or the AO's without clear evidence of inconsistency in the assessee's method. The tribunal noted that the assessee had been consistently following the same method of accounting, which had been accepted in subsequent assessment years. Conclusion: The tribunal allowed the appeal of the assessee and dismissed the appeal of the Revenue, concluding that the supplementary agreements were valid and the assessee's method of revenue recognition should be accepted. The tribunal vacated the CIT(A)'s findings and directed that the assessee's method of accounting be upheld, as there was no evidence of manipulation or inconsistency in recognizing the income.
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