2014 (3) TMI 498 - AT - Income Tax

Deletion made on account of method of accounting u/s 145 of the Act Held that - The assessee was following a particular method of accounting regularly in the earlier as well as subsequent assessment years - the Assessee is a builder and developer and in such a case PCM is an accepted method of accounting. AS-7 is applicable only in case of contractors, engaged in the civil construction business, it does not apply to builder & developer - It is established principle of taxation that PCM and percentage completion method are recognised methods to assess correct income of an assessee under the Act - the assessee can follow any methods, only condition is that the same method has to be followed consistently - It is not open to the AO to change the method of accounting only because he finds another method of accounting better than the one adopted regularly by the assessee. The assessee had constructed the complete building over a period of time and received the purchase consideration from time to time from the purchasers and handed over the possession of the building when the building was fully completed and occupancy certificate was received - It was only at that time that the proverbial risks and rewards were transferred to the purchaser thus, PCM followed by the assessee-AOP was in order and the action of the FAA to reject the stand taken by the AO was justified thus, the order of the FAA upheld - Decided against Revenue. Disallowance of deduction u/s 80IB(10) of the Act - No income has accrued for assessment year 2007-08 based on the project completion method Held that - PCM followed by the assessee was the right method of accounting for determining the taxable income of the assessee, that project was completed in AY. 2009-10 thus, the issue of eligibility of 80IB deduction has been left open by the FAA when he held that the AO would be at liberty to make necessary inquiries - no prejudice has been caused to the interest of the Revenue thus, the order of the FAA upheld Decided against revenue.

Summary

Issues Involved:
1. Deletion of income additions based on the Project Completion Method (PCM) vs. Mercantile System of accounting.
2. Eligibility for deduction under Section 80IB(10) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Deletion of Income Additions Based on PCM vs. Mercantile System of Accounting:

The Assessing Officer (AO) challenged the method of accounting used by the assessee, arguing that the substantial completion of the project warranted income recognition under the Mercantile System rather than the Project Completion Method (PCM). The AO added Rs. 17,68,97,860/- for AY 2007-08 and Rs. 14.72 crores for AY 2008-09, stating that income had accrued and should be taxed accordingly.

The CIT(A) deleted these additions, supporting the assessee's use of PCM, which was consistent with previous years and recognized by the ICAI. The CIT(A) emphasized that the AO had accepted PCM in earlier assessments (AY 2005-06 and 2006-07) and found no defects in the books of accounts. The CIT(A) also noted that the AO could not change the accounting method without proving it distorted profits or was defective.

The Tribunal upheld the CIT(A)'s decision, stating that the assessee is entitled to choose any recognized method of accounting, and the AO cannot change it merely because it defers tax collection. The Tribunal referenced several cases supporting the consistency of accounting methods and concluded that PCM was appropriate for the assessee, a builder and developer, as AS-7 does not apply to builders. The Tribunal confirmed that the AO failed to demonstrate any defects in the PCM or that it was not regularly followed.

2. Eligibility for Deduction Under Section 80IB(10):

The AO denied the assessee's claim for deduction under Section 80IB(10), citing violations in the built-up area limits. The AO argued that certain flats exceeded the 1000 sq. ft. limit due to provisions for combining units and including areas like flower beds and balconies in the built-up area.

The CIT(A) overturned the AO's decision, stating that the assessee sold flats as independent units within the prescribed limits. The CIT(A) noted that combining flats post-sale by purchasers did not violate Section 80IB(10). The CIT(A) also clarified that areas like flower beds and balconies, not on the same floor level, should not be included in the built-up area as per the Development Control Regulations (DCR).

The Tribunal agreed with the CIT(A), confirming that PCM was the correct method for determining taxable income and that the project was completed in AY 2009-10. The Tribunal held that the AO's liberty to make further inquiries on the built-up area did not prejudice the Revenue's interests.

Conclusion:

The Tribunal dismissed the AO's appeals for both AY 2007-08 and AY 2008-09, upholding the CIT(A)'s decisions to delete the income additions and affirm the assessee's eligibility for deduction under Section 80IB(10). The Tribunal emphasized the importance of consistency in accounting methods and recognized PCM as appropriate for the assessee's business.