2015 (3) TMI 847 - HC - Income Tax

Income recognition - accountancy practices of the assessee for the relevant year - AO recomputed the income by treating advances against properties which had NIL outstanding balances, as sales and consequently the income of the assessee as felt that the appropriate method of accounting for revenue recognition was AS-7 supported by the Institute of Chartered Accountant - Held that - As in CIT vs. Manish Build Well Pvt. Ltd. 2011 (11) TMI 35 - DELHI HIGH COURT differentiating between the project completion method and the percentage completion method, and commented that both can achieve the same result. The above ruling clearly establishes that the project completion method was appropriate in the circumstances of the case and the rationale for not adopting it in respect of the 22 transactions by the AO was illogical. The Court notices that in M/s. Excel Industries, 2013 (10) TMI 324 - SUPREME COURT the Supreme Court had indicated three tests to deduce whether income accrued to the assessee is real or hypothetical i.e. if there is a corresponding liability of the other party to pass on the benefits even without the transaction; probability or improbability of realization of benefits by the assessee etc. In these circumstances, the AO s decision was based on hypothetical income given that for the previous years AS-7 had been permitted. Furthermore, applying the decision in M/s. Excel Industries Ltd. (supra), we are of the opinion that the rule of consistency ought not to have been departed from in this case. No substantial question of law arises. - Decided against revenue.

Summary

Issues:
1. Correctness of the ITAT's order in permitting the accountancy practices of the assessee for the relevant year.
2. Whether the project completion method or the percentage completion method is appropriate for revenue recognition in the case.

Issue 1:
The Revenue raised a question of law under Section 260A of the Income Tax Act, 1961, challenging the ITAT's order regarding the accountancy practices of the assessee. The Revenue contended that the ITAT erred in allowing the assessee's method of accounting for revenue recognition. The AO had added deemed sales in respect of 22 specific properties, following AS-7 for revenue recognition. However, the CIT(A) noted that the assessee had consistently followed a particular system of accounting, and the ITAT upheld this practice. The ITAT emphasized the importance of consistency in accounting methods and referred to a Supreme Court decision highlighting that the Revenue cannot change its stance on an issue already decided in favor of the assessee.

Issue 2:
The Court analyzed whether the project completion method or the percentage completion method was appropriate for revenue recognition in the case. The assessee and the ITAT relied on the decision in CIT vs. M/s. Excel Industries Ltd., where the Supreme Court emphasized that income tax cannot be levied on hypothetical income. The Court also referred to the ruling in CIT vs. Manish Build Well Pvt. Ltd., which highlighted that both project completion and percentage completion methods can achieve the same result. The Court concluded that the project completion method was suitable in this case, and the AO's selective adoption of the percentage completion method for certain transactions was illogical. The Court emphasized the importance of consistency in accounting practices and dismissed the appeal, stating that no substantial question of law arose.

In conclusion, the High Court upheld the ITAT's decision, emphasizing the importance of consistency in accounting practices and rejecting the Revenue's challenge to the assessee's method of revenue recognition. The judgment highlighted the need to follow established accounting standards and principles to ensure fair and accurate assessment of taxable income.