2017 (4) TMI 1153 - HC - Income Tax

Recognized system of accounting - maintain its accounts according to AS-7 or AS-9 - Held that - Held that - There is no dispute that the nature of business of the respondent-assessee from the inception is same and that it had been filing its returns as a Real Estate Developer since 2003 by adopting AS-9 system of accounting, which were all through accepted by the Department without any reservation. In view of the fact that the Department itself in the past had accepted the respondent-assessee as a Real Estate Developer, it cannot be permitted to shift the stand at this stage so as to contend that the respondent-assessee is actually not a Real Estate Developer but a Contractor. In the case at hand, there is no finding or even an averment that the system of accounting followed by the assessee is unable to show the true and correct profits or that it results in distortion of the profits. At the same time, we do not find any statutory provision or a Rule, which may compel the respondent-assessee to follow the AS-7 system of accounting alone. In view of the above, as the respondent-assessee is a Real Estate Developer and not a Contractor simplicitor, the system of accounting followed by it for the last many years is in accordance with recognized procedure, the Department cannot reject the said system followed by it for the reason that it ought to have followed the other recognized system AS-7 system i.e. percentage completion system. The Act or the Rules nowhere mandates for following a particular accounting system by the respondent-assessee, therefore, if any of the recognized mode of accounting has been followed, we find that no illegality has been committed by the respondent-assessee. In view of the aforesaid facts and circumstances as well as findings as returned by the Income Tax Appellate Tribunal, there is hardly any question of law, which arises for our consideration.

Summary

Issues:
1. Recognition of accounting method - AS-9 vs. AS-7
2. Nature and status of business - Real Estate Developer vs. Contractor

Recognition of accounting method - AS-9 vs. AS-7:
The case involved a dispute regarding the acceptance of the accounting method by the Income Tax Appellate Tribunal for the assessment year 2013-14. The respondent-assessee, a Real Estate Developer, maintained accounts using the project completion method (AS-9). The Tribunal accepted AS-9 as a recognized method of accounting and overturned the Assessing Authority's rejection based on AS-7, confirmed by the Commissioner (Appeals). The appellant argued that upon entering into a sale agreement, the respondent's status changed to that of a Contractor, necessitating the use of AS-7. However, the consistent acceptance of the Real Estate Developer status by the Department in previous years was deemed conclusive. The court referenced the decision in Commissioner of Income Tax Vs. Excel Industries Limited, emphasizing the importance of maintaining a consistent view unless compelling reasons exist to alter it.

Nature and status of business - Real Estate Developer vs. Contractor:
The second issue revolved around whether the respondent-assessee was required to maintain accounts under AS-7 or AS-9. The Tribunal found that the respondent had consistently followed the project completion method (AS-9), which was recognized by the Institute of Chartered Accountants of India. Citing precedents, the court held that when an assessee consistently follows a recognized accounting method accepted by the Department, it is unfair to compel a change unless there is a distortion of profits. The absence of evidence indicating profit distortion or statutory provisions mandating AS-7 usage led to the conclusion that the respondent's accounting method was valid. The court reiterated that as a Real Estate Developer, the respondent was not obligated to follow AS-7 and dismissed the appeal, stating that no legal questions warranted consideration based on the facts and findings presented by the Tribunal.