2018 (8) TMI 440 - AT - Income Tax

Deferment of the payment of the taxes - project completion method application on the assessee - method of accounting - Accounting standards - Held that - Referring to amendment brought in statute with retrospective effect w.e.f. 1.4.2017 by way of insertion of Section 43CB for the purpose of computation of income from construction and service contract it is crystal clear that before the insertion of this section there was no legal obligation on the part of the assessee to follow percentage completion method only. Before insertion of this section person engaged in construction and service contracts were free to follow either the project completion/ Completed project method or percentage completion method in accordance with the provisions of Section 145 of the Act. In the instant appeal assessee even though not directly involved in the construction activity and it is merely gave its land for development and it was agreed between the assessee company and the developer that 32% of the saleable area shall be given to the assessee. The 54 assessee is consistently followed completed project contract/percentage completion method as recognized its revenue at the time of execution of getting the sale deed registered and before that it has to be consistently showing the advance from sale of flats as the liability in the balance sheet. A.O was not justified in applying the percentage completion method on the assessee merely on the basis that it was followed by the developer JSM DPL and arbitrarily making addition to the income ignored the fact that project completion method/ completed contract method of accounting has been consistently adopted by the assessee and even have been accepted by the revenue authority for the A.Y. 2010-11 and A.Y. 2011-12. We therefore set aside the findings of Ld.CIT(A) and delete the addition of ₹ 16,12,34,754/- for Assessment Year 2012-13. - Decided in favour of assessee

Summary

Issues Involved:
1. Method of Accounting: Percentage Completion Method vs. Project Completion Method.
2. Consistency and Acceptance of Accounting Methods by Revenue Authorities.
3. Legal Justification for Substitution of Accounting Methods.

Issue-wise Detailed Analysis:

1. Method of Accounting: Percentage Completion Method vs. Project Completion Method

The primary issue revolves around whether the assessee should follow the percentage completion method, as adopted by JSM Devcon Pvt. Ltd., or continue with the project completion method, which it has consistently used. The assessee argued that it is the landowner, not the developer, and thus its income should be recognized only upon the completion of the project and the execution and registration of sale deeds. The revenue authorities, however, applied the percentage completion method, calculating the income based on the developer's progress and the agreed ratio of 68:32. The Tribunal emphasized that the assessee’s right to 32% of the constructed area would crystallize only upon completion of the entire construction, as per the agreement.

2. Consistency and Acceptance of Accounting Methods by Revenue Authorities

The Tribunal noted that the assessee consistently followed the project completion method and recognized revenue only upon the completion of sales, i.e., upon execution and registration of sale deeds. This method was accepted by the revenue authorities for the assessment years 2010-11 and 2011-12. The Tribunal highlighted that the revenue authorities had accepted the assessee's method of accounting in the past, and there was no justification for changing the method mid-way without pointing out any defects in the books of accounts.

3. Legal Justification for Substitution of Accounting Methods

The Tribunal referred to several legal precedents, including decisions by the Supreme Court and High Courts, which establish that the assessee has the right to choose its method of accounting, provided it is consistently followed and reflects true profits. The Tribunal emphasized that the revenue authorities could not impose a different method of accounting unless the chosen method distorts the profits. It was noted that the project completion method is a recognized method and has been consistently followed by the assessee. The Tribunal also referred to the retrospective amendment by inserting Section 43CB, which mandates the percentage completion method for construction contracts from 1.4.2017, indicating that before this insertion, there was no legal obligation to follow the percentage completion method.

Conclusion:

The Tribunal concluded that the revenue authorities were not justified in applying the percentage completion method on the assessee, as it had consistently followed the project completion method, which was accepted in previous years. The Tribunal set aside the findings of the lower authorities and deleted the additions made for the assessment years 2012-13 and 2013-14, allowing the appeals of the assessee.