2020 (10) TMI 1116 - AT - Income Tax

Income recognition - Accrual of income - Addition being the value of consideration received by the assessee - Accounting principle followed - whether substantial amounts have been received by the assessee before signing of the agreements of sale during the year? - HELD THAT - In the instant case, the AO has simply followed the AIR information of registration of agreements of sale made during the year and held that the assessee is not entitled to defer the receipts to later years. This is not the correct way to make an assessment. AO could have called for the books of accounts maintained by the assessee and examined it. He has not done so. There is no finding by the AO that the books of accounts maintained by the assessee are defective. Also we find that the AO has shifted the gross sale receipts recognized by the assessee in FYs 2011-12 2012-13 back to FY 2010-11 without shifting the expenditure incurred in connection with completion of the said properties. The assessee is following mercantile system of accounting. In the instant case, the addition made by shifting back the gross sale receipts recognized by the assessee in FYs 2011- 12 2012-13 to FY 2010-11, without shifting the expenditure incurred in connection with the completion of the said project violates the Accounting Standard I notified u/s 145(2) - we uphold the order of the Ld. CIT(A) in deleting the addition - Decided in favour of assessee. Interest / premium paid on cancellation of gala - Whether CIT(A) was right in deleting the addition by admitting fresh evidences in contravention of Rule 46A of IT Rules - HELD THAT - CIT(A) having examined the balance sheet of the assessee as at 31.03.2010 (earlier year), ledger accounts and TDS certificates, has arrived at a definite finding that the amount was repaid to the parties and tax was also deducted on the compensation/premium paid on cancellation. A perusal of the details filed by the assessee before the AO clearly indicates that there is no contravention of Rule 46A of the Income Tax Rules, 1962 by the Ld. CIT(A). We uphold the order of the Ld. CIT(A) and dismiss ground of appeal of revenue.

Summary

Issues:
1. Addition of consideration received by the assessee before signing sale agreements.
2. Recognition of possession letters as date of sales.
3. Addition of interest/premium paid on cancellation of gala.

Analysis:
1. The appeal involved the issue of whether the Commissioner of Income Tax (Appeals) was correct in deleting the addition of the consideration received by the assessee before signing sale agreements. The assessee followed the project completion method for revenue recognition, while the Assessing Officer held that the assessee was deferring revenue recognition. The CIT(A) found that the AO changed the accounting method followed by the assessee and considered the legal implications of possession letters in the construction business. The CIT(A) directed the AO to delete the addition based on a detailed analysis of the facts and legal provisions.

2. The second issue revolved around the recognition of possession letters as the date of sales. The AO shifted sale receipts recognized by the assessee to an earlier year without considering the expenditure incurred. The ITAT held that the AO's actions violated Accounting Standard I and the legal provisions under the Maharashtra Ownership of Flats Act, 1963. The ITAT upheld the CIT(A)'s decision to delete the addition, emphasizing that possession being handed over to the purchaser is crucial for completing a sale transaction.

3. The third ground of appeal concerned the addition of interest/premium paid on the cancellation of gala. The AO made the addition based on discrepancies in the audited accounts, but the CIT(A) examined the balance sheet and ledger accounts to conclude that there was no contravention of IT Rules. The ITAT upheld the CIT(A)'s decision, stating that there was no violation of Rule 46A and dismissed this ground of appeal.

In conclusion, the ITAT dismissed the Revenue's appeal after thorough analysis of the issues related to revenue recognition, possession letters, and interest/premium payments. The judgment highlighted the importance of following accounting standards and legal provisions in determining tax liabilities for construction businesses.