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TMI Blog2015 (3) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... afore-discussed jurisprudence, the assessee has an option to choose between the Percentage completion and the Project completion method. Since the assessee did not offer income under the Percentage completion method, and giving the benefit of choice to the assessee, we hold that the assessee ought to have shown income from the project ‘Paras Down Town Centre’ in its return for the A.Y. 2005-06. As the AO has bifurcated the income from this project in two years, namely, the A.Y.s 2005-06 and 2004-05, we hold that the addition made by the AO in respect of income from this project for the A.Y. 2004-05 be deleted. It appears that the ld. CIT(A), while disposing of the appeal for the A.Y. 2004-05, lost sight of the fact that the AO determined total income for such year at ₹ 5.23 crore. The deletion of addition of ₹ 5.23 crore has resulted into the obliteration of even the returned income at ₹ 3,13,414, which is not correct and cannot be sustained. The components of the returned income need verification. If it is unrelated with the project, then it should be charged to tax. Further, the direction given by the ld. CIT(A) for including income from this project in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the AO noticed that the assessee received a sum of ₹ 15,39,84,824/-, consisting of advance booking of ₹ 11,11,03,624/- and actual sale of ₹ 4,28,81,200/-, from the prospective buyers of this project. The assessee incurred total expenditure of ₹ 11,91,40,472/- which was shown as cost of construction of the commercial complex in its balance sheet relevant to the A.Y. 2005-06. Although the construction of the building was completed during the period relevant to the A.Y. 2005-06, the assessee recognized sale only to the tune of ₹ 4.28 crore, cost of which was shown at ₹ 3.47 crore. The remaining receipts of ₹ 11.11 crore were shown as a current liability in its Balance sheet. The assessee had also shown work-in-progress, valued at cost, amounting to ₹ 7.09 crore in its balance sheet for the year ending 31.3.2005. The AO noticed from the audit report that the assessee recognized revenue from the sale of offices/shops only on the registration of title deeds and till that event, the receipts were shown as liability. On being called upon to explain as to which method, namely, Project completion or Percentage completion was adopted by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into the Agreements inasmuch as they could further sell or transfer their interest in the property before the happening of the event of registration of the sale deed by the assessee in their favour. The assessee s contention that it was a Builder, was also jettisoned. The AO held the assessee to be a Contractor. 3.2. The AO also took into consideration the Accounting Standard (AS)-7 issued by the Institute of Chartered Accountants of India (hereinafter called `the Institute) in 1983 providing two alternative methods for accounting treatment for construction contracts, namely, the Percentage completion method and the Completed contract method. It was noticed that the AS-7 was revised in 2002 w.e.f. 1.4.2003 eliminating the Project completion method or any other method and restricting the recognition of revenue on the basis of the Percentage of completion method alone. The AO also took into consideration the mercantile system of accounting followed by the assessee under which income is recognized at the time of its accrual. The AO also went through AS-9 stipulating that for recognition of revenue in the case of real estate sales, it was necessary that the conditions specified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 5.23 crore for the A.Y. 2004-05 and ₹ 1.56 crore for the A.Y. 2005-06. Addition for a sum of ₹ 1.56 crore was made in the total income determined u/s 143(3) of the Act for the A.Y. 2005-06. Notice u/s 148 was issued for the A.Y. 2004-05 and in the assessment completed u/s 147, he computed total income of the assessee at a sum of ₹ 5.23 crore. 4. The ld. CIT(A) accepted the contentions advanced on behalf of the assessee to the effect that i) it is a `Developer and not a `Contractor ; ii) the revised AS-7 effective from 1.4.2003, providing for recognizing revenue on the basis of Percentage completion method is applicable only to the Contactors and not to the Developers; and iii) the Guidance Note on recognition of revenue by real estate developers has been issued by the Institute in May, 2006 and, hence, the same is not applicable to the computation of income of the assessee for the years in question. He, therefore, approved the action of the assessee in offering income for taxation on the registration of sale deeds. This resulted into the deletion of addition of ₹ 1.56 crore for the A.Y. 2005-06. The ld. CIT(A) in his order for the A.Y. 2004-05, rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions makes it adequately palpable that income earned during the financial year immediately preceding the assessment year is chargeable to tax for the relevant assessment year. In other words, in the absence of any express contrary provision in the Act, income of a person is chargeable to tax for the year in which it is earned. Thus the unit of assessment is the income earned by of a person during the relevant previous year. Neither the Revenue can prepone the taxability of income to an earlier year nor the assessee can postpone the taxability of income to a later year. There can be no estoppel against the provisions of the Act inasmuch as it is not open to an assessee to determine the timing of the taxability of income as per his own sweet will. If a particular income is chargeable to tax in year one, it should be charged to tax in the same year and cannot be shifted to year two. If such a choice is usurped by an assessee, in contradiction of the express provisions of the Act, then income of both the years, namely, one and two, will be distorted. Including an income in the total income of a wrong year, notwithstanding the similar rate of taxation in both the years, not only breach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a `Contractor . We, ergo, need to decide first as to whether the assessee is a Developer/Builder or a Contractor. In the context of construction activity, a contractor is ordinarily a person who undertakes to execute the construction activity on behalf of another person for a consideration. Where a contractor is required to incur some costs also in the execution of the contract, then, the consideration is costs incurred plus a further amount, which is the remuneration of the contractor. On the other hand, in a case where the owner undertakes construction activity upon itself and constructs a commercial building for sale, he is called a Developer or a Builder. Since the entire project belongs to such Owner/developer, he is entitled to income from the transfer of commercial units to the buyers. In a nutshell, whereas, a Contractor does not hold any ownership interest in the constructed building and earns income from the owner of the commercial venture for the construction activity undertaken by him, a Developer/Builder holds ownership interest in the constructed building and earns income only from the transfer of the commercial units. 7.2. Adverting to the facts of the instant ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attention has been given to the mandate of various Accounting Standards and Guidance Notes issued by the Institute. Though some of the grounds raised in the present appeals assail the finding rendered by the ld. CIT(A) on the applicability or otherwise of such ASs and the Guidance Note, but the decision has also been challenged on the deletion of addition de hors such ASs etc. As such, it becomes imperative to have a glance at the material contents of the relevant ASs. 8.2. The AS-7 dealing with Accounting for Construction Contracts , prior to its revision in the year 2002 applicable from 1.4.2003, provides that it applies both to the Contractors and Developers. This AS-7 specifies two methods of accounting for construction contracts, namely, the Percentage/progressive completion method and the Completed contract method, which is also called Project completion method. The revised AS-7 applies only to Contractors and not to Developers for the accounting treatment of construction contracts. It provides the only method of accounting for such contracts, being, the Percentage of completion method. 8.3. Thereafter, the Institute issued Guidance Note on: Recognition of Revenue by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferring of significant risks and rewards even though the legal title is not transferred or the possession of the real estate is not given to the buyer. Once the seller has transferred all the significant risks and rewards to the buyer, any acts on the real estate performed by the seller are, in substance, performed on behalf of the buyer in the manner similar to a contractor. Accordingly, revenue in such cases is recognized by applying the Percentage of completion method. 8.5. On an overview of the above Accounting Standards and Guidance Notes, it is manifest that from time to time, the Institute has laid down the `Procedure for accounting of construction contracts undertaken by Contractors and Developers. Whereas the pre-revised AS-7 provided for accounting of construction contracts either under the Project completion method or the Percentage completion method as applicable both to the Contractors and Developers; the revised AS-7, applicable from 1.4.2003, limits its applicability only to Contractors by providing that accounting be done only as per the Percentage of completion method. Guidance Note issued in 2006 again extends to both the Contractors as well as the Develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144 . It transpires from the prescription of section 145 that only the accounting standards issued by the Central Government under this section are mandatory and have a bearing on the computation of total income. Any other Accounting standard issued by any statutory or nonstatutory body cannot affect the computation of total income under the provisions of the Act. The Accounting standards etc. issued by the Institute, have, of course, relevance in the manner of maintenance of accounts, but, cannot override the mandate of the provisions of the Act. 9.2. It is a well settled legal position that the taxing principles do not necessarily go hand in hand with the accounting principle. The Hon ble Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd. Chemicals vs. CIT (1997) 227 ITR 172 (SC) has laid down in so many words that the taxing principles cannot walk on the footsteps of the accounting principles. Following observations of the Hon ble Supreme Court in the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tile system of accounting, which the extant assessee is following, an income becomes taxable when right to receive an income is finally acquired. Ordinarily, when some goods/products are sold by a businessman, income does not arise before the transfer of title in such goods to the buyer. It is because that till that time, the buyer does not acquire any risks and rewards attached to the product, which pass only with the sale. But if the product under sale is of a unique nature, such as, a commercially constructed unit, for which the Developer has entered into agreement for sale at the initial stage of construction by transferring all significant risks and rewards of the ownership to the buyer, the income accrues on year-to-year basis by considering the percentage of completion of the property under transfer. It is so for the reason that after signing agreement to sell, the Developer acquires an infallible right over the payments received towards sale consideration which coincide with the progress in construction. The buyer simultaneously acquires ownership of the right in the property much before the transfer of legal title in his favour. Such a right in the hands of buyer is a valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is significant to mention that this judgment of the Hon ble jurisdictional High Court, which has since been affirmed by the Hon ble Supreme Court in Tirath Ram Ahuja Pvt. Ltd. Vs. CIT (1990) 186 ITR 428 (SC), was rendered in the context of a Contractor and not a Builder/Developer. Notwithstanding the above judgment advocating for the adoption of Percentage completion method, we find that the Hon ble Delhi High Court in CIT vs. Sabh Infrastructure Ltd., vide its recent judgment dated 7.1.2015, has approved the view taken by the Tribunal taken in DCIT vs. M/s Sabh Infrastructure Ltd., a copy of which order has been placed on record. In this case, the Tribunal noticed that the assessee was a real estate developer and not a construction contractor. It recorded in para 9.1 of its order that: the assessee in this case has followed project completion method which is one of the prescribed methods. It further observed in para 10 that: project completion method is an established method of accounting which the assessee has been following consistently from the preceding so many years and the same has never been disturbed by the Revenue. That is how, the Tribunal approved the following o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od, the costs incurred on year to year basis up to the stage of completion or substantial completion of construction are treated as work-in-progress. Similarly the payments received are also accumulated during the course of the contract and shown as Liability in the balance sheet. Income accrues only upon the completion or substantial completion of the construction activity. Here again, the same caveat applies that the Developer should have transferred the risks and rewards of ownership to the buyers at initial stage. If there is a prior agreement but there is no transfer of risks and rewards of ownership to the buyer, then no income would accrue till the passing of risks and rewards to the buyer at the time of completion or substantial completion of the construction activity. On the other hand, if there is no prior agreement for sale, then income accrues only when sale is actually made, which event may happen after the completion or substantial completion of construction. 12.2. It can be noticed from the decisions available on the point that the assessee has a choice of consistently following either the Project completion method or the Percentage completion method, when it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come from the project Paras Down Town Centre in its return for the A.Y. 2005-06. 14. As the AO has bifurcated the income from this project in two years, namely, the A.Y.s 2005-06 and 2004-05, we hold that the addition made by the AO in respect of income from this project for the A.Y. 2004-05 be deleted. It appears that the ld. CIT(A), while disposing of the appeal for the A.Y. 2004-05, lost sight of the fact that the AO determined total income for such year at ₹ 5.23 crore. The deletion of addition of ₹ 5.23 crore has resulted into the obliteration of even the returned income at ₹ 3,13,414, which is not correct and cannot be sustained. The components of the returned income need verification. If it is unrelated with the project, then it should be charged to tax. Further, the direction given by the ld. CIT(A) for including income from this project in the later years, at the time of execution of registered sale deeds, is also vacated because once income has been directed to be chargeable to tax in one year, then it cannot be charged to tax in a later or earlier years as well. The AO should also ensure that no income from this project, whether included by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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