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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 ..... construction got completed during the previous year relevant to the A.Y. 2005-06. Here, it is pertinent to mention that the assessee undertook only this project during the two years under consideration and none other. On perusal of the balance sheet of the assessee for the financial year relevant to the A.Y. 2005-06, the AO noticed that the assessee received a sum of Rs. 15,39,84,824/-, consisting of advance booking of Rs. 11,11,03,624/- and actual sale of Rs. 4,28,81,200/-, from the prospective buyers of this project. The assessee incurred total expenditure of Rs. 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 Rs. 4.28 crore, cost of which was shown at Rs. 3.47 crore. The remaining receipts of Rs. 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 Rs. 7.09 crore in its balance sheet for the year ending 31.3.2005. The AO noticed from the audit report that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he notice period and in the event of default, it was entitled to forfeit the amount already paid by the buyers. Considering the above factors, the AO came to hold that all the significant risks and rewards of ownership in the property stood transferred to buyers at the time of entering 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 considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct at Rs. 17.79 crore. By reducing total cost of the project at Rs. 10.57 crore, the AO estimated total profit at Rs. 7.22 crore. Applying the Percentage completion method, the AO bifurcated total profit from this venture in two years under consideration, namely, Rs. 5.23 crore for the A.Y. 2004-05 and Rs. 1.56 crore for the A.Y. 2005-06. Addition for a sum of Rs. 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 Rs. 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, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... immediately preceding the assessment year'. The term "Assessment year" has been defined in section 2(9) of the Act to mean: 'the period of twelve months commencing on the 1st day of April every year'. A conjoint reading of the above provisions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed. In no case, can the income of one year be shifted to another year. 7.1. Coming to the facts of the extant case, it can be seen that the assessee claimed itself to be a `Developer' of a building, whereas the AO held it to be 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch commercial units upon itself without any sort of intervention by the erstwhile owners. The impugned order is countenanced to this extent. 8.1. It can be seen from the orders of the authorities below that a lot of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered to have the effect of transferring all significant risks and rewards of ownership to the buyer provided the agreement is legally enforceable and subject to the satisfaction of conditions which signify 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 it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome.' Sub-section (3) of section 145 provides that: `Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of total income. It provides, inter alia, that all income from whatever source derived which accrues or arises or is deemed to accrue or arise, is included in the scope of total income. Under the mercantile 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not wait till the contract is completed, and that it is open to the revenue to estimate the profit on the basis of the receipts in each year of construction, although the contract is not complete." 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct method, income accrues only when the contract is completed or substantially completed. Substantially completed means that when only minor construction work is left to be done. Under this method, 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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. 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 Rs. 5.23 crore. The deletion of addition of Rs. 5.23 crore has resulted into the obliteration of even the returned income at Rs. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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