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TMI Blog2022 (6) TMI 887X X X X Extracts X X X X X X X X Extracts X X X X ..... re than what the assessee has reflected. In such case, the addition should have been made according to the stage of completion as per the Revenue authorities. CIT (A) has made no examination or remanded the matter to the AO for finding of the actual completion. What is the justification of AO holding that 70% of the salary and wages should be debited to project account and not 50% is not at all spelt out by the AO or the ld. CIT (A). If the authorities below were of the opinion that assessee is falsifying his records than the books should have been rejected. This has not been done. Even if books have been rejected the estimation of income has to be done on a reasonable basis as per past performance or the prevalent industry norms. Devoid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per law and hence additions sustained by the CIT (A) are totally illegal. 3. The assessee in this case is a real estate developer and said to be following percentage completion method as per Accounting Standard-7 of ICAI. The Assessing Officer (AO) made an ad hoc disallowance/addition as under :- 5. It is noticed form the P L account form the assessee company that it is not showing any revenue income from operations. It was specifically asked as to why the same has not been shown as per accounting standard 7. The reply of the assessee is submitted as under : As per architect certificate the status of work done upto 31.03.2012 is (i) project construction flat @ 5%, (ii) colony development is @ 10%. As per accounting standar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.58 (iv) Inventories 3055.00 7127.34 Or 7046.17 7983.16 9501.95 Thereafter ld. CIT (A) made a theoretical observation that assessee is not permitted to postpone the revenue recognition as under and confirmed the addition :- 5.4 The appellant is not permitted to postpone the revenue recognition due to the following settled preposition of accounting principles: a) Section 145 of the Act provides for the method of accounting because Sub-section (1) states that income chargeable under the head Profits and gains of business or profession or Income from other sources shall, subject to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accrual of the income or its receipt; but the substance of the matter is the income. The taxation principle relevant for present purpose is contained in section 5 in the form of scope of total income which includes all income from whatever source derived which accrues or arises or is deemed to accrue or arise. Under the mercantile system of accounting, an income becomes taxable when right to receive an income is finally acquired. c) Income becomes taxable only when it accrues and it accrues when right to receive it is finally acquired. In consideration of this concept, Institute of Chartered Accountant was propelled to come out with guidance note in 2006 requiring the adopting of the percentage completion method alone for the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the risks, and rewards of ownership and 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 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. e) The essence of the project completion method is the completion on the substantial completion of construction. But when such a developer, having initially transferred all the risks and rewards of ownership, offers income at the time of the handing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T (A) has held that assessee is not permitted to postpone the revenue recognition. He has even mentioned that assessing officer can pass order under section 144 of the Income-tax Act, 1961. Thereafter, he has confirmed the AO s action. 7. We find that the above order of ld. CIT (A) does not exhibit proper application of mind. As per ld. CIT (A), the project has been completed more than what the assessee has reflected. In such case, the addition should have been made according to the stage of completion as per the Revenue authorities. The ld. CIT (A) has made no examination or remanded the matter to the AO for finding of the actual completion. What is the justification of AO holding that 70% of the salary and wages should be debited to pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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