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TMI Blog2024 (6) TMI 1136X X X X Extracts X X X X X X X X Extracts X X X X ..... lared by the assessee due to change of method of accounting as profit for the current financial year. In our considered view by making above financial impact as addition along with other disallowances/additions, the percentage of profit determined by the Assessing Officer is quite abnormal way above the industry average. We are of the considered view that assessee should submit the financial impact in the financial years 2016-17, 2017-18 respectively and also impact in computation of taxable income declared under Income Tax Act before the AO. Accordingly, the AO is directed to verify the above impact in the financial statements and may verify the declared financial impact in both financial years as well as Income Tax computation, we direct him to verify the profit declared by the assessee in the earlier years as per old method of accounting and because of change of method of accounting, there may be under statement or over statement of declared profit, this under or over statement of profit in the earlier years has to be acknowledged as an impact on such change of profit and ultimately the correct profit alone has to be charged to tax. Merely because a understatement of profit duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the method of account during this year and to produce documentary evidences for the Revenue recognized in the financial year in which registration executed, supporting document with copy of agreements registered during the year and in Revenue recognition during the year from sale of land or any property. In response, the assessee has submitted as under:- during the year there is a change in accounting policy which has been reported in the Form 3CD at point no. 13 and also at note 27 of the audited financial statement. It is further submitted that during the year the company has changed its accounting policy for revenue recognized from sale of land, completed property, project in progress and development right. Now the company is recognizing revenue in accordance with the significant accounting policies. Revenue recognition Revenue from the sale of land, completed and project in progress property and development right Revenue from sale of land completed property and development right is recognized in the financial year in which significant control of right (i. e. registration of the property in the name of buyers and possession thereof is given) has been transferred and no signific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssible considering the prevalent long established legal system/jurisprudence in India, and facts and circumstances of individual case/contract . 3. After considering the above submissions the Assessing Officer rejected the same by observing that percentage completion of method also a recognized method (as per revised in AS 115) and further he observed that the assessee itself has stated that in the earlier years the company was recognizing its Revenue on percentage of completion method and had the company followed the earlier policy of Revenue recognition, it would have resulted in net increase in profit by Rs. 9,47,14,870/-. Further observed that it is also not clear whether the assessee has revised its financial in the earlier year also. In view of the change of method of accounting, the assessee has not established any basis/justification for change in the method of accounting during the year under consideration, resulting in decrease of profit of Rs. 9,47,14,870/-, as the assessee has been regularly following POCM method in the earlier years. Accordingly, he proceeded to make the addition of above mentioned profit to the income of the assessee. 4. Aggrieved the above order, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d upon transfer of control. The appellant contested that the letter method is prescribed under Ind AS which is being prescribed method for accounting as per ICAI. The appellant also submitted the documents such as sample of copies of agreement registered during the year under consideration. 5.5 The appellant also contested that it is not prerogative of the Assessing Officer to determine which accounting method is to be followed. It also contested that agreement registered during the year under consideration were merely sort of arrangement between appellant and its customer. No physical possession was given and no sales deed was registered (Registering of sale deed is conclusive event whereby the purchaser becomes the owner of property) therefore no revenue is being recorded during the year under consideration. 5.6 However, the appellant also mentioned that its customer can sell the property purchased by it before entering into sale deed. This is a contradicting situation, when buyer can sell its property without registering sale deed, it very well indicates that it has deemed ownership of the property pursuant to which he is eligible to sell the same to another party. Under such ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sustaining the addition made of Rs. 9,47,14,870/- has failed to comprehend that, the assessee had computed its income in accordance with the mercantile system of accounting regularly employed by it and that it had computed its income in accordance with mandate of section 145A of the Act. 5. That the learned CIT(A) has failed to appreciate that the findings of the learned NFAC in its order that, there was a 'reduction in profit by a sum of Rs. 9,47,14,870/- is wholly erroneous and unsustainable in law. In so concluding he has failed to appreciate that no such profit and alleged to have been reduced had yet accrued to the assessee company and as such there was no justification to hold that there was a reduction of alleged profit by the assessee company. 6. That the learned CIT(A) has failed to appreciate that the assessee was the real estate developer having a single project to complete and no income could be said to have accrued to it till the completion of the project. 7. That the learned CIT(A) has failed to appreciate the sums received aggregating to Rs. 17,18,65,013/- did not represent the sale price of the project but was merely a sum received towards the booking of space ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing stock of the preceding year aggregating to Rs. 19,22,41,278/-; whereas the same at the end of the year aggregated to Rs. 79,10,66,339/- and thus increase which represented capital expenditure on the construction has not been claimed as deduction. 12. It is most humbly submitted as to what the auditors have stated that as compared to the method of accounting followed by the assessee till the preceding year, there is a decrease in the profit and not that there is decrease of an income which has accrued to the assessee company. Infact, AS115 does permit the Real Estate companies to follow the project completion method and there has been misconception that they were required to follow percentage of project completion method. In view of the aforesaid guidelines issued by the Institute of Chartered Accountants, the appellant considering the fact that it had been receiving advance from the customers without delivering the possession or transferring the same to them recognizing the revenue on the basis of percentage of project completion method is an incorrect method to compute income had the policy of recognizing the revenue on percentage of completion method. The submission thus is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in the case of CIT vs. Bilahari Investment Pvt. Ltd. reported in 299 ITR 1 the expenditure incurred during the year on the construction, as also not been claimed as expenditure while computing the total income. It is because of this the learned AO while computing the income has allowed proportionate expenditure from the advances received from the customers, on the basis of POCM. In other words, the learned AO has taken a view that the method adopted by the appellant in the preceding year is to be followed by him during the instant year disregarding the fact that para 6 of ICDS IV (pages 393 394 of Paper Book), which mandated that while preparing its accounts it should reflect and offer income on the basis of POCM is erroneous as it is one of the method of accounting and not the only method of accounting. 17. It is submitted that the change in the method of accounting on account of striking down para 6 of ICDS IV as well as of clarification issued by the Institute of Chartered Accountants as aforesaid, it is reiterated that advances received as booking which were refundable could not have been regarded as income accrued to the assessee. Thus, there was no accrual of income till ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77 (SC) (vi) CIT vs. Hind Lamps Ltd., (1987) Taxation 85(3)-225 (All.) (vii) CIT vs. Mopeds India Ltd., 173 ITR 347 (AP) (viii) CIT vs. Bikaner Trading Co., 180 ITR 286 (Cal.) (ix) CIT vs. Hollungooree Tea Co., 192 ITR 125 (Cal.) (x) CIT vs. Bharat Commerce Industries Ltd., 240 ITR 256 (Del.) (xi) P. Balakrishnan vs. Tranvancore Cochin Chemicals Ltd. 243 ITR 284 (Ker.) 18.1 In view of the aforesaid facts, it is submitted that in view of the clarification issued by the Institute of Chartered Accountants of India, as also Para 6 of ICDS IV having been struck down, the changed method of accounting followed by it from the AY 2018-19 does deserves an acceptance. It is reiterated that, the change of method of accounting was thus bona fide which infact has not even been adversely commented upon either by the learned AO or by the learned CIT(A) and as such, on the basis of the judgments cited aforesaid, it is submitted that the income offered on the basis of its accounts as maintained from the AY 2018-19 and onwards till date be directed to be accepted and the addition made and sustained by the learned CIT(A) be directed to be deleted. 9. On the other hand, the Ld. DR relied on the findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsequently he proceeded to make the addition. After careful consideration of the facts on record, we are of the view that there is no restriction on the assessee to follow a single or same method of accounting over the years and it has an option to change the method of accounting in any year in order to present the statement of accounts with true and fair basis, further after change of method of account, assessee should consistently follow the same. It is also the duty on the part of the assessee to disclose the financial impact on the financial statements due to such change of method of accounting/revenue recognition adopted by the assessee during the financial year. We observed from the notes to account, the assessee no doubt disclosed the change of method/revenue recognition adopted by the assessee during the year, however, disclosure of financial impact of such change of method is not being properly brought on record. In our view, this has made the Assessing Officer to doubt the change of method adopted by the assessee in order to understate the income. Therefore, in our considered view the assessee has to disclose financial information for two years in its balance sheet as on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge of method of accounting does not mean that the assessee has understated the profit and AO cannot proceed to make any adjustment based on such financial impact. It is only a declaration on such impact for selection of different method of accounting. This approach is approved method as per the accepted standard of accounting by ICAI and IAS. Therefore, the selection of method of accounting is the right of the respective assessee. The AO cannot put any restriction on such selection of method and only thing is that it has to be verified whether the assessee has followed the new method of accounting and follows consistently, the impact declared by the assessee is as per the convention. If these details are proper, the AO cannot insist on to follow the old method of accounting. Therefore, with the above direction, we are remitting this issue back to the file of AO and also direct him to give proper opportunity of being heard to the assessee. Accordingly, the grounds raised by the assessee is allowed for statistical purpose. 13. In the result, grounds raised by the assessee are allowed for statistical purposes. 14. At the time of hearing, the Ld AR has also brought to our notice the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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