AO was not justified in applying accounting method followed by a different assessee – ITAT

AO was not justified in applying accounting method followed by a different assessee and rejecting Percentage of completion method consistently applied which had been accepted by Revenue in past- ITAT

ABCAUS Case Law Citation:
ABCAUS 2474 (2018) 08 ITAT

Important Case Laws Cited/relied upon:
Investment Ltd V/s CIT (1970) 77 ITR 533 (SC), CIT V/s Krishna Swamy Mudiliar (1964) 53 ITR 122 (SC), Mahabir Jute Mills V/s JCIT, CIT V/s Krishna Swamy Mudiliar, Investment Ltd V/s CIT, CIT V/s Advance Construction Company P. Ltd, CIT v Shivalik Buildwell P Ltd (2013) 40 taxmann.com 219 (Guj.), CIT Vs. Umang Hiralal Thakur (2014) 42 taxmann.com 194 (Guj), Vraj Developers, Prem Enterprises V Income Tax Officer (2012) 25 taxmann.com 179 (Mum.), Hill View Infrastructure (P) Ltd, CIT v Hyundai Heavy Industries Co. Ltd (2007) 291 ITR 482/ 161 Taxman 191 (SC),  CIT v. Bilahari Investment (P) Ltd. (2008) 299 ITR 1/168 Taxman 95, Excel Industries Ltd (2013) 358 ITR 295

The instant appeal was filed by the assessee against the order of Commissioner of Income-tax (Appeals) arising out of the order u/s 143(3) of the Income Tax Act, 1961 (the Act) passed by the AO rejecting the method of accounting regularly followed by the assessee.

The assessee was engaged in the business of purchase/sales/development of land, real estate and infrastructure and construction and civil work. Pursuant to a Search and Seizure operation u/s 132 of the Act, the assessee was required to file returns of income.

The assessee was the owner of a piece of land and the same was given for development to a company (the developer). As per the terms and condition of the development agreement, the developer was to construct buildings on the land and in consideration for allowing the development of land, the assessee was entitled to a percentage of the total saleable constructed area to be constructed by the developer. The units were not demarcated between the developer and the land owner. Instead, it was decided that entire revenue shall be shared in the ratio of 68:32 as decided in the development agreement.

During the assessment proceedings, an examination of the audited accounts of the assessee revealed that the assessee had not reflected any revenue from sale of units however it was getting advance against sale from the developer.

It was submitted by the assessee that it is consistently following project completion method and had offered the revenue for tax in the year in which sales have been effected and the sale deeds registered. However the AO was not convinced with the submission and made by the assessee and he applied the method adopted by the developer i.e. the percentage completion method on the assessee and calculated the income of the assessee applying the ratio of 68:32 as agreed in the agreement.  

Aggrieved assessee filed appeal before CIT(A) against the method but the CIT(A) confirmed the action taken by AO.

The Tribunal observed that the method of accounting is governed by section 145 of the Act and as per section 145(2) of the Act the income is to be computed in accordance with either cash or mercantile system of accounting to be regularly employed.

The Tribunal observed that provisions of section 145 nowhere empowers the authorities to assess the income on the basis of method of accounting followed by another assessee nor does it empower the authorities to thrust upon the assessee to adopt the method of accounting followed by another assessee.

The Tribunal after examining the action of the revenue authorities in light of the various jurisdictional pronouncements of Hon’ble Supreme Court, High Court and coordinate Bench, found that we find that the method of accounting along with following project completion method for treatment of advances received from proposed buyers the assessee had been consistently followed this method and appellant’s assessment had been completed by the AO for first two years.

The Tribunal opined that since the said method had been consistently followed by appellant and even accepted by department, the same cannot be deviated in the present two years without there being any finding as contemplated u/s 145(3) on the basis of satisfaction required by that section viz., (1) about correctness or completeness of the accounts of the assessee or (2) about the fact that the assessee had not regularly employed the method of accounts provided in section 145(1) or (3) that the income had not been computed in accordance with the standards notified u/s 145(2).

The Tribunal opined that in view of the various judgments of the Supreme Court it cannot be said that the project completion method followed by the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the Income Tax Act. Accounting Standards 7 (AS7) issued by the Institute of Chartered Accountants of India also recognize the position that in the case of construction contracts, the assessee can follow either the project completion method or the percentage completion method.

The Tribunal observed that in all the judgments it had been consistently held rather a settled law that the action of revenue authorities cannot be held justified if they substitute another method of accounting on the assessee which in the instant case was imposing of percentage completion method on the assessee even when it had been consistently maintaining the regular books of accounts on mercantile basis u/s 145 of the Act adopting project completion method to account for the revenue and the revenue authorities have failed to bring forth any inconsistency in the books of accounts.

The Tribunal observed that the Assessing Officer in the instant case had merely applied the method of percentage completion adopted by the Developer and calculated the income of the assessee completely ignoring the fact that the assessee was merely the owner of land and he was entitled to 32% of saleable area only on completion of construction and the deadline of which was 60 months from the date of agreement.

The Tribunal further observed that the Revenue had not disputed the fact that assessee had offered the impugned advances to tax in the subsequent years based on sale deed registered which proved that there had been no loss to the revenue. Mere postponement of tax as a result of method employed by assessee had not been viewed adversely by courts so long as the method is regularly and consistently employed as held by Hon’ble Apex Court.

Referring to the amendment made by way of insertion of Section 43CB for the purpose of computation of income from construction and service contract, the Tribunal  observed that before the insertion of the section there was no legal obligation on the part of the assessee to follow percentage completion method only. Before, person engaged in construction and service contracts were free to follow either the project completion/ Completed project method or percentage completion method in accordance with the provisions of Section 145 of the Act.

The Tribunal stated that the assessee even though not directly involved in the construction activity and it is merely gave its land for development and it was agreed between the assessee company and the developer that 32% of the saleable area shall be given to the assessee. The assessee consistently followed completed project contract/percentage completion method and recognized its revenue at the time of execution of getting the sale deed registered and before that it had to be consistently showing the advance from sale of flats as the liability in the balance sheet.

Accordingly, the Tribunal aside the findings of CIT(A) and deleted the addition.

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