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2009 (12) TMI 665 - AT - Income TaxIncome from the building project - Method of accounting - Whether CIT(A) was justified in upholding the action of the AO to assess the income from the building project on the basis of percentage completion method instead of project completion method adopted by the assessee - The dispute is regarding year of accounting of income - Assessee reiterated the submissions made earlier that the firm was a developer of the property and not a contractor and therefore income had to be accounted on completion of the project. CIT(A) did not accept the explanation of the assessee. It was observed by him that under the Income-tax Act income is required to be computed on annual basis. The construction was ongoing process and the profit element was embedded into the construction. Therefore there was a profit element embedded into the work-in-progress and the profit could be computed on the basis of work-in-progress. HELD THAT - The assessee has been following project completion method as per which income has to be accounted in the year in which project is complete and the flats are sold. The assessee in the earlier two years followed the same method which has been accepted by the department. Though the earlier returns were accepted summarily u/s 143(1) the fact is that these assessments have become final and method followed by the assessee in these years stands accepted by the department. However in the current year the department has tried to assess the income on the basis of percentage completion method as per which the income has to be assessed on the basis of percentage of work completed during the year. It is established legal position that an assessee can follow any recognised method of accounting and condition is that the same method has to be followed consistently. In case of a building project the ICAI which is an authority on prescribing accounting standards had prescribed accounting standard AS-7 in 1983 for accounting of income in respect of real estate projects and in terms of AS-7 which was applicable to both contractor and real estate developer a person is free to follow either of project completion method or percentage completion method depending upon the nature of project. In this case the project was not complete during the year and therefore there was no question of passing on of the title of ownership or handing over of the possession. Thus even in terms of the revised accounting standard which was applicable for most part of the work done by the assessee the income had been correctly declared as per project completion method in the year of completion. Even if one applies the old accounting standards on the ground that the project of the assessee had been undertaken prior to 1-4-2003 the assessee was free to follow either percentage completion method or project completion method. Department therefore cannot reject the method and apply percentage completion method in a subsequent year. The assessee already following the same method has declared the entire income in assessment year 2007-08 when the project was complete. The same income therefore cannot be assessed in the earlier year by rejecting the regular and recognised method being followed by the assessee. We are therefore unable to sustain the order of CIT(A) upholding the order of AO rejecting the method followed by the assessee. The order of CIT(A) is set aside and the claim of the assessee is allowed. Estimation of net profit - AO had estimated the net profit rate at 10 per cent on the advances received till the end of the relevant assessment year. CIT(A) that in the AY 2007-08 on completion of the project the assessee had declared net profit rate of 6.95 per cent on the basis of audited accounts. Therefore CIT(A) was satisfied by the claim of the assessee. HELD THAT - We have already held that income of the project can be assessed only in AY 2007-08 when the project was complete and not in this year the issue of estimation of profit has become infractuous. We therefore dismiss the appeal of the revenue as having become infractuous in view of our decision given in relation to the appeal of the assessee. In the result appeal of the assessee is allowed whereas that by the revenue is dismissed.
Issues Involved:
1. Whether the CIT(A) was justified in upholding the action of the Assessing Officer to assess the income from the building project on the basis of the percentage completion method instead of the project completion method adopted by the assessee. 2. Estimation of net profit rate by the Assessing Officer and its subsequent adjustment by the CIT(A). Issue-Wise Detailed Analysis: 1. Assessment of Income Method: The primary issue in the appeal by the assessee was whether the CIT(A) was justified in upholding the Assessing Officer's decision to assess the income from the building project using the percentage completion method rather than the project completion method adopted by the assessee. Facts of the Case: The assessee, a builder and developer, followed the project completion method for accounting income from a residential project. The project was incomplete, and the assessee declared nil income from assessment years 2003-04 to 2006-07. The Assessing Officer noted that 50% of the project work and cost had been completed and received as advances by 31-3-2005. Consequently, the Assessing Officer invoked section 145, rejecting the project completion method and adopting the percentage completion method, estimating a profit of 10% on the advances received. CIT(A) Decision: The CIT(A) upheld the Assessing Officer's method, stating that income must be computed annually, and profit is embedded in the work-in-progress. The CIT(A) relied on the case of Champion Construction Co. and observed no basic difference between a developer and a contractor regarding income recognition. Assessee's Argument: The assessee argued that as a real estate developer, profit could only be recognized upon project completion and sale of flats. The assessee referred to AS-7 guidelines, which allowed either percentage completion or project completion method. The revised AS-7 applied to contractors, while revised AS-9 applied to developers, recognizing income upon completion and sale. Tribunal's Analysis: The Tribunal noted that the assessee consistently followed the project completion method, accepted in earlier years. The Tribunal distinguished the cases cited by the department, noting they pertained to contractors, not developers. The Tribunal emphasized that developers can only recognize profit upon sale and completion. The Tribunal upheld the project completion method as per AS-7 and AS-9 guidelines, rejecting the department's method change. Conclusion: The Tribunal set aside the CIT(A)'s order, allowing the assessee's appeal, affirming the project completion method for income recognition. 2. Estimation of Net Profit: The revenue's appeal concerned the estimation of net profit. The Assessing Officer estimated a 10% net profit on advances received, while the CIT(A) adjusted it to 6.95%, based on audited accounts for assessment year 2007-08. Tribunal's Analysis: Given the Tribunal's decision to recognize income only upon project completion in assessment year 2007-08, the issue of profit estimation for the current year became infructuous. Conclusion: The Tribunal dismissed the revenue's appeal as infructuous, given the decision on the primary issue. Final Judgment: The appeal of the assessee was allowed, and the appeal of the revenue was dismissed.
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