TMI Blog2009 (12) TMI 665X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment year 2005-06. These appeals are being disposed off by a single consolidated order for the sake of convenience. 2. We first take up the appeal of the assessee in ITA No. 3691/M./2008. The only dispute raised by the assessee in this appeal is whether on the facts and in the circumstances of the case, CIT(A) was justified in upholding the action of the Assessing Officer to assess the income from the building project on the basis of percentage completion method instead of project completion method adopted by the assessee. 2.1 Briefly stated the facts of the case as borne out from records are as follows: The assessee-firm who was in the business as builder and developer started construction of residential project known as Sanskruti Apartment on plot at CTS Nos. 1361/A, 1362/A, 1325 of Village Dahisar, Mumbai consisting of 56 flats and 8 shops. The commencement certificate for the project had been issued by MCGB on 25-10-2002. The assessee was following project completion method for accounting of income. Since the project was not complete, the assessee was capitalizing the work done as work-in-progress. The assessee declared nil income from assessment year 2003-04 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the judgment of Hon ble High Court of Patna in case of Sri Sukhdeodas Jalan v. CIT [1954] 26 ITR 617. The Assessing Officer was, therefore, not satisfied by the method of accounting followed by the assessee and rejected the same invoking the section under section 145. He adopted the percentage completion method and estimated the profit at 10 per cent of the closing balance of advances received of Rs. 3,18,87,936 till 31-3-2005, i.e., Rs. 31,88,763. This was disputed by the assessee. 2.3 In appeal, the 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. The assessee referred to the guidelines issued by the Institute of Chartered Accountants regarding recognition of income from construction projects. It was argued that mere construction did not give rise to any profit and that profit arises only when the flats are sold and given possession to the buyers. The assessee placed reliance on several judgments as mentioned in para 3.1 of the order of CIT(A). CIT(A), however, did not accept the explanation of the assessee. It was observed by him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nion given by export advisory committee of the Institute of Chartered Accountants in which it was opined that revised AS-7 could not be applicable to real estate developer in which cases revised AS-9 was applicable as per which income had to be accounted when the legal title of the property passed to the buyer or when seller entered into agreement for sale and handed over possession of real estate to the buyer under the agreement. Therefore, it was submitted that even in terms of the revised guidelines, the income could be accounted only on completion of the project when the flats had been sold. It was also submitted that since the assessee had followed one of the prescribed methods and the same method had been accepted in the earlier years, the method could not be changed by the Assessing Officer in the subsequent year. The learned AR referred to several judgments in support of the stand taken by the assessee as mentioned below : ( i ) Bakshi Vikram Vikas Construction Co. (P.) Ltd. v. Dy. CIT [2007] 158 Taxman 61 (Delhi) (Mag.). ( ii ) IRB Infrastructure Ltd. v. ITO [2008] 115 ITD 374 (Mum.). ( iii ) CIT v. Bilahari Investments (P.) Ltd. [2008] 299 ITR 1 (SC). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able. The case of Tirath Ram Ahuja ( supra ) and Sri Sukhdeodas Jalan ( supra ) related to the profit declared by a contractor. The case of a contractor is different from that of the real estate developer. The profit earned by a contractor depends upon the quantum of work done and is not dependent on whether the flats/shops constructed are actually sold by the owner or not. Therefore, in case of a contractor, profit can be estimated on the basis of work done. In case of real estate developer, he can earn the profit only when the space constructed sold. In case, due to some reasons, the project is terminated or is abandoned the builder has to refund the advances received from the buyers and in that case, there cannot be any profit because the flats/shops could not be sold as the construction remained incomplete. In that case, it will be only a case of investment by the builder profit from which will arise only on sale of flats. Similarly the case of Champion Construction Co. ( supra ) is also distinguishable as in that case construction was complete and 80 per cent of the flats had been sold. 2.8 It is established legal position that an assessee can follow any recognised m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessing Officer rejecting the method followed by the assessee. The order of CIT(A) is set aside and the claim of the assessee is allowed. 3. The appeal of the revenue in ITA No. 3695/M./2008. In this appeal, the only dispute raised by the revenue is regarding estimation of net profit. The Assessing Officer had estimated the net profit rate at 10 per cent on the advances received till the end of the relevant assessment year. The assessee disputed the matter and submitted before CIT(A) that in the assessment year 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, adopting net profit rate at 10 per cent by the Assessing Officer was not correct. CIT(A) was satisfied by the claim of the assessee and observed that it would be appropriate to adopt the rate shown by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
