TMI Blog2015 (2) TMI 439X X X X Extracts X X X X X X X X Extracts X X X X ..... a civil liability is itself not sufficient to hold of accrual of income. The Standard is thus set in terms broader than the legal concept of accrual, though is principally in agreement therewith. ICAI has also issued a Guidance Note on recognition of income for real estate developers. The matter would thus stand to be decided on the basis of the entirety of the terms and the conditions of the contract/s, to determine the question if there has been transfer of all significant risks and rewards of ownership, coupled with the absence of the uncertainty associated with the realization of the revenue, so that sale can be said to have taken place. The exercise having not been undertaken at any stage, we only consider it fit and proper under the circumstances to restore the matter back to the file of the A.O. for the purpose to adjudicate the same per a speaking order qua each project after allowing proper opportunity to the assessee to state its case. We may clarify that in doing so we have in effect only sought to determine if the conditions of accrual of income, as legally defined, stand satisfied. AS-9 only articulates the antecedent conditions thereof, and is in conformity with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to contractors. The activity of developing housing project/s on own account as a commercial venture is in the nature of production activity and, therefore, is to be construed as such. Accordingly, the inventories have to be valued following AS-2 Valuation of inventories and the income recognized following AS-9 Recognition of income . The Committee notes, on the basis of the language of the revised AS-7, a difference between the two versions, i.e., prior to and subsequent to the revision, so that the revised Standard departs from the earlier one, which was admittedly applicable to both the contractors and the builders (PB pgs. 5-8). AS-9, it is contended, recognizes both the project completion and the percentage completion methods. The ld. CIT(A) has also allowed relief to the assessee on that basis. Its stands further observed by him that the Tribunal in the assessee s own case for the two preceding years whereat the matter travelled to it, i.e., A.Ys. 1989-90 and 2003-04, accepted the assessee s case of following the project completion method as an accepted method of accounting. The foregoing sums-up the respective cases of the opposing sides as well as the controversy attendin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m) and Suresh G. Wadhwa v. Jt. CIT (in ITA No. 6395/Mum(I)/2012 dtd. 02/8/2013/[2013] 37 CCH 7 (Mum)(Trib)), to name some. 4.3 AS-9, even as explained during the course of hearing, lays down the principles of recognition of income. The statute, per sec. 145, recognizes only two methods of accounting, i.e., cash and mercantile, synonymous with the receipt and accrual method of accounting. The accrual of income (as also of expenditure) is essentially a matter of fact. The law point involved is as to when income can be said to have accrued, and which is defined as the right to receive (or, liability to pay, i.e., qua expenditure). As explained by the hon ble apex court in, inter alia, CIT v. Chunni Lal Mehta Sons (P.) Ltd. [1971] 82 TR 54 (SC)(pg. 60), the only relevant question to be asked under the circumstance is when the right to receive had accrued. Whether, as such, income, to any extent, has accrued is to be determined with reference to the facts and circumstances of the case, viz. the agreement of sale, etc. The issue thus is not of the validity of the method of accounting, but; the assessee following accrual method of accounting, as to whether income on the relevant project ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a business entity in the facts and circumstances of the case. AS-7, mandated for contractors, endorses the former method in-as-much as the risks and, thus, return, is with reference to the work undertaken, which is rightly captured in the proportionate method. The case of builders, undertaking construction on own account, is more appropriately covered by AS-9. The question, therefore, reduces to as to which of the two methods is, on facts of the case, in consonance with AS-9. The said standard stipulates the basic conditions that should obtain if the income can be said to have accrued. The first is the transfer of all significant risks and rewards of ownership. Income arises on exchange. Risk and reward are incidents of ownership. Income, thus, can be said to have accrued when there has been, i.e., given the binding legal contract, transfer of these incidents, wholly or substantially so. It is only then that the consideration received in exchange, i.e., the compensation for the release/transfer of ownership, can be said to have been so in one s own right, and the income embedded therein, accrued to the recipient. In fact, it matters little even if the consideration stands not act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing mercantile (accrual) method of accounting, the basic question therefore that arises is if, and where so to what extent, income has arisen to it in the facts and circumstances of its case. The ld. AR would read clauses of the agreement specifying events outside the control of the builder, whereat the buyer would be obliged to assume risk. This would rather suggest transfer of all significant risks, with the events outside his control, as a calamity, being in the nature of saving clauses, absolving the builder in such circumstances. True, the buyer too could, at the same time, have the right to determine or terminate the contract at any time. Where so, the risk can be said to remain with the builder. This would however be subject to the compensation or the rights that may inure to the builder in such an event. If the property in the construction reverts to the builder, the same only implies that the same had in fact inured to the buyer earlier. Then, again, as afore-noted, the contracting parties have under law the right to seek specific performance of the contract. The matter would thus stand to be decided on the basis of the entirety of the terms and the conditions of the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X
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