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2015 (11) TMI 1217 - DELHI HIGH COURT

2015 (11) TMI 1217 - DELHI HIGH COURT - [2016] 382 ITR 630 - Rejection of books of accounts - AO held that AS-7 is applicable to the Assessee confirmed by ITAT - ITAT setting aside the order of the CIT (A) deleting the addition of the sum received by the Assessee on account of advance from bookings and restoring the case to the file of the AO for a fresh decision - Held that:- The settled legal position as far as Section 145 of the Act is concerned is that it is not open to an AO to reject the a .....

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ently followed by it.

In the present case, there was therefore no good reason for the ITAT to have reversed the finding of the CIT (A). The only reason given in the impugned order of the ITAT is that ‘risks and rewards' of ownership were transferred to the buyers who had paid the booking advance amounts and in some cases these rights were transferred to third parties. However, this does not in any manner affect the treatment of the said amounts in the books of the Assessee. As noted h .....

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to have escaped the attention of the ITAT is that the Assessee offered to tax in the subsequent FY the amounts received and therefore there was no actual loss to the revenue. - Decided in favour of assessee.

As far as AY 2006-07 is concerned, it is apparent that the ITAT in the impugned order lost sight of the fact that the advances received by the Assessee were in respect of a project that never took off. A part of the advance amount was returned in the following FY since the transa .....

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These two appeals by the Assessee under Section 260A (1) of the Income Tax Act, 1961 ( the Act ) are directed against the orders dated 17th February, 2015 of the Income Tax Appellate Tribunal ( ITAT ) in ITA No. 4316/Del/2010 [for the Assessment Year ( AY ) 2005-06] and ITA No. 235/Del/2010 [for AY 2006-07]. 2. Admit. 3. The following questions of law are framed for consideration: (a) For AY 2005-06, whether the ITAT was justified in setting aside the order of the CIT (A) and holding in the fact .....

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h decision? 4. The background to the filing of the present appeals is that the Appellant Assessee is engaged in the business of real estate as a developer. The Assessee either purchases land in its own name or gets the power of attorney from the land owner in case the property is owned by another party so as to carry out activities of development on the land in terms of a collaboration agreement. The Assessee enters into agreements to develop and sell overall projects in terms of sharing with th .....

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hen significant risk and reward of ownership/title is transferred. All sums received for the construction project till such time are treated as advances and shown as liability. All expenses incurred in the construction are accounted for in the stock in trade and/or block of buildings and are reflected as such in the balance sheet of the Assessee. 6. The Assessee started construction of a nine floor commercial complex, viz., 'Paras Down Town Centre' at Sector-53, Gurgaon in the financial .....

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47 crores, corresponding to the recognised sales of ₹ 4.28 crores, as costs in its balance sheet. The remaining receipts of ₹ 11.11 crore were shown as a current liability. 7. The Assessee filed a return of income along with an audited financial statement on 13th October 2005 for AY 2005-06 by declaring an income of ₹ 57,75,159. A question arose during the assessment proceedings whether the percentage completion method (encapsulated in AS 7 issued by the ICAI) should be applied .....

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is contention and held that AS-7 is applicable to the Assessee. The AO held that the Assessee was acting as a contractor. It was held that significant risks and rewards of ownership had been transferred by the Assessee to buyers when the agreements to sell were entered into with them. The books of account of the Assessee were rejected under Section 145 of the Act and its profits were computed by applying the AS-7. The AO added a sum of ₹ 1,56,88,100 to the Assessee's declared income by .....

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) held that the Assessee was only a developer and not a contractor and that AS-7 would not apply to it. It was held that the action of rejecting the books of account of the Assessee under Section 145 of the Act could not be upheld. The AO was directed to compute the income of the Assessee in terms of the Revenue recognition method followed by the Assessee. The addition made by the AO in the sum of ₹ 5,23,00,137/- was directed to be deleted. Significantly, the CIT (A) also noted that the en .....

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hat the civil work/construction activities had not even started and no amount could therefore be booked either under the project completion or the percentage completion methods. It was further pointed out that a sum of ₹ 53.5 lakhs had been refunded in the immediate next year since the transaction could not materialise. The AO, however, negatived the above pleas. 11. The appeal filed by the Assessee for AY 2006-07 was allowed by the CIT (A) by a separate order dated 12th November, 2009 acc .....

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ed two sets of orders. By one order dated 17th February, 2015 the ITAT disposed of the Revenue s appeals pertaining to AY 2004-05 (ITA Nos. 234/Del/2010) and AY 2005-06 (ITA No. 4316/Del/2016). As far as the appeal concerning AY 2004-05 is concerned, it was held by the ITAT that since the AO had bifurcated the income from the Paras Down Town Centre, Sector-53 into two years i.e., AY 2004-05 and 2005-06, the addition made by the AO for AY 2004-05 had to be deleted. To this extent, therefore, the .....

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uyers had transferred their rights in construction to third parties during the currency of the construction. 15. A separate order was passed by the ITAT in ITA No. 235/Del/2010 being the Revenue s Appeal for AY 2006-07. The ITAT recorded the submission that the parties were agreement that there was not much discussion on the factual aspects either in the order of the AO or the order of the CIT (A). The ITAT proceeded to set aside the order of the CIT (A) and remand the matter to the AO for decid .....

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ghout been contending that it is not a contractor. This finding has been accepted by the Revenue inasmuch as it has not filed any appeal against the impugned order of the ITAT. 17. The other significant aspect is that the Assessee has been able to make good its plea regarding treatment of the sum received by it as advance in its books of accounts. The balance sheets filed by the Assessee, copies of which are enclosed with the memorandum of Appeal, do bear out the fact that the cost of constructi .....

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forming part of the final audit statement as under: b) Revenue Recognition Sale of building: i) When building is ready to be delivered - Sale is booked in the books of accounts on the date of possession agreed upon or on the date of sale if the sale deed is executed before the date of possession agreed. ii) When the building is not ready to be delivered- Sale is booked on the date of the building transferred and possession handed over. The income and expenditure are accounted for on accrual bas .....

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een brought about in Section 145 (2) which permits the central government to notify in the Official Gazette from time to time the income computation and disclosure standards to be followed by any class of Assesses or in respect of any class of income. That change is prospective and in any event does not apply to the case on hand. 19. The settled legal position as far as Section 145 of the Act is concerned is that it is not open to an AO to reject the accounts of an Assessee unless he comes to a .....

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Income Tax v. Bilahari Investment P Ltd. (2008) 299 ITR 1 (SC) it was observed as under: Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. The completed contract method is one such method. Similarly, the percentage of completion method is another such method. Under the completed contract method, the revenue is not recognized until the contract is com .....

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of revenue recognized under the method determined by reference to the stage of completion of the contract. The stage of completion can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract. The above indicates the difference between the completed contract method and the percentage of completion method. 21. In the present case, there was therefore no good reason for the ITAT to have reversed the findin .....

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onstruction or block of buildings. It is only as and when a conveyance deed was executed or possession delivered that the receipt was shown as income. The explanation added by way of Notes to the Accounts was not taken note of by the ITAT when it came to the conclusion that the percentage completion method should apply to the Assessee. 22. The other aspect that appears to have escaped the attention of the ITAT is that the Assessee offered to tax in the subsequent FY the amounts received and ther .....

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