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2016 (7) TMI 9 - ITAT CHENNAI

2016 (7) TMI 9 - ITAT CHENNAI - TMI - Adoption of method of accounting - adoption of 8% of the construction cost under work-in-progress method - whether “Project Completion Method” adopted by the assessee is correct or “Percentage of Completion Method” adopted by the Assessing Officer is correct to determine the revenue and costs of a project? - Held that:- The mere fact that there does exist a method of accounting for profits of each year is no justification for rejecting an equally recognized .....

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ssessee, true/correct profits of assessee cannot be deduced and the assessee having been following the "completed project" method consistently, which being a recognized method of accounting, the assessee's method of accounting cannot be rejected nor is there any justification for estimating assessee's profits of the year from the assessee's business activity of building construction by resorting to applying of percentage of profit to the work-in-progress of the year. - In view of the above d .....

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vied only on the additional tax levied on the enhanced income determined under section 143(3) r.w.s. 153A of the Act. Therefore, the period of charging of interest should be from the date of determination of income under section 143(1) or 143(3) to the determination of enhanced income under section 143(3) r.w.s. 153A of the Act. Accordingly, the Assessing Officer is directed to verify the period of charging interest and decide the issue afresh. Accordingly, this ground of appeals filed by the as .....

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)(C) II, Chennai, dated 30.09.2013 relevant to the assessment years 2008-09, 2009-10 and 2011-12. Other two appeals are directed against the different orders of the ld. CIT(A)(C) 18, Chennai both dated 28.01.2015 for the assessment years 2007-08 and 2010-11. The assessee has raised the following common grounds for all the assessment years: 1. The Learned CIT(A) has erred in upholding the order of the A.O., when the A.O had wrongly made additions, which were not based on any incriminating evidenc .....

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or legal principles. 4. The Learned CIT(A) erred in not appreciating the fact that the appellant has been following the project completion method consistently over the years. 5. The Learned CIT(A) erred in ignoring the settled principle that the taxpayers are entitled to follow a particular method of accounting, as long as it is an accepted method and is consistently followed by the assessee. 6. The Learned CIT(A) erred in not appreciating that "project completion method" is an accepte .....

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earned CIT(A) erred in upholding the decision of the A.O in taxing the income on the basis of cost of construction, thereby charging the amounts to tax, when the income has not even accrued. 10. Without prejudice to the above, the Learned CIT(A) erred in upholding the action of the A.O in adopting 8% as the percentage of income, without giving any basis for adopting this percentage. 11. The Learned CIT (A) erred in not deleting the levy of interest u/s 234A and 234B of the Income tax Act, 1961, .....

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he construction cost under work-in-progress method. The facts of the case, in brief, are that the assessee is engaged in the business of real estate - Builder and there was a search in the group case of M/s. Om Shakthy Agencies (Madras) Pvt. Ltd. on 02.07.2010. The assessee has filed original return of income on 29.09.2011 admitting a total loss of ₹.4,46,892/-. The assessment was completed under section 143(3) r.w.s. 153B of the Income Tax Act, 1961 [ Act in short] on 30.03.2013 determini .....

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e has pleaded that the ground raised by the assessee should be allowed. On the other hand, the ld. DR supported the order passed by the ld. CIT(A). 5. We have heard rival contentions, perused the materials on record and gone through the orders of authorities below. The main dispute in this case is for computation of profits, whether Project Completion Method adopted by the assessee is correct or Percentage of Completion Method adopted by the Assessing Officer is correct to determine the revenue .....

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ute of Chartered Accountants of India (ICAI) is applicable only to the contractors and not to builders and real estate developers. Accordingly, the project completion method followed by the tax payer for recognizing revenue in the books of accounts cannot be regarded as unreasonable. Further, the tax department cannot change the method of accounting. Despite not controverting the decisions of the Mumbai Benches of the Tribunal in the case of Unique Enterprises v. ITO (supra), the ld. CIT(A) coul .....

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Benches of ITAT has observed and held as under: 2.6 We have perused the records and considered the rival contentions carefully. The assessee is a builder and real estate developer. The dispute is regarding year of accounting of income. The dispute is not whether the assessee had underestimated the income in a particular year. 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 asses .....

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of work completed during the year. The case of the department is that the profit is inbuilt into the quantum of work done by the assessee and, therefore, the profit has to be computed annually on the basis of work done in a particular year. The department has placed reliance on the judgment of Hon'ble High Court of Delhi in case of Tirath Ram Ahuja (supra) and on the judgment of Hon'ble High Court of Patna in case of Sri Sukhdeodas Jalan (supra). Reference has also been made to the decis .....

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old 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 onl .....

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India 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. The assessee, in this case, has followed project completion method which is one of the prescribed methods .....

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seller enters into agreement with the buyer for the sale and gives possession to the buyer under the agreement. 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 compl .....

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a subsequent year. This view is also supported by several decisions of the Tribunal as mentioned in para 2.5 of this order earlier which have been relied upon by the learned AR of the assessee. 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, una .....

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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 on the basis of books of account maintained for assessment year 2007 .....

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We, therefore, dismiss the appeal of the revenue as having become infructuous in view of our decision given in relation to the appeal of the assessee. 4. In the result, appeal of the assessee is allowed whereas that by the revenue is dismissed. 7. Thus, in our opinion, profits in the case of a trade adventure/project may be determinable in each year without waiting for the whole adventure/project to be finally completely, yet there is also another method of accounting for profits of the adventur .....

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each year is no justification for rejecting an equally recognized method of accounting whereby the profits of the adventure/project are determined when the whole adventure/project is completed; being consistently followed by an assessee, without suffering from an infirmity/ defect calling for a rejection of the same for the reason that true/fair profits of the adventure/project being not deducible thereby. The Assessing Officer having not drawn any finding that the accounts of assessee suffer f .....

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