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TMI Blog2024 (6) TMI 1136X X X X Extracts X X X X X X X X Extracts X X X X ..... re, it recognized Revenue from sale of land, complete property, project in progress and development right is recognized in the financial year in which significant control of right (i.e. registration of the property in the name of buyers and possession thereof is given) was adopted. Therefore, assessee was called upon to explain the reasons for changing the method of account during this year and to produce documentary evidences for the Revenue recognized in the financial year in which registration executed, supporting document with copy of agreements registered during the year and in Revenue recognition during the year from sale of land or any property. In response, the assessee has submitted as under:- "during the year there is a change in accounting policy which has been reported in the Form 3CD at point no. 13 and also at note 27 of the audited financial statement. It is further submitted that during the year the company has changed its accounting policy for revenue recognized from sale of land, completed property, project in progress and development right. Now the company is recognizing revenue in accordance with the significant accounting policies. Revenue recognition Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce does not create an asset with an alternative use to the entity (see paragraph 36) and the entity has an enforceable right to payment for performance completed to date (see paragraph 37)." It may be noted that Paragraph 35(b) & (c) of Ind AS 115 are intended to address situations of real estate sector. In view of the above, recognition of revenue as the construction progresses is possible considering the prevalent long established legal system/jurisprudence in India, and facts and circumstances of individual case/contract". 3. After considering the above submissions the Assessing Officer rejected the same by observing that percentage completion of method also a recognized method (as per revised in AS 115) and further he observed that the assessee itself has stated that in the earlier years the company was recognizing its Revenue on percentage of completion method and had the company followed the earlier policy of Revenue recognition, it would have resulted in net increase in profit by Rs. 9,47,14,870/-. Further observed that it is also not clear whether the assessee has revised its financial in the earlier year also. In view of the change of method of accounting, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue is entirely academic or at best may have a minor tax effect." 5. After considering the submissions of the assessee and assessment order Ld. CIT(A) dismissed the grounds raised by the assessee by observing as under:- "5.4 The appellant submitted that it used to recognise revenue following percentage of completion method which was changed to other method wherein the revenue would be recognised upon transfer of control. The appellant contested that the letter method is prescribed under Ind AS which is being prescribed method for accounting as per ICAI. The appellant also submitted the documents such as sample of copies of agreement registered during the year under consideration. 5.5 The appellant also contested that it is not prerogative of the Assessing Officer to determine which accounting method is to be followed. It also contested that agreement registered during the year under consideration were merely sort of arrangement between appellant and its customer. No physical possession was given and no sales deed was registered (Registering of sale deed is conclusive event whereby the purchaser becomes the owner of property) therefore no revenue is being recorded during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y following the provisions of section 144B (1) to 144B(7) of the Act. 3. That in any case and without prejudice the learned CIT(A) has erred in disposing off the appeal arbitrarily without granting to the assessee a proper and valid opportunity of being heard, so much so that even the written submissions dated 20.02.2023 have not been considered and dealt while disposing off the appeal. 4. That the learned CIT(A) while sustaining the addition made of Rs. 9,47,14,870/- has failed to comprehend that, the assessee had computed its income in accordance with the mercantile system of accounting regularly employed by it and that it had computed its income in accordance with mandate of section 145A of the Act. 5. That the learned CIT(A) has failed to appreciate that the findings of the learned NFAC in its order that, there was a 'reduction in profit by a sum of Rs. 9,47,14,870/- is wholly erroneous and unsustainable in law. In so concluding he has failed to appreciate that no such profit and alleged to have been reduced had yet accrued to the assessee company and as such there was no justification to hold that there was a reduction of alleged profit by the assessee company. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke submissions on the issue of change of accounting policy and addition proposed by the Assessing Officer of Rs. 9,47,14,870/-. In this regard, he filed detailed written submission discussed on the whole issues. 8. After considering the written submissions, we have reproduced the relevant submissions, which is relevant for our discussion. "11. It is submitted that the perusal of the Balance sheet Note 5 (Pg. 18) would show that inventories i.e. closing stock of the preceding year aggregating to Rs. 19,22,41,278/-; whereas the same at the end of the year aggregated to Rs. 79,10,66,339/- and thus increase which represented capital expenditure on the construction has not been claimed as deduction. 12. It is most humbly submitted as to what the auditors have stated that as compared to the method of accounting followed by the assessee till the preceding year, there is a decrease in the profit and not that there is decrease of an income which has accrued to the assessee company. Infact, AS115 does permit the Real Estate companies to follow the project completion method and there has been misconception that they were required to follow percentage of project completion method. In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned AO has disputed any of the factual submissions made by the appellant. 15. To demonstrate that advances received against bookings from the prospective customers, details had also been placed on record to justify that the appellant had offered an income on the basis of POCM, even on advances since it had refunded the sums of advances on the cancellation of the bookings. (See Pg. 209/329) 16. It is reiterated that the following judgment of the Supreme Court in the case of CIT vs. Bilahari Investment Pvt. Ltd. reported in 299 ITR 1 the expenditure incurred during the year on the construction, as also not been claimed as expenditure while computing the total income. It is because of this the learned AO while computing the income has allowed proportionate expenditure from the advances received from the customers, on the basis of POCM. In other words, the learned AO has taken a view that the method adopted by the appellant in the preceding year is to be followed by him during the instant year disregarding the fact that para 6 of ICDS IV (pages 393 394 of Paper Book), which mandated that while preparing its accounts it should reflect and offer income on the basis of POCM is erro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfies the requirement of section 145 of the Act. The aforesaid submission is supported by judicial pronouncements as are stated as below: (i) Indo-Commercial Bank Ltd. vs. CIT, 44 ITR 22 (Mad.) (ii) Forest Industries Travancore Ltd. vs. CIT, 51 ITR 329 (Ker.) (iii) New Victoria Mills Co. Ltd. vs. CIT, 61 ITR 395 (All.) (iv) Dr. Ishwari Prasad vs. CIT, 143 ITR 789 (All.) (v) CIT vs. Shriram Associated Bearing Pvt. Ltd. SLP (Civil) No. 6665 of 1982, 150 ITR (St.) 77 (SC) (vi) CIT vs. Hind Lamps Ltd., (1987) Taxation 85(3)-225 (All.) (vii) CIT vs. Mopeds India Ltd., 173 ITR 347 (AP) (viii) CIT vs. Bikaner Trading Co., 180 ITR 286 (Cal.) (ix) CIT vs. Hollungooree Tea Co., 192 ITR 125 (Cal.) (x) CIT vs. Bharat Commerce & Industries Ltd., 240 ITR 256 (Del.) (xi) P. Balakrishnan vs. Tranvancore Cochin Chemicals Ltd. 243 ITR 284 (Ker.) 18.1 In view of the aforesaid facts, it is submitted that in view of the clarification issued by the Institute of Chartered Accountants of India, as also Para 6 of ICDS IV having been struck down, the changed method of accounting followed by it from the AY 2018-19 does deserves an acceptance. It is reiterated that, the change of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit by Rs. 9,47,14,870/- and decreased inventory by Rs. 7,71,50,143/. We observed that the Assessing Officer during the assessment proceeding observed that there is a change in method of accounting recognized by the assessee and is not satisfied with the submissions made by the assessee. He is of the view that assessee has changed the method of accounting to understate the profit of the company and not brought on record any justified reasons for such change of method of accounting during the year, consequently he proceeded to make the addition. After careful consideration of the facts on record, we are of the view that there is no restriction on the assessee to follow a single or same method of accounting over the years and it has an option to change the method of accounting in any year in order to present the statement of accounts with true and fair basis, further after change of method of account, assessee should consistently follow the same. It is also the duty on the part of the assessee to disclose the financial impact on the financial statements due to such change of method of accounting/revenue recognition adopted by the assessee during the financial year. We observed fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation, we direct him to verify the profit declared by the assessee in the earlier years as per old method of accounting and because of change of method of accounting, there may be under statement or over statement of declared profit, this under or over statement of profit in the earlier years has to be acknowledged as an impact on such change of profit and ultimately the correct profit alone has to be charged to tax. 12. Merely because a understatement of profit during the current year due to change of method of accounting does not mean that the assessee has understated the profit and AO cannot proceed to make any adjustment based on such financial impact. It is only a declaration on such impact for selection of different method of accounting. This approach is approved method as per the accepted standard of accounting by ICAI and IAS. Therefore, the selection of method of accounting is the right of the respective assessee. The AO cannot put any restriction on such selection of method and only thing is that it has to be verified whether the assessee has followed the new method of accounting and follows consistently, the impact declared by the assessee is as per the conventio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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