Monday, July 18, 2011

Income tax - Sec 4 - assessee following project completion method is out of purv

Income tax - Sec 4 - assessee following project completion method is out of purview of revised AS-7 - AO cannot ignore it and apply percentage completion method particularly when it has been accepted for earlier years: ITAT

MUMBAI, AUG 10, 2010: THE issue before the Tribunal is - Whether an assessee who is following project completion method and has constructed the residential complex on his own is out of the purview of revised (Accounting Standard) AS-7 which is applicable in the case of construction contracts and recognizes percentage completion method and hence the AO was not correct in ignoring project completion method and applying percentage completion method particularly when the method applied by the assessee has been accepted in earlier years. And the answer is YES.

Facts of the case

Assessee bought some land in Khar, Mumbai and constructed certain floors on it but could not complete the construction for six years and as such did not reflect any profits attributable to the project. During the course of assessment proceedings the AO applied percentage completion method and estimated profits observing that assessee has received advances from prospective buyers and ignoring the contention of the assessee that the assessee was following project completion method and has shown profits in the year in which the project was completed. CIT (A) deleted the addition and reversed the order of the AO.

On appeal, the Tribunal held that,

++ right from the inception, i.e. from the assessment year 1994- 95, the assessee has been following the project completion method of accounting and has also stated so in its accounts as well as before the Income Tax authorities. The returns up to and including the assessment year 1999-2000 do not appear to have been disputed by the Assessing Officer. For the first time an attempt was made to disturb the return filed by the assessee for the assessment year 2000- 01 in which year the Assessing Officer had attempted to estimate profits from the project on a percentage of the work-in-progress. This attempt was negated by the CIT(A) who held that the assessee was following the project completion method which had been accepted by the Department since 1994-95. He also held that the project was completed only in the financial year 2006-07. A similar decision was rendered by him in respect of the assessment year 2004-05 by order dated 29.04.2008. Both these orders do not seem to have been appealed against by the Assessing Officer. Thus the rule of consistency requires that the same decision has to be applied even for the year under consideration as there is no difference in the facts of the case;

++ for the year under consideration, in addition to the earlier orders of the CIT(A) which have become final, there are further facts which are in favour of the assessee. These facts are that the BMC gave the Occupation Certificate only on 24.05.2006 and that the possession letters were given to the purchasers only in the period between May to July 2006. The electricity connection has also been provided in June 2006. These three aspects have also been taken note of by the CIT(A) in the impugned order. In addition to the same there is also the certificate of the Civil Engineers & Architects that the RCC work up to sixth floor was completed as on 31.03.2005. The Occupation Certificate as well as the certificate of the Civil Engineers & Architects have been furnished before the Assessing Officer as can be seen from paragraph 4.13 of the assessment order. These additional facts also go to show that the project was not completed as on 31.03.2005;

++ in the paper Book the assessee has given the summary of the work-in-progress for the years ended 31.03.2005 to 31.03.2007. The work-in-progress which was Rs.5,53,36,058/- as on 31.03.2005 increased to Rs.6,74,65,954/- as on 31.03.2006 and further increased to Rs.7,35,68,053/- as on 31.03.2007. When the work is in progress, it is not possible to say that the project has been completed. It may be clarified that the work-in-progress of Rs.7,35,68,053/- has been taken as the final cost of construction of the project and debited to the Profit & Loss Account for the year ended 31.03.2007. A copy of the Profit & Loss Account for the year ended 31.03.2007 is at page 33 of the Paper Book. After taking credit for the sale of flats of Rs.7,49,71,250/-, legal charges, electricity & water charges and car parking charges, the assessee has set off the expenditure being the cost of construction of Rs.7,35,68,053/-, audit fees, depreciation, interest on vehicle loan and Directors' remuneration and has arrived at a net profit of Rs.24,58,942/- which has been shown as the assessee's profit from the project in the return filed for the assessment year 2007-08;

++ as already noted, the said return has been examined under section 143(3) and accepted. The full Occupation Certificate issued by the Municipal Corporation of Greater Mumbai, a copy of which is at page 41 of the Paper Book, is dated 24.05.2006. When the Occupation Certificate has been issued only in the financial year ended 31.03.2007, it cannot be said that the project was complete earlier. The assessee's contention that the revised Accounting Standard-7 is applicable for construction contracts as clarified by the Expert Committee of the ICAI is correct. The assessee has constructed the building all by itself and cannot be said to be in the business of taking up and executing construction contracts

Revenue's appeal dismissed.

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