Profits may be recognized on sale even if Assessee follows project completion method if all risk and reward been passed on

Brief Facts of the case-

• The assessee firm is a builder and developer and is assessed in the status of AOP.
• During the year under consideration, the assessee was developing a residential project which involved construction of 182 flats.
• The assessee did not disclose any income out of these projects on the plea that it was following ‘project completion method’ and offered income on these in AY 2010-11
• The A.O., however, noticed that the assessee has received major portion of advances and also completed major portion of the construction activity by 31-3-2008,
• The A.O. further noticed that the assessee has realized full sales consideration in respect of 33 units and more than 90% of the sales value in respect of 59 units out of total units of 190.
• Accordingly, the AO took the view that the assessee should have offered the income pertaining to the above said 92 units and estimated the profit at Rs. 6.48 crores on the basis of GP ratio of AY 2010-11.
• AO further made an addition of Rs. 55 lacs u/s 69C of the Act considering that the assessee must have incurred expenditure under the various heads without recording the same in the books of account.
• The CIT(A) granted relief on both the issues and now the revenue is in appeal before ITAT.

Contention of Assessee

• Under project completion method, profit is to be recognized only when the project construction is wholly completed. Accordingly, the profit has been recognized in FAY 2010-11
• In respect of addition u/s 69C, all the expenses have been properly and truly recognized in profit and loss accounts of respective years. It is the lack of appreciation of facts by the AO.

Contention of the revenue

• The assessee has received major portion of advances and also completed major portion of the construction activity by 31-3-2008.
• The assessee has already passed on all the risks and rewards in respect of the above said 92 units (59 + 33).
• Accordingly, since the sale has already been made, the profit should be recognized in the current year itself.
• Further, in respect of s.69C addition, the assessee has over-recorded the expenses.

Held by ITAT

• There is nothing wrong in assessing the income pertaining to the units that have already been sold by the assessee, even if the assessee is following project completion method. This is so because, once the assessee has sold the flats, then the profit from such sale stands realized and it may not be proper to postpone the tax liability thereon.
• However, the case has been referred back to the AO to substantiate as to whether the sale has actually been made and also whether the risks and rewards have actually been transferred.
• In respect of addition u/s 69C, it has been held that the disallowance resulted on account of lack of appreciation of facts by the AO and is not sustainable.