Brief of the Case
Delhi High Court held In the case of Paras Buildtech India Pvt. Ltd. vs. CIT that the settled legal position as far as Section 145 is concerned is that it is not open to an AO to reject the accounts of an Assessee unless he comes to a determination that notified accounting standards have not been regularly followed by the Assessee. As pointed out by the CIT (A) in the order dated 2nd July, 2010, the AS of the ICAI did not have any statutory recognition under the Act although it was binding under the Companies Act, 1956. The method of accounting followed by the Assessee in the present case i.e. project completion method was certainly one of the recognized methods and has been consistently followed by it. Hence rejection of books of accounts not maintainable.
Facts of the Case
The 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 the owner. It enters into contracts with various buyers and receives sums by way advance for booking or reserving flats/shops/areas. On completion of the project, the Assessee hands over the possession of the flats booked to the respective customers/buyers along with the execution of the sale/conveyance deed. It is stated that the Assessee regularly follows Accounting Standard (AS) 9 issued by the Institute of Chartered Accountants of India (ICAI). In this method, revenue is recognized as and when 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.
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 Rs.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 to the Assessee? The Assessing Officer (AO) called upon the Assessee to submit whether the working of the profit was done as per the project completion method or the percentage completion method as provided in AS-7 issued by ICAI. In reply thereto, the Assessee took the categorical stand that AS-7 was not applicable since it was a developer and not a contractor. It further took the stand that it had booked sales on signing of title deeds in AYs 2005-06 and 2006-07.
The AO however rejected this 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 and its profits were computed by applying the AS-7. The AO added a sum of Rs.1,56,88,100 to the Assessee’s declared income by applying the percentage completion method. Apart from this the AO disallowed certain other sums including the sums on account of depreciation and under Section 14A. The income of the Assessee
was determined at Rs.2,28,68,559/- as against the declared income of Rs.57,75,159/-.
As far as AY 2006-07 is concerned, the AO by the assessment order dated 31st December, 2007 again applied the percentage completion method and made an addition of Rs.10,76,70,521 (constituting the advance booking amounts received) to the income of the Assessee. It was urged by the Assessee before the AO in respect of the aforementioned advance booking amount, that 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.
Contention of the Assessee
The ld counsel of the assessee placed reliance on the decision of this Court in Lahmeyer Holding GMBH v. Deputy Director of Income Tax:  376 ITR 70 (Delhi) to submit that the re-assessment proceedings would be invalid in case an issue or query is raised and answered by the assessee in the original assessment and yet, the Assessing Officer does not make any addition in the assessment order. In such situations, it would have to be accepted that the issue had been examined, but the Assessing Officer did not find any ground or reason to make any addition or reject the stand of the assesses.
Relying on the said decision, it was also submitted that when such an exercise is undertaken by the Assessing Officer, it can be regarded as a case where the Assessing Officer forms an opinion and that re-assessment on the very same ground would be invalid because the Assessing Officer having once formed an opinion in the course of the original assessment, although he did not record the reasons for the same, cannot be permitted to change his opinion through the re-assessment proceedings.
Held by CIT (A)
CIT (A) held that the Assesses 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 Assesses under Section 145 could not be upheld. The AO was directed to compute the income of the Assesses in terms of the Revenue recognition method followed by the Assesses. The addition made by the AO in the sum of Rs. 5,23,00,137/- was directed to be deleted. Significantly, the CIT (A) also noted that the entire exercise was revenue neutral as the AO had only advanced the accrual of income from AY 2006-07 to AYs 2004-05 and 2005-06.
The appeal filed by the Assesses for AY 2006-07 was allowed by the CIT (A) by a separate order dated 12th November, 2009 accepting the plea of the Assesses that the advances received against two of the projects could not be treated as income since construction had not started. No expenses had been booked by the Assesses against the said advances. Therefore, even on the basis of AS -7 the said sum could not be assessed as income of the Assesses.
Held by ITAT
As far as AY 2005-06 is concerned, the ITAT reversed the order dated 2nd July 2010 of the CIT (A) and accepted the plea of the Revenue that the percentage completion method would apply since the Assesses had transferred risks and rewards to the buyers even prior to commencement of construction activities. The further factor which weighed with the ITAT was that some of the buyers had transferred their rights in construction to third parties during the currency of the construction.
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 deciding it afresh in conformity with the ITAT’s order for AYs 2004-05 and 2005-06.
Held by High Court
It is required to be noticed that the ITAT has in the impugned order dated 17th February, 2015 in ITA No. 4316/Del/2010 upheld the finding rendered by the CIT (A) that the Assesses was only a developer and not a contractor. This finding is significant because, as noticed hereinbefore, the agreements entered into by the Assesses are only on the basis that it is a developer. The Assessee has throughout 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.
The other significant aspect is that the Assesses 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 Assesses, copies of which are enclosed with the memorandum of Appeal, do bear out the fact that the cost of construction is capitalized as regards the flats the construction of which is yet to be completed, and no conveyance deed has been executed or possession has not been handed over. The Assessee’s balance sheet dated 31st March, 2005 discloses under the sub-head ‘Inventory’ under the head ‘Current loans and advances’ a sum of Rs.7,09,93,957. The explanatory Schedule 4 describes the said figure as ‘Stock and inventory’.
Section 145 (1) states that the income chargeable under the heads ‘Profits and gains of business or profession’ shall be computed in accordance with either cash or mercantile system of accounting “regularly employed by the Assesses”. It is only with effect from 1st April 2015 that a change has been 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.
The settled legal position as far as Section 145 is concerned is that it is not open to an AO to reject the accounts of an Assesses unless he comes to a determination that notified accounting standards have not been regularly followed by the Assesses. As pointed out by the CIT (A) in the order dated 2nd July, 2010, the AS of the ICAI did not have any statutory recognition under the Act although it was binding under the Companies Act, 1956. The method of accounting followed by the Assesses in the present case i.e. project completion method was certainly one of the recognized methods and has been consistently 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 Assesses. As noted hereinbefore, the expenses of construction were not debited to the P & L account of the Assesses. It was shown as cost of construction 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 Assesses.
The other aspect that appears to have escaped the attention of the ITAT is that the Assesses offered to tax in the subsequent FY the amounts received and therefore there was no actual loss to the revenue. In similar circumstances, the Supreme Court in CIT v. Excel Industries Limited 2013 ITR 295 (SC) observed that the dispute if any raised at the instance of the Revenue would be at best academic. The stand of the Assesses in the present case also finds support in the decision of the Gujarat High Court in CIT-IV v. Shivalik Buildwell (P) Ltd. (2013) 40 taxmmann.com 219 (Gujarat). It was held that the Assesses in that case, who was a developer, was entitled to book the amount received as booking advance as income on transfer of the property. Till then the advance booking amounts could not be treated as his trading receipt. The High Court recognized that the Assesses in that case was entitled to apply the project completion method in terms of the applicable AS. This Court too has by order dated 7th January 2015 in ITA 111/2014 (CIT v. SABH Infrastructure Ltd.) held likewise, after noticing the decisions of the Supreme Court in CIT v. Bilahari Investment P. Ltd. (2008) 299 ITR 1 (SC) and the order dated 15th November 2011 in ITA No. 928 of 2011(CIT v. Manish Buildwell Pvt. Ltd.).
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 Assesses were in respect of a project that never took off. A part of the advance amount was returned in the following FY since the transaction itself fell through. In the circumstances the question of treating the amounts as income in the hands of the Assesses did not arise. No purpose was going to be served in remanding the matter to the AO for a fresh determination. Consequently, as far as AY 2006-07 is concerned, question (b) is answered in the negative i.e. in favour of the Assesses and against the Revenue.
Accordingly appeal of the assesses allowed.