S-9 (Projectcompletion Method) Instead Of Accounting Methodas-7 (Percentage Completion Method) Since Theassessee Is A Contractor Which Has Been Provedby The Ass v. M/S Salarpuria Simplex Dwelling Llp

IN THE HIGH COURT AT CALCUTTASPECIAL JURISDICTION (INCOME TAX)ORIGINAL SIDE ITAT/45/2022IA No: GA/2/2022PRINCIPAL COMMISSIONER OF INCOME TAX -1, KOLKATAVERSUSM/S. SALARPURIA SIMPLEX DWELLING LLP BEFORE : THE HON’BLE JUSTICE T.S. SIVAGNANAMAndTHE HON’BLE JUSTICE BIVAS PATTANAYAKDate : 26[th] July, 2022 Appearance :- Ms. Smita Das De, Adv. Ms. Sangita Das, Adv. … For Appellant Mr. J.P. Khaitan, Sr. Adv. Mr. S. Kejriwal, Adv. Ms. Swapna Das, Adv. Mr. Siddhartha Das, Adv.… For Respondent The Court : We have heard Ms. Smita Das De, learnedCounsel appearing for the appellant/revenue and Mr. J.P.Khaitan, learned Senior Advocate appearing for therespondent/assessee. This appeal filed by the revenue under Section 260A ofthe Income Tax Act, 1961 (the Act, for brevity) is directed against the order dated 29[th] May, 2020, passed by the IncomeTax Appellate Tribunal “A” Bench, Kolkata, in I.T.A No.2328/Kol/2018, for the assessment year 2015-16. The revenue has raised the following substantialquestions of law for consideration. (i) Whether on the facts and circumstances of thecase the Tribunal was justified in law to acceptthe accounting method followed by the assesseeas accounting standard-9 (AS-9) instead ofaccounting standard-7 (AS-7) despite the factthat the assessing officer arrived at a conclusion finding that the assessee is acontractor and not a builder after analysing thevarious aspects of the business of the assessee?(ii) Whether in the facts and circumstances of thecase the Tribunal was justified in law to deletethe addition of Rs.5,67,14,868/- under the head“Income from Business” by accepting theassessee’s accounting standard as AS-9 which isexclusively applicable for sales of goodswhereas the assessee sells flats which areimmovable in nature and only movable objects aretreated as goods under Goods Act ? (iii)Whether in the facts and circumstances of thecase the Tribunal was justified in law inaccepting the accounting method AS-9 (ProjectCompletion Method) instead of accounting methodAS-7 (Percentage Completion Method) since theassessee is a contractor which has been provedby the assessing officer in the Assessment Order? We have heard Ms. Smita Das De, learned Counselappearing for the appellant/revenue and Mr. J.P. Khaitan,learned Senior Advocate appearing with Ms. Swapna Das,learned Advocate for the respondent/assessee. The assessee is a LLP and is engaged in the businessof development of property. They entered into a developmentagreement on 22[nd] March, 2010 whereby the assessee asdeveloper had started construction and developed aresidential plot. The assessee had been following theaforesaid procedure under “Project Completion Method” andshowing entire advances received on account of flat bookedunder `advances’ and similarly all the contracts and theprojects concerning expenses were shown and carried forwardunder “work-in-progress”. The assessee contended that theyhad been consistently following this method which has beenaccepted by the Department in the assessment year 2014-15. The assessee is a LLP and is engaged in the businessof development of property. They entered into a developmentagreement on 22[nd] March, 2010 whereby the assessee asdeveloper had started construction and developed aresidential plot. The assessee had been following theaforesaid procedure under “Project Completion Method” andshowing entire advances received on account of flat bookedunder `advances’ and similarly all the contracts and theprojects concerning expenses were shown and carried forwardunder “work-in-progress”. The assessee contended that theyhad been consistently following this method which has beenaccepted by the Department in the assessment year 2014-15. The assessing officer stated that the assessee’s case wasselected for scrutiny for the reason as to whetherpercentage computation method should be followed instead ofproject completion method followed by the assessee. Theassessing officer while completing the assessment underSection 143(3) of the Act, by order dated 28[th] December,2016 by placing reliance on the decision of the Hon’bleSupreme Court in Chintaman Rao vs. State of Madhya Pradeshreported in AIR 1958 SC 388 held that the assessee was amere contractor and they ought to have adopted thepercentage completion method as per Accounting Standard-7.Aggrieved by such order, the assessee preferred appealbefore the Commissioner of Income Tax (Appeals)-12, Kolkata[CIT(A)]. By order dated 16[th] August, 2018 the appeal wasallowed. The CIT(A) while considering the appeal framedthree questions; firstly, as to whether the method ofaccounting followed consistently by the assessee can bedisturbed by the assessing officer. Secondly, whether theassessee can be treated as a contractor and percentagecompletion method to have been followed. After taking noteof the factual position, more particularly, that theassessee has been consistently following the projectcompletion method, which was accepted by the department,the CIT(A) held in favour of the assessee and reversed the order passed by the assessing officer. In doing so, theCIT(A) had referred to various decisions of the High Courtsas well as tribunal. The revenue being aggrieved by suchorder, had preferred appeal before the tribunal and theassessee also filed a cross-objection seeking to sustainthe order passed by the CIT(A), which, in our opinion, wasunnecessary unless and until a specific issue decidedagainst the assessee, is challenged before the tribunal.Be that as it may, the tribunal took note of theorder passed by the CIT(A) and affirmed the same and, inparticular, pointed out that the principle of consistencyhas to be applied. In the case of Commissioner of IncomeTax, Central-1 Vs. Manish Build Well (P.) Ltd., reported in(2011) 16 taxmann.com 27 (Delhi) one of the substantialquestions of law which was raised was whether the assessingofficer wrongly held that the determination of income bythe respondent therein on completion of its projectsamounts to deferment of payment of taxes which isassessable annually under the existing tax law of the land.The said question was answered in favour of the assesseeand against the revenue and in doing so, the Hon’ble Courtreferred to the decision of the Hon’ble Supreme Court inCIT Vs. Hyundai Heavy Industries Co. Ltd., reported in(2007) 291 ITR 482 (SC) for the principle that the project completion method is one of the recognised methods ofaccounting. The Court also noted that the said principlewas reiterated by the Hon’ble Supreme Court in CIT Vs.Bilahari Investment (P) Ltd., reported in (2008) 299 ITR 1(SC). The operative portion of the said decision reads asfollows : “Question Nos.2 and 3 are connected. They completion method is one of the recognised methods ofaccounting. The Court also noted that the said principlewas reiterated by the Hon’ble Supreme Court in CIT Vs.Bilahari Investment (P) Ltd., reported in (2008) 299 ITR 1(SC). The operative portion of the said decision reads asfollows : “Question Nos.2 and 3 are connected. They assail the decision of the Tribunal rendered inparagraph 20 of its order. An addition of Rs.28,21,000/-was made by the assessing officer on the footing thatthe assessee was adopting the project completion methodor the completed contract method, which was not properand the profits of the business should be computed onthe basis of the percentage completion method underwhich the profits of the development and constructionbusiness of the assessee get assessed over a period ofyears, keeping pace with the progress in theconstruction/development of the project. The CIT(A)however held that the assessee had no reason to withholdthe handing over of possession of the space to thepurchaser in respect of a project which is completed andthat whatever possession was not handed over to thepurchaser, it was for the reason that the project wasnot completed. He further found that a buyer who haspaid the entire sale consideration would immediatelydemand possession and the entire sale considerationcould be received by the assessee only on completion ofthe project. On these facts it was noted by the CIT(A)that unless the buyer makes full payment the assesseecould not hand over possession nor get the sale transaction registered. A further finding recorded bythe CIT (A) was that the impugned project was completedonly in the accounting period relevant to the assessmentyear 2008-09 and in support of this finding, he notedthat a copy of the completion/occupancy certificate wasplaced on the record of the Assessing Officer. Hefurther recorded a finding that after the issue of theoccupancy certificate and till the date of theassessment order, possession of almost 75% of thedeveloped area was handed over to the buyers who madefull payment and the sale deeds were also executed.Thereafter, possession of 20% of the remaining area washanded over to the buyers. The possession of the balance5% of the developed area could not be handed over to theremaining buyers because they could not make fullpayment and take possession. On these findings theCIT(A) held that the allegation of the assessing officerthat the assessee was adopting a method of accountingnamely the project completion method, to suit itsconvenience to book income was baseless. A furtherfinding recorded by the CIT (A) is that there was nomanipulation in the books of accounts. So far as themethod of accounting is concerned, the CIT(A) held thatthe project completion method is a well recognized andaccepted method of accounting and was the only methodsuitable for any developer who has to deliver acompleted product to the buyer. Ultimately the CIT(A)held as under:- “Thus on overall perusal of the assessment orderit is seen that neither any defect has beenpointed out by the assessing officer in the methodof accounting followed by the appellant nor any finding has been given that true and fair profitscannot be deduced following the said method ofaccounting. No evidence was found during thecourse of search to show that the books of accountare not properly maintained by the appellant. Themain thrust of the assessing officer in making theaddition is that the assessee is deferring thepayment of taxes. But this allegation of theassessing officer cannot be accepted as theassessee is consistently following a method ofaccounting which is well recognized in developmentbusiness and has been accepted by the assessingofficer also in the other group cases. Thus theaddition is hereby deleted.” finding has been given that true and fair profitscannot be deduced following the said method ofaccounting. No evidence was found during thecourse of search to show that the books of accountare not properly maintained by the appellant. Themain thrust of the assessing officer in making theaddition is that the assessee is deferring thepayment of taxes. But this allegation of theassessing officer cannot be accepted as theassessee is consistently following a method ofaccounting which is well recognized in developmentbusiness and has been accepted by the assessingofficer also in the other group cases. Thus theaddition is hereby deleted.” The aforesaid finding of the CIT(A) was approvedby the Tribunal with the observation that the departmenthas accepted the assessee’s method of accounting namely,the project completion method and therefore there was nojustification for adopting the percentage completionmethod for one year on selective basis. It is well settled that the project completionmethod is one of the recognized methods of accounting.In CIT v. Hyndai Heave Industries Co. Ltd. [2007] 291ITR 482 / 161 Taxman 191 (SC) the Supreme Court held asfollows:- “Lastly, there is a concept in accounts which iscalled the concept of contract accounts. Underthat concept, two methods exist for ascertainingprofit for contracts, namely, “competed contractmethod” and “percentage of completion method”. To know the results of his operations, the contractorprepares what is called a contract account whichis debited with various costs and which iscredited with revenue associated with a particularcontract. However, the rules of recognition ofcost and revenue depend on the method ofaccounting. Two methods are prescribed inAccounting Standard No.7. They are “completedcontract method” and “percentage of completionmethod”. This view was reiterated by the Supreme Court inCIT v. Bilahari Investment (P.) Ltd. [2008] 299 ITR1/168 Taxman 95 with the following observations: “Recognition/identification of income under the1961 Act is attainable by several methods ofaccounting. It may be noted that the same resultcould be attained by any one of the accountingmethods. The completed contract method is one suchmethod. Similarly, the percentage of completionmethod is another such method. Under the completed contract method, the revenueis not recognized until the contract is complete.Under the said method, costs are accumulatedduring the course of the contract. The profit andloss is established in the last accounting periodand transferred to the profit and loss account.The said method determines results only when thecontract is completed. This method leads toobjective assessment of the results of thecontract. On the other hand, the percentage of completionmethod tries to attain periodic recognition ofincome in order to reflect current performance.The amount of revenue recognized under this methodis determined by reference to the stage ofcompletion of the contract. The stage ofcompletion can be looked at under this method bytaking into consideration the proportion thatcosts incurred to date bears to the estimatedtotal costs of contract.The above indicates the difference between thecompleted contract method and the percentage ofcompletion method.” (underlining ours) On the other hand, the percentage of completionmethod tries to attain periodic recognition ofincome in order to reflect current performance.The amount of revenue recognized under this methodis determined by reference to the stage ofcompletion of the contract. The stage ofcompletion can be looked at under this method bytaking into consideration the proportion thatcosts incurred to date bears to the estimatedtotal costs of contract.The above indicates the difference between thecompleted contract method and the percentage ofcompletion method.” (underlining ours) After the above judgements of the Supreme Court itcannot be said that the project completion methodfollowed by the assessee would result in deferment ofthe payment of the taxes which are to be assessedannually under the Income Tax Act. Accounting Standards7 (AS7) issued by the Institute of Chartered Accountantsof India also recognize the position that in the case ofconstruction contracts, the assessee can follow eitherthe project completion method or the percentagecompletion method. In view of the judgments of theSupreme Court (Supra), the finding of the CIT (A),upheld by the Tribunal, does not give rise to anysubstantial question of law. Further, the Tribunal hasalso found that there was no justification on the partof the assessing officer to adopt the percentagecompletion method for one year (the year under appeal)on selective basis. This will distort the computation ofthe true profits and gains of the business. For these reasons, we are of the view that no substantial questionof law arises. We, therefore, decline to admit questionNos.2 and 3.” In Paras Buildtech India P. Ltd. Vs. Commissioner of Income Tax, reported in (2016) 382 ITR 630 (Delhi)identical substantial question of law was raised by theassessee as to whether the tribunal was justified insetting aside the order passed by the CIT(A) and holdingthat the percentage completion method of accounting has tobe followed by the assessee. The said application wasanswered in favour of the assessee in the following terms :“19. The settled legal position as far as section145 of the Act is concerned is that it is not open toan Assessment Officer to reject the accounts of anassessee unless he comes to a determination thatnotified accounting standards have not been regularlyfollowed by the assessee. As pointed out by theCommissioner of Income-tax (Appeals) in the orderdated July 2, 2010, the Accounting Standard of theICAI did not have any statutory recognition under theAct although it was binding under the Companies Act,1956. The method of accounting followed by theassessee in the present case, i.e. project completionmethod was certainly one of the recognised methods andhas been consistently followed by it.” The Court also took note of the decision of theHon’ble Supreme Court in Bilahari Investment (P) Ltd.(supra)in Commissioner of Income-Tax Vs. PrincipalOfficer, Hill View Infrastructure (P.) Ltd., reported in(2016) 384 ITR 451 (P & H). Similar question arose as towhether the percentage completion method ought to have beenfollowed by the assessee therein. The Court after takingnote of the decision of the Hon’ble supreme Court inBilahari Investment (P) Ltd. (supra) and that of ManishBuild Well (P) Ltd. (supra) heldthat the assessee has beenconsistently following one of the recognised methods ofaccounting that is project completion method forcomputation of income and in the absence of any prohibitionor restriction under the provisions of the Income Tax Act.For doing so it cannot be held that approach of the CIT(A)and the tribunal was erroneous or illegal in any manner soas to call for interference by Court. Accordingly, theappeal filed by the revenue was dismissed.In the case on hand the CIT(A) as well as thetribunal have noted the aforementioned decision and alsothe fact that the method of accounting, namely, the projectcompletion method was followed by the assessee and has beenaccepted by the Department and, thus, by applying theprinciple of consistency, the appeal of the revenue is dismissed. Thus, we find that there is no error in theorder passed by the tribunal nor any substantial questionof law arises for consideration in this appeal.Accordingly, the appeal (ITAT/45/2022) fails and isdismissed. Consequently, the connection application for stay IANo.GA/2/2022 also stands closed. (T.S. SIVAGNANAM, J.) (BIVAS PATTANAYAK, J.)