Facts of the Case

The assessee, Indrapuram Habitat Centre Pvt. Ltd., was engaged in development and construction of commercial projects. During the assessment proceedings, the Assessing Officer (AO) examined the accounting method followed by the assessee for recognizing revenue from ongoing construction activities.

The assessee claimed to follow Accounting Standard-9 (AS-9) and adopted the Project Completion Method, under which revenue was recognized only upon completion of the project.

The AO rejected this method and sought to bring additional income to tax by applying the Percentage Completion Method, asserting that the assessee’s activities were akin to construction contracts and therefore governed by AS-7.

The ITAT upheld the assessee’s accounting method. Aggrieved, the Revenue filed appeals before the Delhi High Court.

 Matter Involved (Professional Legal Summary)

The present matter concerns the legality and acceptability of the accounting method adopted by a builder/developer for recognition of revenue arising from construction projects. The core dispute revolved around whether the assessee, being a developer of commercial projects, was justified in following the Project Completion Method for income recognition, or whether the Assessing Officer was justified in compelling application of the Percentage Completion Method under Section 145 of the Income Tax Act. The Revenue challenged the order of the Income Tax Appellate Tribunal (ITAT), contending that the assessee’s accounting treatment was inconsistent with recognized accounting standards and resulted in deferment of taxable income.

 Issues Involved

  1. Whether the ITAT erred in accepting the Project Completion Method followed by the assessee?
  2. Whether builders/developers are mandatorily required to follow Percentage Completion Method under Section 145?
  3. Whether AS-7 applies to builders/developers engaged in construction of commercial buildings?
  4. Whether the Revenue could reject a consistently followed accounting method accepted in previous and subsequent years?

 Petitioner’s Arguments (Revenue’s Contentions)

The Revenue contended that:

  • The assessee wrongly claimed compliance with AS-9 while not recognizing revenue appropriately.
  • The Project Completion Method adopted by the assessee resulted in deferment of taxable income.
  • The nature of business being construction-oriented brought the assessee within the ambit of AS-7.
  • As per ICAI guidance notes, activities closely resembling construction contracts should follow AS-7.
  • Therefore, the Percentage Completion Method ought to have been adopted for proper revenue recognition.

 Respondent’s Arguments (Assessee’s Contentions)

The assessee argued that:

  • It had consistently followed the Project Completion Method over the years.
  • The same method had been accepted by the Assessing Officer in earlier and subsequent assessment years.
  • Huge income was offered in the subsequent year after completion of the project, showing no tax evasion.
  • AS-7 applies to contractors and not to builders/developers.
  • Under settled legal principles, an assessee is entitled to follow any recognized accounting method consistently.

 Court Findings / Observations

The Delhi High Court upheld the findings of the ITAT and observed:

  • The Project Completion Method is a recognized and accepted method of accounting for builders.
  • The assessee had consistently followed this method, and such consistency had been accepted by the department in previous and subsequent years.
  • AS-7 is generally applicable to contractors engaged in civil construction and not necessarily to builders/developers.
  • Once a recognized accounting method is regularly followed, it should not be disturbed without strong reasons.
  • The Revenue failed to establish any substantial error in the ITAT’s findings.

 Court Order / Final Decision

The Delhi High Court dismissed the Revenue’s appeal and held that no substantial question of law arose for consideration. The Court affirmed the ITAT’s order accepting the Project Completion Method adopted by the assessee.

 Important Clarification / Legal Principle Settled

Project Completion Method is valid for Builders/Developers

The Court clarified that:

  • Builders and developers may legitimately adopt the Project Completion Method.
  • AS-7 does not automatically apply to every entity involved in construction activity.
  • Consistency in accounting treatment is an important principle under tax law.
  • Revenue cannot arbitrarily force adoption of Percentage Completion Method if the adopted method is recognized and consistently followed.

 Relevant Sections Involved

  • Section 145, Income Tax Act, 1961 – Method of Accounting
  • Accounting Standard (AS)-7 – Construction Contracts
  • Accounting Standard (AS)-9 – Revenue Recognition 

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:8954-DB/SRB06112017ITA4762017_125544.pdf

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