Facts of the Case

The respondent-assessee, a builder and developer engaged in construction projects including commercial buildings, had consistently followed the Project Completion Method for recognizing revenue. During assessment proceedings, the Assessing Officer (AO) disputed the accounting treatment adopted by the assessee and sought to bring additional income to tax on the basis that the assessee had not followed the recognized revenue recognition principles in accordance with Section 145 of the Income Tax Act.

The Revenue argued that although the assessee claimed to be following AS-9, the nature of activities substantially resembled construction contracts and therefore AS-7 and the Percentage Completion Method ought to have been applied.

However, the Income Tax Appellate Tribunal (ITAT) accepted the assessee’s method, noting consistency in accounting treatment and acceptance by the department in earlier and subsequent years. The Revenue challenged the ITAT’s findings before the Delhi High Court.

 Issues Involved

  1. Whether the ITAT erred in accepting the Project Completion Method adopted by the assessee?
  2. Whether the assessee ought to have followed the Percentage Completion Method under Section 145?
  3. Whether AS-7 was applicable to a builder/developer engaged in commercial construction projects?
  4. Whether any substantial question of law arose for consideration by the High Court?

 Petitioner’s Arguments (Revenue’s Contentions)

  • The Revenue contended that the ITAT committed an error in accepting the accounting treatment of the assessee.
  • It was argued that the activities undertaken by the assessee were in the nature of construction contracts.
  • Reliance was placed on ICAI Guidance Notes to argue that AS-7 should govern such transactions.
  • According to the Revenue, the assessee ought to have adopted the Percentage Completion Method rather than the Project Completion Method.
  • The AO maintained that the accounting method adopted led to deferment of taxable income.

 Respondent’s Arguments (Assessee’s Contentions)

  • The assessee submitted that it had consistently followed the Project Completion Method, which is a recognized accounting method for builders and developers.
  • The same method had been accepted by the department in preceding as well as subsequent assessment years.
  • The assessee emphasized that substantial income had been offered in the subsequent year upon project completion.
  • It was argued that AS-7 was applicable to contractors and not builders/developers.
  • The assessee maintained that consistency in accounting practice is legally recognized and cannot be disturbed arbitrarily.

 Court Findings / Court Order

The Delhi High Court upheld the findings of the ITAT and dismissed the Revenue’s appeals. The Court observed:

  • The assessee had consistently followed the Project Completion Method.
  • The Assessing Officer had accepted the same method in both preceding and subsequent assessment years.
  • Project Completion Method is a recognized method of accounting for builders.
  • Merely because another accounting method exists does not justify rejection of a consistently followed recognized method.
  • The factual circumstances did not warrant interference.

The Court held that no substantial question of law arose in the matter and therefore dismissed the appeal.

 Important Clarification

The Court clarified that:

  • Builders and developers can validly adopt the Project Completion Method if followed consistently.
  • AS-7 cannot be mechanically applied to every construction-related activity.
  • Consistency in accounting treatment carries significant legal weight under tax law.
  • Revenue cannot selectively reject an accepted accounting method without compelling justification.

Importantly, the Court clarified that its findings were based on the peculiar facts of the case and were not intended to have universal application.

Sections Involved

  • Section 145 of the 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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