| Question And Answer | |
|---|---|
| Subject: | Sec. 145(3) and assessment U/Sec. 143(3) of the Act. |
| Category: | Income-Tax |
| Querist: | Prakash |
| Answered by: | Research Team |
| Tags: | percentage completion method, project completion method |
| Date: | April 15, 2023 |
- The appellant is an Association of Person engaged in the business as builder and developer.
- Search action was conducted in the case of Group of cases on in the Aug 2016. A Notice u/s 153A was issued and duly served upon the assessee requiring the asseeseee to file return of income including undisclosed income. The appellant e-filed the return of income for A.Y.2015-16 .
- The assessee was developing a single project and the developer claimed to be following completed contract method of accounting for the purpose of revenue recognition.
- During the course of hearing various details were called for and submitted by the assessee. In support of the method adopted by the assessee of not recognizing the revenue and income on the project , submitted that since the project is under construction and the possession was not handed over to the customer , the amount received from the customer is just an advance and cannot be construed as sale consideration .It was also submitted by the appellant that when substantial risk and reward was passed on , the appellant has recognized the revenue of the project in the A.Y.2016-17. However, the ld AO has not appreciated the contention of the appellant and held that the method of recognizing revenue followed by the assessee is not as per the provisions of section 145 of the Act and inconsistent with the method adopted in the immediate succeeding year.Therefore, the ld AO has rejected the books of accounts of the assessee by invoking the provisions of section 145(3) of the Act on the ground that the appellant has not followed the Guidance Note issued by ICAI for revenue recognition by following percentage completion method, without pointing out any error in the method of revenue recognition i.e. completed contract method followed by the assessee.
- Assessment is completed u/Sec. 143(3) r.w.s.153A for a.Y. 2015-16 by working out the profit as per percentage completion method and added the substantial amount .
- Issues. a: Whether AO can reject books of accounts by resorting to Sec. 145(3) and asked the assessee to change the method of recognizing revenue form Project completion to percentage completion .
- b. Whether assessment passed U/SEc. 143(3) r.w.s. 153A is legally correct or AO once he reject the books of accounts , Assessment order is to be passed U/Sec. 144.
- c: Whether action of the AO of invoking provisions of sec. 145(3) on the ground that the assessee had accepted the method of recognizing revenue on percentage completion method in the A.Y. 2016-17is legally justified .
In PCIT v. Salarpuria Simplex Dwelling LLP. (2022) 289 Taxman 264 / 216 DTR 425 (Cal)( HC) the Court held that when the assessee has followed the project completion method the Revenue is not justified the rejecting the books of account and adopting the percentage completion method.
Before passing the order under section 144 a show cause notice must be given to the asessee for the proposed order under setionn144 of the Act. While passing the order under section 144 of the Act the estimation of income must be on a reasonable basis incongruent with the result of the prior previous years. The principle of consistency must be followed
In CIT v. Prestige Estate Projects Pvt Ltd ( 2022) 440 ITR 343 ( Karn) ( HC) , dismissing the appeal of the revenue the Court held that the assessee has changed the method of accounting from project completion method to percentage completion method. The case was revenue neutral. Relied upon CIT v. Bilahari Investment Pvt Ltd ( 2008) 299 ITR 1( SC)