INCOME TAX ACT, 1961

Section 145

Accounting method - Project completion method - Value reported in AIR already disclosed as sales in subsequent year -

During the course of assessment proceedings, the assessing officer (AO) asked the assessee to provide a reconciliation of transactions reported in AIR information with the books of accounts and other details. In response to it, the assessee submitted various details and also a list of registered agreements for sale of immovable properties as reported in AIR statement and reconciliation of revenue recognized in the books of accounts. The assessee submitted before the assessing officer that project completion method was followed for revenue recognition i.e. when possession was handed over to the purchaser of the properties and that out of total of Rs. 4,70,70,210 reported in AIR information, sale receipts of Rs. 1,76,02,300 were recognized in financial year (FY) 2010-11, sale of Rs. 2,61,06,912 in financial year 2011-12 and sale of Rs. 15,01,000 in financial year 2012-13. However, the assessing officer held that the assessee was following mercantile system of accounting but deferring revenue recognition to the subsequent years and made an addition of Rs. 2,76,07,910 being the total of sales recognized by it in the subsequent two assessment years. Held: There was no dispute that out of total receipts of Rs. 4,70,70,210 reported in AIR information, the assessee has recognized sale receipts of Rs. 1,76,02,300 in financial year 2010-11, sale receipts of Rs. 2,61,06,910 in financial year 2011-12 and sale receipts of Rs. 15,01,000 in financial year 2012-13. In the instant case, the assessing officer has simply followed the AIR information of registration of agreements of sale made during the year and held that the assessee was not entitled to defer the receipts to later years. This was not the correct way to make an assessment. The assessing officer could have called for the books of accounts maintained by the assessee and examined it. He has not done so. There was no finding by the assessing officer that the books of accounts maintained by the assessee were defective. Also the assessing officer has shifted the gross sale receipts recognized by the assessee in financial years 2011-12 & 2012-13 back to financial year 2010-11 without shifting the expenditure incurred in connection with completion of the said properties. The assessee was following mercantile system of accounting. In exercise of the powers conferred by sub-section (2) of section 145 of the Act, the Central Government has notified Accounting Standard I and II to be followed by all assessees following the mercantile system of accounting. It is operative from 1-4-1997. As per the said Accounting Standard I 'accrual' refers to the assumption that revenue and costs are accrued, that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate. In the instant case, the addition made by the assessing officer of Rs. 2,76,07,910 by shifting back the gross sale receipts recognized by the assessee in financial years 2011-12 & 2012-13 to financial year 2010-11, without shifting the expenditure incurred in connection with the completion of the said project violates the Accounting Standard I notified under section 145(2) of the Act. In view of the above factual scenario, order of the Commissioner (Appeals) upheld in deleting the addition of Rs. 2,76,07,910.

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