Method of accounting — Assessee a builder and developer and not construction contractor — AS 7 applicable only in case of contractors — Assessee adopting completed contract method for A.Y. 2006-07 — No income offered in subsequent A.Y. 2007-08 — Result revenue neutral

Method of accounting — Assessee a builder and developer and not construction contractor — AS 7 applicable only in case of contractors — Assessee adopting completed contract method for A.Y. 2006-07 — No income offered in subsequent A.Y. 2007-08 — Result revenue neutral

The assessee was a builder and developer and not a construction contractor simpliciter. Assessee adopted completed contract method for the A.Y. 2006-07 onwards. Following the said method the assessee did not offer any income for the A.Y. 2007-08. The Assessing Officer rejected the assessee’s claim and made addition applying the percentage completion method.

The Tribunal allowed the assessee’s claim.

In appeal by the Revenue, the following question was raised before the High Court.   

“Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the income of the assessee from project ‘Mantri Sarovar’ has to be computed for the A.Y. 2006-07 on the basis of ‘Project completion method’ without appreciating that as per AS-7 and AS-9, the assessee has to follow percentage completion method as the assessee is a builder and developer?”

The Karnataka High Court upheld the decision of the Tribunal and held as under:

“i) U/s. 145(1) of the Act, the income chargeable under the head “Profits and gains of business” shall be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee. The general provision was subject to accounting standards that the Central Government may notify.

ii) The assessee was a builder and developer and not a construction contractor simpliciter. Accounting Standard 7, titled construction contracts, was applicable only in case of contractors and did not apply to the case of developers and builders as evident from the opinion rendered by the expert advisory committee of the Institute of Chartered Accountants of India. No income from the project was offered for the A.Y. 2007-08 on the basis of the project completion method and either method of accounting finally would lead to the same results in terms of profits and therefore, was revenue neutral.

iii) The substantial question of law is answered against the Revenue and in favour of the assessee.”