While hearing the case of M/s Vascular Township Pvt. Ltd, Jaipur bench of the Income Tax Appellate Tribunal (ITAT) recently held that the advance received from the customer is subject to tax for the reason that the builder is following percentage completion method of accounting.
The assessee in the instant case engaged in the development of township project in collaboration. During the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee follows “percentage completion method” but recognizes only part of the sales as “revenue” and no income is offered for tax in respect of the amount of “advance received from customers”. The assessee was asked to why provisions of section 145(3) should not be applied and why the profits should not be determined by applying “percentage completion method” as per Accounting Standards issued by ICAI.
AO refused to accept the contentions of the assessee and he rejected the books of accounts of the assessee and made an addition of the said advance also.
On appeal, CIT(A) observed that the assessee, who was a developer, was entitled to book amount received as booking advance as income on the transfer of property then advance booking amounts could not be treated as his trading receipt. The authority further observed that advance received from the customer registry has been done in the subsequent years and offered for tax as per the method of accounting consistently followed by the assessee. In subsequent years, income so offered has been accepted and therefore, taxing the income as per the method adopted by the lower authorities would tantamount to double taxation. Therefore the department opinioned that addition made by AO with reference to the advance received from the customer is unjust.
Before the Tribunal, the counsel for the assessee Advocate P.C. Parwal submitted that the accounting policy followed by the assessee is given in Schedule 11 of the Audited Financial Statement and the same is in accordance with Paras 10 and 11 of AS-9 issued by the Institute of Chartered Accountants of India (ICAI) as well as Guidance Note on Accounting for Real Estate Transactions issued by the ICAI. Further, he submitted that by following the consistent accounting policy, sales for the year are recognized at Rs.2,11,38,286/- as against the sale proceeds of Rs.4,50,18,026/- and no sales are recognized against the advance/booking amount of Rs.4,44,28,514/- received from customers.
After considering the rival submissions of both parties, the Tribunal bench comprising of Judicial Member Kul Bharat and Accountant Member Vikram Singh Yadav refused to accept the findings of the CIT(A).
The bench observed that “in the present case, where the assessee has admittedly chosen to follow the percentage completion method, it cannot be allowed to breach the very same method by not offering the advances so received during the year to tax and following a project completion method. Further observed that the assessee has therefore to maintain the consistency in its method of accounting where it is following percentage completion method and within the said method, it cannot be allowed to make a variation on the basis of plot buyers agreement and executed sale deeds so long as the basic parameters for recognition of revenues.
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