2019 (8) TMI 1843 - AT - Income Tax

Revision u/s 263 - Taxability on estimated income from the development and construction project of building - Estimation of net profit by invoking provisions of Section 145 - Revenue recognition - addition made by the AO by applying percentage completion method delete by CIT - HELD THAT - AO could not challenge the project completion method adopted by the assessee to the percentage completion method unless all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership. The assessee has referred to BU permission etc. and has demonstrated on facts that the risks associated with the project continued with the developer in a significant way during the year under consideration. It is also not in dispute that the income has been ultimately offered in the later assessment year and duly assessed. Thus, the entire exercise of the AO is revenue neutral. The CIT(A) in our view correctly appreciated the facts and circumstances of the case and has taken note of the revenue recognition in the later year. We are unable to see any infirmity in the process of reasoning adopted by the CIT(A) while granting relief to the assesse. The assessee has also demonstrated that the revenue recognized from project has been actually assessed and accepted in 143(3) r.w.s. 263 of the Act proceedings. We thus see no merit in the appeal of the Revenue.

Issues Involved:

1. Whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in deleting the addition of Rs.82,90,562/- made by the Assessing Officer (AO) on account of estimation of net profit by invoking provisions of Section 145 of the Income Tax Act, 1961.
2. Applicability of Accounting Standard-7 (AS-7) vs. Accounting Standard-9 (AS-9) for revenue recognition in the case of a real estate developer.
3. Determination of the correct method for revenue recognition: percentage completion method vs. completed contract method.
4. Double taxation issue arising from the AO's estimation of profits for the assessment year 2008-09.

Issue-Wise Detailed Analysis:

1. Deletion of Addition by CIT(A):

The Revenue challenged the CIT(A)'s decision to delete the addition of Rs.82,90,562/- made by the AO. The AO had estimated the profits at 15% of the advances received from customers, invoking Section 145 of the Income Tax Act, 1961, and alleging non-compliance with accounting standards. The CIT(A) found that the AO's estimation was based on incorrect assumptions about the completion status of the construction project and the applicability of AS-7. The CIT(A) concluded that the significant risks and rewards had not been transferred to the buyers by 31-3-2008, and thus, the revenue recognition should follow the completed contract method as per AS-9, applicable to real estate developers.

2. Applicability of AS-7 vs. AS-9:

The AO applied AS-7, which mandates the percentage completion method for revenue recognition. However, the CIT(A) and the assessee argued that AS-7 is applicable to contractors, not real estate developers. The relevant standard for real estate developers is AS-9, which allows revenue recognition when significant risks and rewards are transferred to the buyer. The CIT(A) supported this view by referencing the decision in Awadhesh Builders vs. Income Tax Officer and other similar cases, establishing that AS-9 is the correct standard for the assessee.

3. Revenue Recognition Method:

The AO's application of the percentage completion method was based on the assumption that substantial construction work had been completed and significant advances had been received. The CIT(A) found this assumption factually incorrect, as the construction work was not as advanced as the AO claimed. The CIT(A) noted that the project had not reached a stage where significant risks and rewards could be transferred to the buyers. The completed contract method, as per AS-9, was deemed appropriate, and the revenue was correctly recognized in the subsequent assessment year (AY 2009-10).

4. Double Taxation Issue:

The assessee argued that the AO's action led to double taxation, as the same profits were taxed in both AY 2008-09 and AY 2009-10. The CIT(A) and the Tribunal acknowledged that the income from the project was ultimately assessed in AY 2009-10 and that the AO's estimation for AY 2008-09 was unwarranted. The Tribunal noted that the AO's approach resulted in revenue neutral exercise and upheld the CIT(A)'s decision to delete the addition, thereby preventing double taxation.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the addition of Rs.82,90,562/-. The Tribunal agreed that AS-9 was the appropriate standard for the assessee, a real estate developer, and that the completed contract method was correctly applied. The Tribunal also recognized that the AO's action led to double taxation and upheld the CIT(A)'s findings that the revenue was duly recognized and assessed in AY 2009-10. The appeal was dismissed, and the CIT(A)'s order was upheld.

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