2017 (4) TMI 911 - AT - Income Tax

Accrual of income - Taxation of net advance amount received in respect of flat No.701 & 702 for which no permission was there for construction - ownership - Held that - From the record, we found that the assessee company has under taken the redevelopment project of M/s. Dushyant CHS limited as per the development agreement executed between both the parties dated 18-07-2008. The Assessee Company has to abide with the provisions of law while constructing the new building by way demolishing the old building and getting the building plans approved from MCGM was the essence of contract. Due to non-approval of building plans for the 7th floor of the building the agreements which were executed became not legally enforceable. The purchaser s of flats also disputed making of progress payments since their banks refused to grant housing loan due to non availability of building plan approved for the 7th floor where these 2 flats were situated. Also due to the non approval of the 7th floor of the building by the MCGM an uncertainty came into the agreement and the flats which were agreed to sell were into the question. Since as per the clause no.7 of the agreements for sale the purchaser were entitled to get full refund on demand on developer fails to give possession of the fiats within stipulated time period. It is also not in dispute that as on 30th Sept, 2010, the building plan was approved only upto 6th floor of the building. A complete uncertainty was existed in respect of further approval and construction of 7th floor of the building. The Assessee Company has followed accounting standards issued by lCAI. As per AS-7 revenue was booked on the flats agreed to sale by % completion method. As per the said method revenue was booked up to a 60% of agreement value of respective flats agreed to sell upto 6th floor. However an uncertainly existed pertaining to construction of flats no. 701 and 702 the booking amount received against these 2 flats was kept under head Advance received in the balance sheet. As per the understanding of AS-9 the revenue should be booked when all the following 2 conditions are satisfied. (i) the seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with ownership. (ii) No significant uncertainty exists regarding the amount of consideration that will be derived from the real estate sale. Hence, in case of flat No. 701 and 702 none of the above conditions were satisfied and therefore the stand taken by the assessee company of postponing revenue recognition in respect of these two flats is justified. Also found that the agreement pertaining to the flat no. 701 is duly cancelled by the registered deed of cancellation dated 30-11-2011. The agreement pertaining to the flat No.702 is terminated and the suit for cancellation of agreement is pending in the Bombay City Civil Court. In view of the above facts and circumstances of the case, we do not find any merit in the action of lower authorities for bringing tax net advance amount received in respect of flat No.701 & 702 for which no permission was there for construction. Moreover, assessee itself has offered the said amount in the subsequent year when the plan was approved; there is no reason to tax the very same income double. - Decided in favour of assessee.

Summary

Issues:
1. Treatment of income from flat nos. 701 and 702 up to completion of 4th slab.
2. Application of accounting standard by the appellant.
3. Consideration of percentage completion method.

Analysis:

Issue 1: Treatment of income from flat nos. 701 and 702 up to completion of 4th slab
The appellant, a Private Limited Company engaged in builders and developers business, appealed against the order treating 60% of the agreement value of flat nos. 701 and 702 as income. The AO considered these agreements as income up to the completion of the 4th slab, leading to tax imposition. The CIT(A) upheld this action, prompting the appellant's further appeal. The appellant argued that conditions for revenue recognition, as per the Guidance Note on Recognition of Revenue by Real Estate Developer, were not met. The appellant highlighted that the agreements lacked enforceability due to non-approval by the government authority, leading to uncertainties and making it unreasonable to expect ultimate collection. The appellant offered the income in the subsequent year when permissions were obtained, emphasizing the non-satisfaction of conditions for revenue recognition.

Issue 2: Application of accounting standard by the appellant
The appellant contended that it followed the accounting standard issued by ICAI, specifically AS-9, for revenue recognition. The appellant justified postponing revenue recognition for flat nos. 701 and 702 based on the non-satisfaction of conditions outlined in AS-9. The cancellation of the agreement for flat no. 701 and the pending suit for flat no. 702 further supported the appellant's stance on delaying revenue recognition. The appellant's adherence to accounting standards and the subsequent treatment of income in the following year when permissions were obtained were crucial aspects of the argument.

Issue 3: Consideration of percentage completion method
The Tribunal examined the percentage completion method applied by the appellant for revenue recognition. The Tribunal noted the uncertainties and lack of enforceability regarding the agreements for flat nos. 701 and 702 due to non-approval by the government authority. The Tribunal acknowledged the appellant's decision to postpone revenue recognition based on the conditions set forth in AS-9. The cancellation of one agreement and the pending suit for the other agreement further supported the appellant's approach. Ultimately, the Tribunal found no merit in the lower authorities' decision to tax the advance amount received for flat nos. 701 and 702, as the appellant had already offered the income in the subsequent year when permissions were obtained, leading to the allowance of the appeal.

In conclusion, the Tribunal allowed the appellant's appeal, emphasizing the importance of adhering to accounting standards and the justification for postponing revenue recognition based on the non-satisfaction of conditions outlined in the relevant guidance notes and accounting standards.