2018 (2) TMI 97 - AT - Income Tax

Recognition of revenue - revenues where the assessee has entered into registered sale deeds with the plot buyers and where certain advances have been received from the plot buyers, where the assessee is following percentage completion method of accounting - profits determined by applying percentage completion method as per Accounting Standards issued by ICAI - Held that - In respect of revenues from executed sale deeds, the revenues have been recognized to the extent of work completed and the said principle will apply in respect of advances so received from the buyers. The assessee has therefore to maintain the consistency in its method of accounting where it is following percentage completion of method and within the said method, it cannot be allowed to make variation on the basis of plot buyers agreement and executed sale deeds so long as the basic parameters for recognition of revenues, as we have discussed above, have been fulfilled. In respect of total advances actually received from the customers as on 31.03.2012 amounting to ₹ 4,44,28,514 arising out and in respect of which plot buyers agreement has been executed, revenues to the extent of percentage of work completed (45.73%) which comes to ₹ 2,03,17,159, following the percentage completion method has been rightly brought to tax by the Assessing officer and the order of the ld CIT(A) is set aside to this extent. Thus following the percentage completion method, revenues, as per executed sale deeds amounting to ₹ 2,11,38,286 and in respect of advances received from the customers amounting to ₹ 2,03,17,159 arising out and in respect of which plot buyers agreement has been executed, shall be recognized for the year under consideration. There is no dispute regarding the cost incurred and expected to be incurred in future and which has been determined as a percentage of sale @ 44.27% at ₹ 1,83,52,325 and after setting off the said cost, the profit chargeable to tax shall be ₹ 2,31,03,120 as against ₹ 3,43,13,700 determined by the AO.

Issues Involved:
1. Determination of gross profit from sales where registry has been executed.
2. Recognition of revenue on a percentage completion basis for advances received from customers.

Detailed Analysis:

1. Determination of Gross Profit from Sales Where Registry Has Been Executed:

The assessee challenged the CIT(A)'s determination of gross profit at ?1,17,80,367/- against the declared ?1,17,24,318/-, confirming an addition of ?56,049/-. The Revenue contested the reduction of profit from ?2,29,91,672/- to ?1,17,80,367/-.

The assessee follows the "percentage completion method" for revenue recognition. The AO observed that the assessee recognized only part of the sales as revenue and did not offer income for tax on advances received from customers. The AO issued a show-cause notice and subsequently rejected the books of accounts, applying the percentage completion method as per Accounting Standards issued by ICAI.

The CIT(A) noted that the assessee had completed only 45.73% of development work by 31.03.2012 and applied the percentage completion method to the sales where registry had been executed, determining the profit at ?1,17,80,367/-. The CIT(A) stated that revenue should be recognized when the seller has transferred significant risks and rewards of ownership, even if substantial acts remain to be performed.

2. Recognition of Revenue on Percentage Completion Basis for Advances Received from Customers:

The assessee argued that revenue recognition conditions were not satisfied for advances from customers, as significant risks and rewards of ownership had not been transferred. The AO applied the percentage completion method to advances received, determining a profit of ?1,13,22,028/-. The CIT(A) enhanced this amount to ?1,73,71,778/- by considering the gross value of advances and applying the percentage completion method.

The CIT(A) held that the assessee had not applied the percentage completion method to advances received from customers, which was inconsistent with the method claimed to be followed. The CIT(A) concluded that the total contract amount for plots, where plot buyer agreements were executed and substantial advances received, should be considered for computing profit by applying the percentage completion method.

Findings and Conclusions:

The Tribunal affirmed the CIT(A)'s application of the percentage completion method for sales where registry had been executed, recognizing revenue at ?2,11,38,286/-. Regarding advances received from customers, the Tribunal held that the significant risks and rewards of ownership had been transferred under the plot buyer agreements, and the percentage completion method should apply to the advances received.

The Tribunal noted that the assessee's consistent accounting policy of not recognizing revenue on advances was not in consonance with the percentage completion method. The Tribunal directed that revenues to the extent of work completed (45.73%) should be recognized for advances received, amounting to ?2,03,17,159/-.

Disposition:

The Tribunal disposed of the respective grounds of appeal, affirming the CIT(A)'s findings on the recognition of revenue for executed sale deeds and setting aside the CIT(A)'s enhancement of income for advances received from customers, directing the recognition of revenue to the extent of work completed. The appeals of the assessee and the revenue were disposed of with these directions.

← Previous Next →