2019 (3) TMI 1114 - AT - Income Tax

Estimation of cost of project - consequential application of Accounting Standard-7 for recognition of the project revenue, project cost and project income - as per AO cost of the project should be at ₹ 200 crores whereas the assessee estimate comes to ₹ 305 crores - HELD THAT - AO s estimate is not based on any material on record whereas the assessee has submitted a certificate from the Architect. During the year, significant construction has not taken place as it appears from the expenses incurred. Therefore, the claim of the AO that the project is complete and the assessee has allotted the flats to the buyers is not acceptable. Hence, the cost of the project as estimated by the architect appears to be correct. The flats were not handed over the buyers as the assessee was not allowed to do so by NOIDA. The assessee could sell only 44% of the total project area and the assessee had entered into individual contracts with the buyers which are legally enforceable. The significant performance w.r.t. the remaining component of the project is pending and the revenue in respect of such individual contract cannot be recognized until the remaining components are completed. Estimated cost of the project as per the architect, the assessee had only incurred 16.42% of the expenditure on the construction. CIT(A) has rightly allowed the claim of the assessee and reject the estimate of cost of the project by the AO and accordingly deleted the addition which does not need any interference on our part, therefore, we uphold the action of the CIT(A) on the issue in dispute and reject the ground raised by the Revenue. Adisallowance of development expenses, commission expenses, and traveling expenses - HELD THAT - As per the Assessing Officer these expenses are not allowable as these have not been estimated by the appellant in its project cost. Infact these expenses are not part of the project cost but are in the nature of overhead expenses. AO also has not declared these expenses to be unjustified or bogus and hence, CIT(A) has rightly allowed these expenses totaling to ₹ 16,53,396/- u/s 37(1) and deleted the addition in dispute and rightly directed the AO to allow the carry forward of losses of previous year, which does not need any interference on our part, therefore, we uphold the action of the CIT(A) on the issue in dispute and reject the ground raised by the Revenue. - Decided against revenue.

Summary

Issues:
Assessment of income based on project valuation report and application of Accounting Standard-7 for revenue recognition.

Analysis:
The Revenue filed an appeal against the Ld. CIT(A)'s order relevant to the assessment year 2012-13. The AO assessed the income of the assessee at a higher amount than the returned loss, making disallowances and adjustments. The Ld. CIT(A) deleted the additions made by the AO. The Revenue challenged this decision before the Tribunal. The Tribunal noted that the main issue revolved around the estimated cost of the project and the application of Accounting Standard-7 for revenue recognition. The AO's estimated project cost differed significantly from the assessee's estimate, which was supported by a certificate from an architect. The Tribunal found that the project was not complete, as claimed by the AO, and that revenue recognition should align with the completion of the project components. The Tribunal upheld the Ld. CIT(A)'s decision to delete the addition based on the architect's estimated project cost, as it was deemed correct. The Tribunal also addressed the disallowance of certain expenses by the AO, noting that these were overhead expenses and not part of the project cost. The Ld. CIT(A) was deemed correct in allowing these expenses and directing the AO to carry forward losses from previous years. Consequently, the Tribunal dismissed the Revenue's appeal.

This case highlights the importance of accurate project cost estimation and adherence to accounting standards for revenue recognition in the construction industry. The Tribunal's decision emphasizes the significance of supporting documentation, such as certificates from professionals like architects, in determining project costs. Additionally, the distinction between project costs and overhead expenses is crucial for proper income assessment. The judgment underscores the need for a thorough analysis of expenses and revenue recognition methods to ensure compliance with tax laws and accounting standards.