2019 (10) TMI 977 - AT - Income Tax

Revenue recognition - sale of under construction flats - date of execution of registered document or date of delivery of possession or registration of agreements, which is relevant? - application of principles of AS-7 and AS-9 - AO observed from the details that in many cases, the assessee had received almost 90% of the agreement, still it had not offered the income for taxation on the pretext that no agreement has been made with the prospective buyer. - Assessee contended that, The Ld.CIT(A) completely misapplied himself and erred in confirming the stand taken by the assessing officer in invoking the provisions of sec. 2(47) which apply to capital asset and not to stock-in-trade. HELD THAT - In the instant case as recorded by the AO when a prospective buyer approaches the assessee for booking the flat, allotment letter is issued to the buyer on receipt of the advance money. The appellant filed a written submission dated 26.03.2015 before the AO stating that the degree of work completed and certified by architect till 31.03.2009 is 73% and the assessee-company has recognized the revenue by applying 73% to the value of agreements executed till 31.03.2009. It was further stated before the AO that the revenue in respect of balance advances could not be recognized as passing of risks and rewards by virtue of ownership is an essential condition for revenue recognition as per AS-9, which has not been fulfilled in the instant case, as no agreement is executed and no possession have been given to the buyer. The case laws relied on by the Ld. counsel and Ld. DR have been narrated at length hereinbefore. One principle which emerges from the above case laws is the role of agreement executed. Immovable property is not conveyed by delivery of possession, but by a duly registered deed. Further, it is the date of execution of registered document, not the date of delivery of possession or the date of registration of document which is relevant. Once the executed documents are registered, the transfer will take place on the date of execution of documents and not on the date of registration of documents as held in Alapati Venkataramiah v. CIT 1965 (3) TMI 21 - SUPREME COURT As per the ingredients of AS-7 and AS-9, revenue be recognized even though legal title of the property is not transferred and possession is not given. Once seller transfers significant risks and rewards of ownership to buyer, seller thereafter acts like a contractor. Accordingly revenue recognition will have to be as in Percentage Completion Method (AS 7). We are concerned here with the execution of agreements and not with the registration of agreements. Having considered the application of principles of AS-9 in respect of sale of goods to a real estate project and the case laws relied on by both sides in the back drop of the facts of the case, we set aside the order of the Ld.CIT(A) and restore the matter to the file of the AO to make an addition, bringing to tax by percentage completion method, the revenue out of the remaining executed agreements, if any, during the impugned assessment year. The assessee is directed to file the documents/evidence in respect of agreements executed during the impugned assessment year. Needless to say, the AO would provide reasonable opportunity of being heard to the assessee before finalizing the order. Appeals are allowed for statistical purposes.

Issues Involved:
1. Addition of ?2,59,62,160/- by recomputing the income.
2. Method of accounting adopted by the appellant.
3. Application of section 2(47) concerning capital assets versus stock-in-trade.
4. Principle of consistency in accounting methods from previous assessment years.
5. Revenue loss to the department due to different assessment years.

Issue-wise Detailed Analysis:

1. Addition of ?2,59,62,160/- by recomputing the income:
The Assessing Officer (AO) observed that the assessee had received an advance of ?24,92,42,860/- from prospective buyers for the project "Sterling Tower" but only recognized income from agreements executed. The AO, referring to Accounting Standard (AS)-9, concluded that all conditions for revenue recognition were met and added ?2,58,30,786/- to the income. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this addition.

2. Method of accounting adopted by the appellant:
The appellant followed the 'Percentage Completion' method, recognizing revenue based on the completion percentage certified by an architect. The appellant argued that this method was consistent with the Guidance Note of the Institute of Chartered Accountants of India (ICAI) and AS-9. The AO, however, desired revenue recognition upon receipt of advances, leading to a dispute.

3. Application of section 2(47) concerning capital assets versus stock-in-trade:
The appellant contended that section 2(47) applied to capital assets and not stock-in-trade. The AO, however, held that the definition of transfer under section 2(47) included the transactions in question, thus justifying the revenue recognition on advances.

4. Principle of consistency in accounting methods from previous assessment years:
The appellant highlighted that in previous assessment years (2005-06 and 2008-09), the same accounting method was accepted by the department, arguing against deviation from this method. The CIT(A), however, did not find this argument persuasive enough to overturn the AO's decision.

5. Revenue loss to the department due to different assessment years:
The appellant argued that since the company was taxed at a constant rate, there was no revenue loss to the department even if the income was taxed in different years. The Tribunal noted this but emphasized the importance of following proper revenue recognition principles.

Tribunal's Decision:
The Tribunal reviewed various case laws and principles under AS-9 and AS-7, noting that revenue should be recognized when significant risks and rewards of ownership are transferred, even without legal title transfer. The Tribunal set aside the CIT(A)'s order, restoring the matter to the AO to reassess revenue recognition based on executed agreements during the assessment year. The AO was instructed to provide the assessee with a reasonable opportunity to present evidence.

Conclusion:
The appeals were allowed for statistical purposes, and the AO was directed to reassess the revenue recognition following the 'Percentage Completion' method for the executed agreements in the impugned assessment year. The decision was applied mutatis mutandis to the assessment years 2010-11, 2011-12, and 2012-13.

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