2020 (7) TMI 524 - AT - Income Tax

Revision u/s 263 - Income recognition method - method accounting regularly employed by the appellant in recognizing the revenue from sale of residential flats which was submitted and considered during the assessment proceedings u/s.143(3) - whether assessee was duty bound to follow AS-7 for revenue recognition? - HELD THAT - Assessee is a construction company engaged in the construction of flats/residential units on the land owned by it without any contract with the customers for construction of flats/residential units. It is ample clear that the assessee company is consistently following revenue recognition method by adopting completed project method, wherein, the revenue is recognised at the time of sale of flats/residential units by way of registered sale deed in favour of the customers and advance from customer and work in progress is recognised at cost in the balance sheet. Assessee has recognised revenue on two broad heads viz; sale of flats and sale of plots/land and amount of advance is transferred to the sales account when the registered sale deed is executed in favour of the customers adding the amount of advance pertaining to flats/residential units/plots sold during the relevant financial year and further adding the amount of advance received during the year. PCIT could not point out any defect in the revenue recognition method i.e. completed project method/percentage completion method adopted by the assessee and we are satisfied that the method consistently followed by the assessee and accepted by the department for recognition of revenue by following AS-2 alongwith AS-9 is a reasonable and right method for recognition of revenue on sale of flats/residential units/land. As per section 43CB the profits and gains of a construction company arising from construction contract or a contract for providing services shall be determined on the basis of percentage completion method and the same is mandatory for revenue recognition w.e.f. 1.4.2017 i.e. assessment year 2017-18 and this method of revenue recognition was not mandatory and compulsory to be followed for assessment year 2013-14. PCIT cannot revise or revisit the assessment order(s) by pressing into service the provisions of section 43CB of the Act in the present case. Findings arrived at by PCIT in the impugned order without any deliberation of explanation of the assessee explaining the method of accounting of revenue on account of sales and regarding non-applicability of AS-7 cannot be held as valid and sustainable without any further examination and exercise. PCIT cannot direct the AO for denovo assessment without assigning any defects or deficiencies in the method of accounting of revenue recognition on account of sale of flats/residential units/land and regarding non-applicability of AS-7 as contended by ld counsel for the assessee during the proceedings u/s 263. We are of the considered view that the revisionary order passed by the Ld. Pr. CIT is without jurisdiction - Decided in favour of assessee.

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Admission of additional ground of appeal.
3. Applicability of Accounting Standard AS-7 for revenue recognition.
4. Validity of the revisionary order under Section 263 of the Act.
5. Method of accounting employed by the assessee for revenue recognition.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal was filed late by 158 days. The assessee submitted a condonation petition supported by an affidavit and medical prescriptions, citing the ill health of the Director responsible for finance and taxation. The Tribunal, after considering the petition and rival submissions, was satisfied with the reason provided and condoned the delay, admitting the appeal for hearing.

2. Admission of Additional Ground of Appeal:
The assessee sought to raise an additional ground challenging the revision of the assessment order under Section 263 of the Act. The Tribunal admitted the additional ground for consideration and adjudication, noting that it revolved around the method of accounting employed by the assessee for revenue recognition and could be decided based on the existing record.

3. Applicability of Accounting Standard AS-7 for Revenue Recognition:
The Pr. CIT alleged that the assessee did not follow the mandatory AS-7 for revenue recognition. However, the assessee argued that AS-7 was not applicable for the assessment year 2013-14, as it was mandatory only from assessment year 2017-18. The Tribunal noted that ICAI guidelines and judicial precedents supported the assessee's method of accounting. It was concluded that AS-7 was not applicable for the assessment year in question, and the assessee's method of recognizing revenue on the completion method was justified and consistently followed.

4. Validity of the Revisionary Order under Section 263 of the Act:
The Tribunal found that the Pr. CIT initiated proceedings under Section 263 by considering the assessment order for the year 2015-16, which was selected for limited scrutiny, instead of the relevant assessment year 2013-14. This was a clear case of non-application of mind, rendering the revisionary proceedings and the order under Section 263 unsustainable. The Tribunal emphasized that the Pr. CIT must examine the relevant assessment record before initiating revisionary proceedings.

5. Method of Accounting Employed by the Assessee for Revenue Recognition:
The assessee followed the completion method for revenue recognition, where revenue was recognized upon the sale of flats/residential units through registered sale deeds. This method was consistently followed and accepted by the department in previous years. The Tribunal observed that the Assessing Officer had made adequate inquiries during the original assessment proceedings, and the method of accounting was properly explained and justified by the assessee. The Tribunal concluded that the method employed by the assessee was reasonable and in line with the applicable accounting standards (AS-2 and AS-9) for the relevant assessment year.

Conclusion:
The Tribunal quashed the revisionary order passed by the Pr. CIT under Section 263 of the Act, as it was without jurisdiction and not sustainable on merits. The appeal of the assessee was allowed, and the order pronounced on 20/07/2020.

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