2021 (8) TMI 122 - AT - Income Tax

Revenue recognition - eligible method of accounting - appellant company followed Percentage Completion Method PoCM , duly considering the provisions of Accounting Standards 7 and 9 - difference between the profit shown by the assessee and profit computed as per PoCM - HELD THAT - It is true that the assessee recognised revenue in A.Y 2014-15 when the project was completed only 18.26% and as per the accounting principles read with Guidance Notes under PoCM, revenue has to be recognised after completion of 25% of the project. In our considered opinion, the action of the assessee company on the revenue reported by it on its project Prateek Edifice has not caused any loss to the revenue and the entire exercise is revenue neutral as the assessee has already offered complete amount of tax in the subsequent F.Y., and such completion was before passing of impugned assessment order, which is dated 29.12.2017. These facts clearly show that the Assessing Officer was well aware of the revenue recognised by the assessee from the entire project and the taxes paid by it. As undisputed position that emerges is that the assessee is following consistent method of accounting to recognise revenue under the project. No doubt, the assessee has not included cost of land for computation of profit under PoCM, but before completion of project, the entire revenue has been offered for taxation which also included the impugned addition made by the Assessing Officer. We, therefore, do not find any merit in the impugned addition. Considering the facts of the case in totality, we direct the Assessing Officer to delete the addition. This ground is accordingly allowed. Addition being interest on loan - HELD THAT - The assessee was asked to furnish clarification in respect of claim of interest. It is also not in dispute that vide letter dated 27.11.2017, the assessee has simply stated that it has borrowed loan from Prateek Infratech Pvt Ltd and M/s Prateek Buildtech India Pvt Ltd for general purposes. No supporting evidences were furnished by the assessee to substantiate its claim. Even before us, no details/documentary evidences regarding claim of interest expenses as revenue expenditure has been furnished. Therefore, the action of the AO is found to be correct - interest on loan amount shall remain added in total project cost. However, in all fairness, we direct the AO to consider this enhanced project cost in total estimated cost of project. With these observations, this ground is dismissed.

Summary

Issues:
1. Addition of interest on loan in project cost
2. Inclusion of cost of land for computation under Percentage of Completion Method (POCM)

Issue 1: Addition of interest on loan in project cost

The appellant contested the addition of ?1,25,72,260 on account of interest on loan, arguing that the interest expenses were not directly related to the ongoing project and should not be considered as part of the project cost. The Assessing Officer believed that interest expenditure is part of borrowing cost and thus part of the total project cost, as per the Guidance Notes on Accounting for real estate transactions. The appellant failed to provide supporting evidence for their claim, leading to the disallowance of the amount by the Assessing Officer. The appellant's appeal before the CIT(A) was unsuccessful. The Tribunal upheld the Assessing Officer's decision, stating that the interest amount should be added to the project cost. However, they directed the Assessing Officer to consider this enhanced project cost in the total estimated cost of the project.

Issue 2: Inclusion of cost of land for computation under Percentage of Completion Method (POCM)

The appellant, engaged in real estate development, followed the Percentage Completion Method (PoCM) for revenue recognition for the Prateek Edifice project. The Assessing Officer insisted that the appellant must recognize revenue as per the PoCM method in line with the Guidance Note on Accounting for Real Estate Transactions, rejecting the appellant's contention that the cost of land should not be included in the computation under PoCM. The Assessing Officer added an amount of ?3,61,56,783 after re-computing the percentage of completion. The Tribunal noted that the appellant consistently followed a method of accounting for revenue recognition under the project and had already offered the complete revenue for taxation before the completion of the project. The Tribunal found no merit in the addition and directed the Assessing Officer to delete it, considering the approach of the appellant as revenue neutral.

In conclusion, the Tribunal partially allowed the appeal of the assessee, directing the Assessing Officer to delete the addition related to the inclusion of cost of land for computation under PoCM and dismissing the addition of interest on loan in the project cost.