2021 (10) TMI 1195 - AT - Income Tax

Revenue recognition - method of accounting - sale of residential/commercial units - revenue from booking of units by the customers - Addition invoking percentage of completion method - completed contract method v/s percentage of completion method - Addition deleted by CIT(A) - HELD THAT - Accounting standard AS-7 relied upon by the Assessing Officer is applicable strictly in the case of construction contracts only. CIT(A) has followed binding precedent of the jurisdictional High Court in the case of Paras buildtech India private limited 2015 (11) TMI 1217 - DELHI HIGH COURT ; Sabh infrastructure Ltd. 2015 (11) TMI 1283 - DELHI HIGH COURT and Manish Buildwell P. Ltd. 2011 (11) TMI 35 - DELHI HIGH COURT Further, the assessee is following consistently this method of revenue recognition in prior years as well as in subsequent years and which has been accepted by the revenue and thus rule of consistency also demand that in the year under consideration the assessing officer is not justified in deviating the consistent approach of the Department. No error in the order of the Ld. CIT(A) on the issue in dispute and accordingly we uphold the same. The grounds of the appeal of the revenue are accordingly dismissed.

Issues Involved:
1. Legality of deleting the addition made by the Assessing Officer (AO) by applying the Percentage of Completion Method (POCM) for revenue recognition.
2. Applicability of the principle of res judicata in Income Tax proceedings.
3. Justification for deleting the addition by ignoring the findings of the AO regarding profit element in installments received and reinvested by the assessee.

Issue-wise Detailed Analysis:

1. Legality of Deleting the Addition Made by the AO by Applying the POCM:

The Revenue appealed against the order of the Ld. Commissioner of Income-tax (Appeals) [CIT(A)], which deleted an addition of ?10,00,65,850/- made by the AO. The AO had applied the POCM for revenue recognition, asserting that the assessee should recognize revenue from booking of units by customers as per the guidance note issued by the Institute of Chartered Accountants of India (ICAI). The AO computed the addition based on the estimated project cost, total sale consideration, and percentage of work completed.

The assessee argued that it consistently followed the 'completed contract method' for recognizing revenue, which was accepted by the Revenue in earlier and subsequent years. The Ld. CIT(A) accepted the assessee's method, noting that the assessee recognized revenue at the time of execution of sale deeds and this method was supported by judicial decisions and ICAI's guidance note on accounting for real estate transactions. The CIT(A) held that the AO's reliance on AS-7 was misplaced as it applies to contractors, not developers, and deleted the addition.

The Tribunal upheld the CIT(A)'s order, noting that AS-7 is applicable to construction contracts and not to real estate developers. The Tribunal also emphasized the rule of consistency, as the assessee's method had been accepted in prior and subsequent years.

2. Applicability of the Principle of Res Judicata in Income Tax Proceedings:

The AO contended that the principle of res judicata does not apply to Income Tax proceedings as each assessment year is separate. However, the Ld. CIT(A) and the Tribunal referred to the Supreme Court's decision in Excel Industries Ltd., which supports consistency in the Revenue's approach. The Tribunal agreed with the CIT(A) that the AO's deviation from the consistent method followed by the assessee and accepted by the Revenue was unjustified.

3. Justification for Deleting the Addition by Ignoring the AO's Findings:

The AO argued that the installments received by the assessee included an element of profit, which was reinvested during the year. However, the assessee maintained that it accounted for these as advances and recognized revenue only upon completion and sale of the units. The Tribunal noted that the AO did not provide material evidence to controvert the assessee's method or its consistency. The Tribunal upheld the CIT(A)'s deletion of the addition, finding no error in the CIT(A)'s order.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that the assessee's method of revenue recognition was consistent, supported by judicial precedents, and appropriate for a real estate developer rather than a contractor. The Tribunal emphasized the importance of consistency in the Revenue's approach and found the AO's application of AS-7 to be legally misconceived. The appeal was dismissed, and the order was pronounced in the open court.

← Previous Next →