2022 (6) TMI 339 - AT - Income Tax

Estimating the cost of construction - percentage of completion and estimation of profits - Cost of completion of the project worked out to 24.89% - AO on the basis of the details furnished by the assessee came to the conclusion that assessee fall into the category of construction contractor and therefore AS-7 read with Guidance Note on Real Estate Developers issued by Institute of Chartered Accountant of India was applicable - HELD THAT - When there is increase in saleable area, the cost of construction will definitely increase. We are therefore of the view that the increase in total saleable area with the escalation in cost of material and change in specification by customers had led to the estimated cost at Rs.138 crores. As before CIT(A) assessee had furnished Architect certificate wherein the initial estimated cost of project and with the increase in saleable area and other factors the revised cost has been certified. Based on the total estimated construction cost the percentage of the completion works out to 24.89% which is less than the 25%, being the limit prescribed for recognition of Revenue. We thus find that CIT(A) after considering the details, has given a finding that the architect certificate as on 31.03.2014 has given head wise, item wise project cost and there is no material placed by AO to show that the certificate issued by the architect was bogus. He has further given a finding that the certificate estimating cost of project of the architect as on 31.03.2013 was duly accepted by AO. We further find that CIT(A) while deciding the issue has given a finding that the estimated project cost of Rs.120 crores was calculated as per the provision of Water and Air Act and according to which the amount incurred in Government fee and project over head was not required to be included to the cost of project. Based on the reasoning given by CIT(A) in the order, he has concluded that the cost of completion of the project worked out to 24.89% which is less than 25%. Before us, no fallacy in the findings of CIT(A) has been pointed out by Revenue.

Summary

Issues:
1. Recognition of revenue based on percentage completion method.
2. Discrepancy in estimated project cost leading to the calculation of profits.

Issue 1: Recognition of revenue based on percentage completion method:
The case involved an appeal by the Revenue against the order of the Commissioner of Income Tax (Appeals) relating to the Assessment Year 2014-15. The Assessing Officer (AO) had determined the total income of the assessee company at Rs. 13,63,41,560, applying the percentage completion method for revenue recognition. The AO contended that the critical necessary approvals for the project were obtained, contracts secured with buyers, and over 10% of contract consideration received, justifying revenue recognition. However, the assessee argued that only 24.89% of the project was completed, below the 25% threshold for revenue recognition as per the Guidelines. The Commissioner of Income Tax (Appeals) held that the AO's addition to income was unjustified and directed its deletion, leading to the Revenue's appeal before the tribunal.

Issue 2: Discrepancy in estimated project cost leading to the calculation of profits:
The dispute also revolved around the estimated project cost, affecting the calculation of profits. The AO based the project's completion percentage on a total construction cost of Rs. 120 crores, while the assessee considered it to be Rs. 138 crores due to increased saleable area and other factors. The assessee supported the higher cost with an Architect certificate and reasons for cost escalation. The tribunal noted the undisputed increase in saleable area and accepted the revised cost of Rs. 138 crores, leading to a completion percentage of 24.89%, below the 25% threshold. The tribunal found no fault in the Commissioner of Income Tax (Appeals)'s decision, dismissing the Revenue's appeal.

In conclusion, the tribunal upheld the Commissioner of Income Tax (Appeals)'s decision, dismissing the Revenue's appeal regarding the recognition of revenue based on the percentage completion method and the discrepancy in estimated project cost affecting profit calculation for the Assessment Year 2014-15.