2022 (11) TMI 70 - AT - Income Tax

Addition on account of income from project under PCM method - whether income of the assessee is taxable in the impugned year or in the subsequent year? - HELD THAT - DR was unable to point any infirmity in the findings of the CIT(A) that as per the guidance note issued by the ICAI for accounting of construction contracts the cost of land was to be excluded for calculating the Construction and Development cost of the project, nor was he able to controvert the factual findings of the CIT(A) that after excluding this cost of land the CDC completed by the assessee during the year was below the prescribed 25% of the Estimated cost of the project. Since the basis of the AO for recognizing Revenue from construction contracts of the assessee during the impugned year was the CDC as per his calculation exceeding the prescribed limit of 25% of the estimated cost of project, which the CIT(A) has found to be factually incorrect and the Revenue has been unable to controvert the factual finding of the CIT(A) before us, we see no reason to interfere in the order of the CIT(A) upholding the claim of the assessee that no revenue was to be recognized in the impugned year from the construction projects undertaken by it. Ground no.1 raised by the Revenue is accordingly dismissed. Disallowance u/s.36(1)(iii) - HELD THAT - Since we have held in ground no.1 above that no income is assessable in the impugned year, there arises no question of claim of any expense whatsoever by the assessee and therefore the addition made on account of disallowance of interest is not tenable. Ground no.2 is therefore become infructous, and is thus dismissed.

Summary

Issues involved:
1. Deletion of addition on account of income from project under PCM method.
2. Deletion of disallowance of interest under section 36(1)(iii) of the Income Tax Act.

Issue-wise detailed analysis:

1. Deletion of addition on account of income from project under PCM method:

The primary issue was whether the income of the assessee, a builder/developer, was taxable in the impugned year or in the subsequent year. The assessee had adopted the Percentage Completion Method (PCM) for recognizing its income/revenue and did not recognize income for the impugned year as the construction and development cost incurred was only 22.73%, below the 25% threshold required by the Guidance Note issued by the Institute of Chartered Accountants of India (ICAI).

The Assessing Officer (AO) computed the work completed at 34%, including land cost in the construction and development cost (CDC), and thus held that income needed to be recognized in the impugned year. The Commissioner of Income Tax (Appeals) [CIT(A)] found that the AO had erroneously included land cost in the CDC, which should be excluded as per the Guidance Note. After correcting this and other factual errors, the CDC was recalculated to 23.88%, below the 25% threshold, leading the CIT(A) to hold that no income was assessable in the impugned year.

The CIT(A) relied on Accounting Standard 7 and the Guidance Note of ICAI, which stipulate that revenue recognition under PCM is applicable when certain conditions are met, including a minimum of 25% of construction and development costs incurred. The CIT(A) agreed with the assessee that land cost should not be included in CDC and recalculated the percentage completion to 23.88%. Consequently, the addition of Rs.11,20,03,956/- made by the AO was deleted.

The Revenue could not point out any infirmity in the CIT(A)'s findings or controvert the factual findings that the CDC was below 25%. Therefore, the Tribunal upheld the CIT(A)'s order, dismissing the Revenue's ground.

2. Deletion of disallowance of interest under section 36(1)(iii) of the Income Tax Act:

The second issue pertained to the disallowance of interest amounting to Rs.6,06,86,887/- under section 36(1)(iii) of the Act. Given that no income was assessable in the impugned year, as determined in the first issue, the Tribunal held that there was no question of claiming any expense, including interest, by the assessee. Consequently, the addition made on account of disallowance of interest was deemed not tenable and the ground became infructuous.

Conclusion:

In conclusion, the appeal of the Revenue was dismissed, with the Tribunal upholding the CIT(A)'s findings that no income was assessable in the impugned year and that the disallowance of interest was not tenable. The order was pronounced on 19th October 2022 at Ahmedabad.