2022 (6) TMI 1490 - AT - Income Tax

Method of revenue recognition - recognition of revenue under the Percentage Completion Method PCM as per Accounting Standards AS issued by the Institute of Chartered Accountants of India ICAI - as argued AO has considered only the purchase cost of the land and if the percentage needs to be calculated, the estimated project cost has to be increased by the revalued cost of land and the AO cannot take the revalued value only for the limited purpose of cost of land. HELD THAT - We notice that Guidance Note issued by the ICAI contains a clause (5) which speaks about application of PCM in the accounting of real estate transactions or activities as per it cost of construction and also saleable project area needs to be taken into account while recognizing revenue under the PCM. In the present case, we notice that the condition mentioned in clause (c) of para 5.3 of the ICAI Guidance Note is not satisfied since the saleable area for the year under consideration as a percentage tot the total saleable area (104685 / 526645 sq.ft.) is much less than 25%. The cost of land and the estimated project cost have to be looked into, based on the facts and the documentary evidence. We, therefore, remit the issue back to the Assessing Officer with a direction that percentage of cost and saleable area have to be recomputed in accordance with para 5.3 of the ICAI Guidance Note. AO is also directed to take into consideration the conditions prescribed in para 5.3 of the ICAI Guidance Note are cumulative and needs to be satisfied in toto and consider the revenue recognition accordingly, after giving opportunity of being heard to the assessee. Appeal by the assessee is allowed for statistical purposes.

Summary

Issues:
Recognition of revenue under the Percentage Completion Method (PCM) as per Accounting Standards (AS) issued by the Institute of Chartered Accountants of India (ICAI).

Detailed Analysis:

Issue 1: Recognition of Revenue under PCM
The appellant, a company engaged in property development, filed an appeal against the order of the CIT(Appeals) for the assessment year 2015-16, specifically contesting the recognition of revenue under PCM. The Assessing Officer (AO) had directed the appellant to adopt PCM for revenue recognition as per AS-9. The AO observed discrepancies in the percentage of completion submitted by the appellant, leading to a revised calculation of revenue recognition. The CIT(Appeals) upheld the AO's decision, citing concerns about the revised cost of construction by the appellant to defer tax payments. The appellant argued that the conditions for revenue recognition under PCM are cumulative and not all were met. The Tribunal noted the conditions outlined in the ICAI Guidance Note, emphasizing the need for critical approvals, a reasonable level of project completion, and a minimum percentage of the saleable project area secured by contracts. The Tribunal found that the condition related to the saleable area percentage was not met, and the cost calculation was based on the revalued land cost instead of the original cost, affecting the percentage of construction cost. Consequently, the Tribunal remitted the issue back to the AO for recomputation based on the ICAI Guidance Note, ensuring all conditions are met for revenue recognition under PCM. The appeal by the appellant was allowed for statistical purposes.

This detailed analysis provides a comprehensive overview of the legal judgment, focusing on the issue of revenue recognition under PCM and the Tribunal's decision based on the ICAI Guidance Note and factual considerations presented in the case.