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2012 (6) TMI 241 - AT - Income TaxApplicability of AS-7 to Developer - assessee engaged in business of construction of Civil Work and Road Construction as a Contractor, had entered into an agreement with GSRTC for the development of a shopping complex - Revenue on observation that assessee was authorized to collect advances from the customers, opined that the assessee should have declared profit of the said project on percentage of completion method - Held that - Facts reveal that assessee was developing the commercial complex and, therefore, acting as a developer. Also, units of complex were to be transferred to lessees on approval of GSRTC, which was not received till the end of the accounting period. Further, since only part money was received, hence shown as an advance and sales were not materialized till the end of the year. Since the assessee can be termed as a contractor as also a developer, therefore the Revenue can be recognized in terms of AS-9 and not As-7. It was wrong on the part of the AO to assess the income irrespective of the year of completion of project when the amount received in advance has not reached certainty and that too the AO has merely estimated 10% as the recognition of Revenue of the construction contract, without assigning any specific basis of such an estimation. Thus, percentage completion method could not be applied. Deletion of addition upheld - Decided in favor of assessee.
Issues Involved:
1. Applicability of Accounting Standard-7 (AS-7) for revenue recognition. 2. Classification of the assessee as a contractor or a developer. 3. Method of revenue recognition (percentage of completion method vs. completed contract method). 4. Validity of the addition made by the Assessing Officer (AO) based on work-in-progress. Issue-Wise Detailed Analysis: 1. Applicability of Accounting Standard-7 (AS-7) for Revenue Recognition: The primary issue was whether AS-7, revised in 2002, which mandates the percentage of completion method for revenue recognition, applies to the assessee. The AO argued that AS-7 should be applied as the assessee had entered into an agreement with GSRTC for the development of a shopping complex and was authorized to collect advances from customers. The AO concluded that the assessee should recognize revenue based on the percentage of completion method, citing several judicial precedents to support this stance. 2. Classification of the Assessee as a Contractor or a Developer: The assessee contended that it was a developer, not a contractor, and thus AS-7 was not applicable. The CIT(A) supported this view, stating that the assessee was developing a commercial complex and acting as a developer, not as a contractor. The CIT(A) further noted that the lessees were identified, but the units were not transferred to them until GSRTC's approval, and only part money was received as advances, not sales. 3. Method of Revenue Recognition: The AO applied the percentage of completion method, estimating 10% of the addition to work-in-progress as profit. However, the CIT(A) found this method inappropriate for a developer. The CIT(A) emphasized that AS-7 applies to contractors, not developers, and that revenue should be recognized in accordance with AS-9, which is applicable to developers. The CIT(A) concluded that revenue should be recognized upon the sale of units, not based on work-in-progress. 4. Validity of the Addition Made by the AO: The AO added Rs. 22,10,000/- to the income based on the work-in-progress, applying a 10% profit rate. The CIT(A) rejected this addition, stating it was based on assumptions without a proper basis. The CIT(A) highlighted that profit should be calculated by reducing cost from sale price, and since no sales occurred, no profit could be assumed. The CIT(A) deleted the addition, asserting that the percentage completion method could not be applied to a developer. Conclusion: The Tribunal upheld the CIT(A)'s decision, concluding that the AO incorrectly applied AS-7 to the assessee, who was a developer, not a contractor. The Tribunal agreed with the CIT(A) that revenue recognition should follow AS-9 guidelines, recognizing revenue upon the sale of units. The Tribunal also noted that the AO's estimation of profit at 10% was arbitrary and lacked a specific basis. Consequently, the appeals of the Revenue were dismissed.
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