2015 (11) TMI 1271 - AT - Income Tax

Accrual of income - income of the assessee firm as business profit of the assessee firm made by the assessing officer by estimating profit @15% on 30% of the total cost of work-in-progress - CIT(A) deleted the addition - Held that - The assessee firm has undertaken development of the project Neptune Infotech IT Park during the assessment year 2009-10. The assessee firm has to receive 58% of the area after construction while 42% of the constructed area is to be given to the owners of the land as per agreement with the owners of the land. The assessee firm has spent 14.11 crores till 31.03.2009 and the assessee firm received ₹ 1.85 crores as deposit from its sister concern, Ritesh Exports which was later on refunded to the tune of ₹ 20 lacs in May 2009, while the balance of ₹ 1.65 crores was credited to the partners account. The assessee firm has not sold any unit till assessment year 2011-12 while the total WIP was 28.30 crores as on 31.03.2012 whereby 90% of the project was completed while there was no sale of unit till 31.03.2012. Since the assessee firm has not sold any portion of the constructed area, no hypothetical income can be brought to tax as in fact no real income has accrued to the assessee as per the ratio of decision of Hon ble Supreme Court in the case of CIT v. Bokaro Steel Ltd. (1998 (12) TMI 4 - SUPREME Court) No infirmity in the order of the CIT(A) qua this issue and upheld the same. Hence, the additions of ₹ 63,52,000.00 made to income of the assessee firm as business profit of the assessee firm made by the assessing officer by estimating profit @15% on 30% of the total cost of work-in-progress is hereby deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition of Rs. 63,52,000/- made by the Assessing Officer (A.O.) based on estimated profit on the project.
2. Non-recognition of revenue on percentage completion method despite 30% project completion.
3. Classification of closing Work-In-Progress (WIP) as a business asset.
4. Non-provision of development agreement details during assessment proceedings.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 63,52,000/-:
The A.O. added Rs. 63,52,000/- to the assessee's income, estimating profit at 15% on 30% of the total cost of WIP. The CIT(A) deleted this addition, reasoning that the revenue should be recognized as per Accounting Standard 9 (AS-9) and guidance from the Institute of Chartered Accountants of India (ICAI). The CIT(A) noted that significant risks and rewards of ownership had not transferred to the buyer, as no agreements were executed, no specific units were identified, and the project was only 30% complete. The Tribunal upheld the CIT(A)'s decision, emphasizing that no real income had accrued to the assessee, citing the Supreme Court's ruling in CIT v. Bokaro Steel Ltd. which states that only real income, not hypothetical income, can be taxed.

2. Non-recognition of Revenue on Percentage Completion Method:
The A.O. argued that since 30% of the project was complete, the assessee should recognize revenue on a percentage completion method. The assessee contended that it had not sold any units and had received only a refundable advance of Rs. 1.85 crores from a sister concern, which was later refunded. The CIT(A) agreed with the assessee, stating that revenue recognition depends on significant risks and rewards transfer, which had not occurred. The Tribunal supported this view, noting that the project's completion percentage and the refundable nature of the advance did not warrant revenue recognition.

3. Classification of Closing Work-In-Progress (WIP) as a Business Asset:
The A.O. considered the closing WIP of Rs. 14.11 crores as a business asset and argued for profit recognition. The assessee maintained that the WIP was not yet saleable and was intended for leasing, not outright sale. The CIT(A) and the Tribunal found that the WIP classification did not necessitate immediate profit recognition, especially given the lack of sales and the decision to lease the units.

4. Non-provision of Development Agreement Details:
The A.O. criticized the assessee for not providing development agreement details during assessment. The assessee argued that the agreement with the landowners stipulated that 42% of the constructed area would be given to the landowners, with the remaining 58% retained by the assessee. The CIT(A) and the Tribunal found that the absence of specific unit sales and the refundable advance meant that no revenue could be recognized, regardless of the agreement details.

Conclusion:
The Tribunal upheld the CIT(A)'s order, concluding that the conditions for revenue recognition under AS-9 were not met. The addition of Rs. 63,52,000/- made by the A.O. was deleted, and the appeal by the Revenue was dismissed. The Tribunal emphasized that only real income, not hypothetical or estimated income, can be brought to tax.