2017 (9) TMI 803 - AT - Income Tax

Addition towards advance received for sale of flats - accrual of income - revenue recognized from sale of goods or rendering services - AO made additions only on the ground that the assessee is following mercantile system of accounting and project completion method for recognition of revenue - According to the AO, revenue from the project should be recognized when the project is complete - Held that - We do not find any merit in the findings of the AO for the reason that unless a written sale agreement is entered into specifying the terms and conditions for sale, it cannot be construed that the parties have agreed for transfer of property. Since the assessee has entered into agreement for sale in the financial year relevant to AY 2008-09 and also executed the sale deeds in the same financial year, the revenue therefrom towards sale of flats needs to be recognized as and when the sale is complete. We further observe that the assessee has recognized revenue from sale of these flats in the financial year relevant to AY 2008-09 and this fact was not disputed by the AO as well as the CIT(A). Therefore, we are of the view that the assessee has rightly recognized revenue from sale of flats as per the method of accounting regularly followed in its business and also as per the Accounting Standard-9 issued by the ICAI. Hon ble Gujarat High Court in the case of CIT vs Motilal C Patel & Co (1988 (4) TMI 36 - GUJARAT High Court) under similar facts has observed that income accrues to a builder or developer only when transaction of sale is complete and any advance received under the agreement for sale or mere earnest money cannot be taxed as income before the transaction of sale is complete. Thus assessee has rightly recognized revenue from sale of flats when the sale of flat was completed by way of instrument of sale which has happened in the financial year relevant to AY 2008-09. - Decided in favour of assessee.

Summary

Issues:
1. Validity of reopening of assessment u/s 147 of the Act.
2. Addition made by the AO towards advance received for sale of flats.

Issue 1: Validity of reopening of assessment u/s 147 of the Act

The appellant challenged the validity of the assessment reopening before the CIT(A), arguing that income chargeable to tax was not escaped due to non-disclosure of income from the sale of a flat. The AO issued a notice u/s 148, converting the case into scrutiny assessment. The CIT(A) observed that the project was complete in the impugned financial year, and as the appellant follows the mercantile system of accounting, the revenue should have been recognized accordingly. The CIT(A) held that the revenue recognition principle in AS-9 cannot override the provisions of the law. The CIT(A) directed the AO to avoid double taxation if the same amount was taxed in the subsequent year. The appellant appealed against the CIT(A)'s decision.

Issue 2: Addition made by the AO towards advance received for sale of flats

The appellant contended that they follow the mercantile system of accounting and project completion method for revenue recognition, as per AS-9 issued by ICAI. The appellant argued that the agreements for sale of flats were entered into in the financial year relevant to AY 2008-09, and the revenue was recognized in the subsequent year. The AO made additions based on the mercantile system of accounting, ignoring the actual sale completion. The appellant cited the decision of the Hon’ble Gujarat High Court to support their argument. The ITAT found that the appellant had recognized revenue in the subsequent year, as per the method consistently followed and accepted by the revenue. The ITAT noted that the AO's findings lacked merit as the sale was complete only when the sale deed was executed, which happened in the subsequent financial year. Relying on the Gujarat High Court decision, the ITAT held that the revenue was rightly recognized by the appellant and directed the AO to delete the addition made towards advance for the sale of property.

In conclusion, the ITAT allowed the appeal filed by the assessee, reversing the CIT(A)'s decision and directing the AO to delete the addition made towards the advance for the sale of property.