2017 (11) TMI 960 - AT - Income Tax

Revenue recognition - application of percentage completion method or project completion method - contention of the assessee that the loss returned by the assessee in the year of completion of project stood accepted by the Department when similar method of revenue recognition, viz., Project Completion method was adopted and that, what led the authorities below to take a different method is not discernible from their orders - Held that - In the instant case, the assessee has adopted the mercantile system of accounting and has adopted the project completion method for revenue recognition. From the sample copy of one of the prospective buyers as submitted it is clear that the total value of the flat/shop was quite an ascertained value and nothing sort of it is depicted there from as to which part of the receipt was not ascertainable. The assessee was also in receipt of the amounts as stipulated in the said agreement. The assessee has also incurred expenditure towards construction works and the auditor s report categorically speaks of revenue recognition on accrual basis. However, the loss claimed by the assessee is based on application of Project completion method. In such peculiar facts, it has to be decided whether the profit earned on a particular receipt would be taxable or not during the year under consideration or not. The learned authorities below also appear to have not examined all these aspects of the case. They have also not properly examined whether there was any item of income, the quantum of which was not ascertainable during the disputed year. There is nothing on record before us to examine that the assessee has been consistently following the project completion method for revenue recognition in respect of all the projects undertaken by assessee during the years preceding to the year under consideration, as also to the subsequent projects undertaken by him. This aspect also needs examination at the stage of AO before finally deciding the issue. In case the assessee is found to have adopted consistent method of revenue recognition in preceding and subsequent projects, then the Assessing Officer will not be justified to work out the profit by applying percentage of completion method during the impugned year on selective basis. Therefore, the matter deserves to be restored back to the file of Assessing Officer to decide the issue afresh - Decided in favour of assessee for statistical purposes

Summary

Issues Involved:
1. Applicability of 'percentage completion method' vs. 'project completion method' for revenue recognition.
2. Justification of notional addition made by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Applicability of 'percentage completion method' vs. 'project completion method' for revenue recognition:

The primary issue is whether the authorities were justified in applying the percentage completion method instead of the project completion method adopted by the assessee for revenue recognition. The assessee, engaged in construction and real estate development, declared a loss in its return, citing the project completion method. The AO, however, applied the percentage completion method, arguing that it was necessary to determine the correct profits as per Accounting Standard 9 (AS-9). The AO noted that 62.47% of the Pitampura Project and 29.44% of the Agra Project were completed during the year. The AO thus estimated profits based on the proportionate completion method, resulting in a notional addition of ?26,07,172/-.

The CIT(A) upheld the AO's decision, stating that the assessee was continuously taking advances from prospective buyers and utilizing them for construction, thus providing a service. The CIT(A) reasoned that if the assessee had followed the project completion method, it should have constructed the properties from its own funds and sold them as completed units. Since the assessee was taking advances, the revenue recognition method as per AS-9 was deemed appropriate.

2. Justification of notional addition made by the Assessing Officer (AO):

The assessee contested the notional addition, arguing that the project completion method was consistently followed and accepted by the AO in the assessment year 2007-08. The assessee claimed that AS-9 was not applicable as it pertains to the sale of goods, rendering of services, and use of enterprise resources yielding interest, royalties, and dividends. The assessee maintained that it was the owner of the project lands and was not rendering services to prospective buyers but constructing properties for sale.

The Tribunal observed that the assessment order for A.Y. 2007-08 did not clearly indicate the method of revenue recognition adopted by the assessee. Even assuming the project completion method was used, the Tribunal noted that the year under consideration was not the year of project completion. The Tribunal found that the assessee had adopted the mercantile system of accounting, which generally recognizes income on an accrual basis. The Tribunal also noted that the statutory auditor's report indicated revenue recognition on an accrual basis, barring some unascertainable income items.

The Tribunal emphasized the need to examine whether the assessee consistently followed the project completion method in preceding and subsequent projects. The Tribunal decided to restore the matter to the AO for a fresh examination, considering all relevant aspects and providing the assessee an opportunity to present evidence.

Conclusion:

The Tribunal allowed the appeals for statistical purposes, directing the AO to re-examine the issue of revenue recognition method and notional addition after considering the consistency of the assessee's accounting practices and providing a fair hearing to the assessee. The decision for A.Y. 2005-06 was applied similarly to A.Y. 2006-07.