2020 (5) TMI 593 - AT - Income Tax

Revenue recognition - Percentage of completion method - Revenue recognized significantly based on principle of AS-9 (Accounting Standard as per ICAI) - HELD THAT - Assessee has two main stream of revenues, one from NOP Project and from other project. Assessee is basically construction contractor and also indulged in developing and sale of project named NOP . On overall basis, assessee is following percentage completion method. Whether the method of percentage of completion method can be applied for construction contract as well as real estate development project with reference Guidance Note GN(A) 23 (R2012). Assessee has commenced this project in AY 2006-07 and completed the whole project. It developed the total saleable area of 56727 Sq. ft. and upto AY 2012-13, it sold 46006 Sq. ft, this assessment year, it sold 1032 Sq. ft. only and it carried unsold stock of 9689 Sq.ft. This indicates that assessee has divergent business module. As per guidance note, percentage completion method can be applied only when revenue, costs and profit from transactions and activities of real estate which have same economic substance as construction contracts. Though, it is clear that only when the economic substance in real estate development and construction contract has to be same. Project NOP does not have same economic substance as construction contract. The difference in revenue generating pattern. NOP project already completed but certain portion of development remain unsold. It shows that revenue model is not same i.e. in construction contract, the whole revenue is already determined and only construction has to be completed. Revenue can be recognized significantly based on principle of AS-9 (Accounting Standard as per ICAI). Where the sale of goods for recognizing revenue, cost and profits from transactions which are in substance similar to delivery of goods. Principle of AS-9 alone can be applied as far as revenue recognition is concern. We notice that percentage of margin recognized by assessee upto 31.03.12 at 13.94% and the revised estimate indicate that it is at 25.97% of the whole project. Short recognition of profit of past sales. As per prudent method of accounting, the revised estimate cost to be recognized immediately and as far as income is concerned, the construction is already completed and still 9689 Sq. ft pending for sale. The economic situation might change when the actual sales of stock in trade i.e. pending area of sale. We are in agreement with the proposed absorption of the profit during this year based on the revised estimation of profit of ₹ 5,391.88 per Sq. ft. Accordingly, we direct the AO to estimate the profit of the assessee to the extent of sales achieved by the assessee during this year i.e. 1032 Sq. ft. and to estimate the profit of ₹ 55,64,424/-. Assessee carries stock-in-trade for the next assessment year at 9,689 Sq. ft and we are not sure whether the cost of sales will remain same and there may be cost of holding the stock which might reduce the profit of the assessee, therefore it is prudent to absorb the profit based on the revenue not based on estimation which should have been earned by the assessee by the end of this year. Accordingly, enhancement proposed by the CIT(A) are reduced to ₹ 55,64,424/-. The method proposed by CIT(A) is not applicable to the present case as explained above. Accordingly, the grounds raised by the assessee are allowed.

Issues Involved:
1. Uncalled for Enhancement of Income
2. Percentage of Completion Method not Appreciated
3. Profits Exceeding Revenue

Detailed Analysis:

1. Uncalled for Enhancement of Income:
The assessee challenged the enhancement of income by ?2,58,43,592/- by the Ld. CIT(A). The Ld. CIT(A) had rejected the assessee's contention that the method adopted for working out the profit of a year on the basis of the percentage of completion method of revenue recognition was incorrect. The Ld. CIT(A) argued that the profit for a particular year can exceed the sales made during the year, as illustrated by an example involving projected revenue and cost. The Ld. CIT(A) also rejected the assessee's claim that expenses incurred in respect of the 'NOP' project were not accounted for, stating that the cost incurred during the year of ?80,34,214/- was taken into account while arriving at the projected cost and profit for the year.

2. Percentage of Completion Method not Appreciated:
The assessee argued that the percentage of completion method should be applied on a cumulative basis in each reporting period to the current estimates of the project revenues and costs, as per the ICAI guidance note GN(A) 23 (Revised 2012). The assessee contended that the method used by the Ld. CIT(A) was incorrect and that the balance profit should be estimated based on the revenue recognized and the pending unsold flats. The tribunal noted that the assessee was following the percentage completion method and had two main streams of revenue from the 'NOP' project and another project. The tribunal recognized that the percentage of completion method could be applied only when the economic substance in real estate development and construction contracts is the same.

3. Profits Exceeding Revenue:
The Ld. CIT(A) had argued that the profit for a particular year could exceed the sales made during the year. The assessee, however, contended that the net profit of a year cannot exceed the gross revenue of or attributable to the relevant year. The tribunal agreed with the assessee's contention that the profit should be recognized based on the unsold stock and balance profit to be recognized based on actual sales. The tribunal noted that the prudent method would be to recognize the profit based on the unsold stock and balance profit to be recognized based on actual sales. The tribunal directed the AO to estimate the profit of the assessee to the extent of sales achieved during the year, i.e., 1032 Sq. ft., and to estimate the profit of ?55,64,424/-.

Conclusion:
The tribunal concluded that the method proposed by the Ld. CIT(A) was not applicable to the present case. The tribunal directed the AO to estimate the profit of the assessee based on the revised estimation of profit per Sq. ft. Accordingly, the enhancement proposed by the Ld. CIT(A) was reduced to ?55,64,424/-. The grounds raised by the assessee were allowed, and the appeal filed by the assessee was allowed.

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