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2020 (7) TMI 157 - AT - Income TaxRevenue recognition of the work completed to the returned income - return was selected for scrutiny assessment under CASS - HELD THAT - The assessee has recognized the revenue in Assessment Year 2015-16 onwards when the completion exceeded 30%. The reasons for the reduction in the estimated cost of project from ₹ 362 crores as on 31.03.2014 to ₹ 349.53 crores as on 31.03.2016 has been well explained at para 37 of the AS 7 which is mentioned elsewhere and the reason for reduction in the estimated cost so far as the case in hand is concerned is due to selling cost which was earlier taken at ₹ 25 crores which was reduced rs. 12.35 crores. It is pertinent to note that the assessment order for Assessment Year 2014-15 was filed on 29.09.2015. This means that the Assessing Officer was well aware of the revenue recognition in Assessment Year 2015-16 and, therefore, grossly erred in making additions in Assessment Year 2014-15 for income which has been duly recognized in subsequent assessment year. As relying on M/S EXCEL INDUSTRIES LTD. AND MAFATLAL INDUSTRIES P. LTD. 2013 (10) TMI 324 - SUPREME COURT Assessing Officer / CIT (Appeals) were not justified in substituting the cost as on 31.03.2014 with the cost on 31.03.2016. The addition made by the Assessing Officer is not justified on the facts of the case. We accordingly direct the Assessing Officer to delete the addition - Decided in favour of assessee.
Issues Involved:
1. Revenue recognition of the work completed. 2. Percentage of project completion. 3. Validity of cost estimates and their adjustments. 4. Application of Accounting Standard 7 (AS 7). 5. Consistency in assessment years. 6. Legal principles from the Supreme Court's judgment. Issue-wise Analysis: 1. Revenue Recognition of the Work Completed: The primary grievance of the assessee was that the CIT (Appeals) erred in confirming the addition of ?17,32,78,878/- made by the Assessing Officer on the grounds of revenue recognition of the work completed to the returned income. The assessee argued that the work was not completed to the extent of 30% and, following the accounting policy, no revenue was recognized during the year under consideration. 2. Percentage of Project Completion: The assessee provided a detailed working of the cost of the project, indicating that the completion percentage was less than 30%. The Assessing Officer, however, believed that the figures were manipulated to show less than 30% completion to avoid triggering revenue recognition. The Assessing Officer re-evaluated the project costs and concluded that the completion percentage was 30.74%, thus necessitating revenue recognition. 3. Validity of Cost Estimates and Their Adjustments: The assessee's cost estimates showed a reduction from ?362.60 crores to ?349.56 crores due to adjustments in selling and marketing expenses. The Assessing Officer rejected this reduction, citing a lack of basis for the changes and discrepancies in the FAR sanctioned by the Noida Authority. The CIT (Appeals) upheld this view, leading to the addition of ?17,32,78,878/- to the assessee's income. 4. Application of Accounting Standard 7 (AS 7): The tribunal referred to AS 7 issued by the Institute of Chartered Accountants of India, which prescribes the accounting treatment of revenue and costs associated with construction contracts. The tribunal noted that the assessee followed the "Percentage of Completion Method" and recognized revenue only upon achieving 30% completion of the project cost. The tribunal found that the reduction in estimated costs was justified under AS 7 due to changes in selling costs. 5. Consistency in Assessment Years: The tribunal observed that in subsequent assessment years (2015-16, 2016-17, and 2017-18), the assessee recognized revenue upon achieving 30% completion, and the returned income was accepted by the Assessing Officer. The tribunal held that the Assessing Officer erred in making additions for the assessment year 2014-15 when the revenue was duly recognized in subsequent years. 6. Legal Principles from the Supreme Court's Judgment: The tribunal referred to the Supreme Court's judgment in CIT Vs. Excel Industries Ltd., which emphasized that fundamental aspects permeating through different assessment years should not be reconsidered if they remain unchallenged. The tribunal concluded that the Assessing Officer and CIT (Appeals) were not justified in substituting the project cost as on 31.03.2014 with the cost on 31.03.2016. The addition made by the Assessing Officer was deemed unjustified. Conclusion: The tribunal directed the Assessing Officer to delete the addition of ?17,32,78,878/-, allowing the appeal in favor of the assessee. The judgment emphasized the importance of consistency in revenue recognition practices and adherence to established accounting standards.
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