2020 (10) TMI 978 - AT - Income Tax

Estimation of income - Revenue recognition method - Percentage Completion Method for recognition of revenue - HELD THAT - Percentage Completion Method for recognition of revenue, till the F.Y. 2015-16 (A.Y. 2016-17), was not mandatory/compulsory to be followed by the assessee. It is only with effect from F.Y. 2016-17 (A.Y. 2017-18), that Percentage Completion Method has been made compulsory for the Real Estate Developers, that too for projects commencing on or after 01.04.2016, by way of introduction of Income Computation and Disclosure Standards (ICDS - III), relating to Construction Contracts. Since the assessee firm has been consistently following the same accounting policy for recognition of revenue, which has even been accepted in the past, therefore, there is no justification, on the part of the ld. AO to disturb the accounting policy adopted and thereby apply Percentage Completion Method for the relevant previous year. No infirmity in the order of the CIT(A) in holding that the assessee was consistently following the project completion method and income has been properly estimated accordingly. Accordingly, we uphold the order of the ld. CIT(A). Appeal of the revenue is dismissed.

Summary

Issues:
1. Addition of ?1,74,70,288
2. Method for revenue recognition
3. Compliance with AS-7 and AS-9

Analysis:
1. Addition of ?1,74,70,288:
The appeal by the revenue was against the order of the ld.CIT(A)-2, Jaipur for the A.Y. 2015-16 under Section 143(3) of the Income Tax Act, 1961. The AO concluded that the assessee, a Real Estate Developer, had not maintained accounts properly and had not declared correct profits. The AO rejected the books of accounts and applied the percentage completion method, resulting in an addition of ?1,74,70,288 to the total income of the assessee. However, the ld CIT(A) allowed the appeal, stating that the AO's estimation using the percentage completion method was incorrect. The ITAT upheld the CIT(A)'s decision, emphasizing that the assessee consistently followed the project completion method, and the income was estimated correctly. The ITAT noted that the AO had not applied the percentage completion method accurately, leading to the deletion of the addition.

2. Method for Revenue Recognition:
The assessee, a Real Estate Developer, followed the project completion method for revenue recognition, as per its accounting policy. The AO preferred the percentage completion method over the project completion method, considering the entire advance received as revenue. However, the ITAT found that the assessee's method was consistent and acceptable, as it recognized revenue when the sale deed was registered or final payment was received. The ITAT highlighted that AS-7, applicable to Construction Contractors and not Real Estate Developers, did not govern the assessee's revenue recognition method. It was also noted that the Percentage Completion Method became mandatory only from A.Y. 2017-18 for Real Estate Developers, which was not applicable for the year under consideration.

3. Compliance with AS-7 and AS-9:
The AO alleged that the assessee had not complied with AS-7 and AS-9, leading to the rejection of books of accounts under Section 145(3) of the Act. However, the ITAT found that the assessee had consistently followed a proper accounting policy for revenue recognition, which had been accepted in previous assessments. The ITAT cited the Hon'ble Supreme Court's decision emphasizing an assessee's right to follow an accounting method previously accepted by the department. Consequently, the ITAT upheld the CIT(A)'s decision, dismissing the revenue's appeal.

In conclusion, the ITAT dismissed the revenue's appeal, affirming the CIT(A)'s decision in favor of the assessee regarding the addition of ?1,74,70,288, the method for revenue recognition, and compliance with AS-7 and AS-9.