2022 (2) TMI 756 - AT - Income Tax

Revenue recognition - Acceptability of correct method of accounting as per accounting standard and revised guidance note - change the accounting standard - Revised return of income rejected - assessee finalized the balance sheet by following the method of proportionate completion method as per AS-7, subsequent to finalization of the balance sheet assessee has filed original return of income by declaring the profit as per audited balance sheet - HELD THAT - Even to change the accounting standard, the assessee has to declare the impact of change in such accounting standard/policy in the financial statements. Assessee decided to change the policy based on the status of the project it has to first modify the balance sheet and declare the impact. But in this case assessee preferred only to file revised return of income. Assessee and the TATA Housing Development Company Ltd. jointly developed the project and as per the joint development agreement assessee has brought proportionate land for the project and as per the joint development agreement assessee would receive the sale consideration based on the gross sales effected by the TATA Housing Development Company Ltd., and not based on the stage of project completion - gross revenue and the related cost for the project will depend upon the receipt of gross consideration from the TATA Housing Development Company Ltd., not depends upon stage of completion of the project - merely because assessee has received a certificate of statement from the TATA Housing Development Company Ltd. that the project completed is less than 25% it does not mean that assessee has to modify the method of accounting or the revenue from the project. The joint development agreement remains same and the compensation to the assessee remains same, the assessee has received 24% of the gross sales effected by TATA Housing Development Company Ltd. Therefore, the change of method proposed by the assessee in order to revise the return of income is not as per the fact brought on record. As stated earlier the Accounting standards and guidance notes are applied to present the financial statement reliably and for consistency. Certainly not for filing return of income. In the given case assessee is an LLP and no doubt accounting standard and guidance note is applicable to the assessee, however, the revenue sharing method and revenue declared by the assessee as per JDA are not based upon the project completion rather it depends upon the gross sales effected by the TATA Housing Development Company Ltd. Therefore, as per the facts on record the GN 2012 has no application to the case of the assessee. In the given case assessee has not revised the balance sheet and Profit and Loss Account based on the change of method of accounting adopted by the assessee but only filed the revised return of income. It is immaterial whether assessee followed the revised method of account in the subsequent assessment year, what is relevant is whether the assessee has followed the proper method of accounting to declare the revenue for this assessment year. In this assessment year assessee has revised return of income just because JV partner has certified that the project completed is less than 25% but it has to follow the revenue sharing method prescribed in the joint development agreement based upon which the financial statement was finalized/prepared. Consideration received by the assessee is not based on the stage of completion of the project. It is only depends upon the gross sales effected by the TATA Housing Development Company Ltd. Therefore, we are in agreement with the findings of the Assessing Officer and we sustain the addition proposed by the Assessing Officer. Accordingly, the appeal filed by the Revenue is allowed.

Summary

Issues Involved:
1. Validity of the revised return of income filed by the assessee.
2. Applicability of Accounting Standards (AS-7 and AS-9) and Guidance Note 2012 (GN-2012) for revenue recognition.
3. Justification for the change in the method of accounting and its impact on the assessment.

Detailed Analysis:

1. Validity of the Revised Return of Income:
The assessee initially filed a return declaring an income of ?1,70,65,640, which was later revised to show a loss of ?2,87,19,393. The Assessing Officer (AO) rejected the revised return, arguing that the method of recognizing income cannot be changed after filing the original return. The AO emphasized that the assessee consistently followed AS-7 and AS-9, and any change in the method of accounting must be reflected in the financial statements, not just in the revised return. The Ld. Commissioner of Income Tax (Appeals) [Ld.CIT(A)] allowed the revised return, stating that it complied with legal guidelines and the proper method of accounting.

2. Applicability of Accounting Standards (AS-7 and AS-9) and Guidance Note 2012 (GN-2012):
The AO observed that the assessee's reliance on AS-7, AS-9, and GN-2012 was misplaced, as the construction was entirely managed by TATA Housing Development Company Ltd., and the assessee was not responsible for the project's construction. The AO argued that the income from the project should be recognized based on the sales made by TATA Housing, not on the project's completion stage. The Ld.CIT(A) disagreed, noting that revenue recognition should follow the Percentage Completion Method as per GN-2012, which requires the project to reach at least 25% completion before recognizing revenue. The Ld.CIT(A) cited judicial precedents supporting this method.

3. Justification for the Change in the Method of Accounting and Its Impact on the Assessment:
The AO contended that the revised return was unjustified as it deviated from the original accounting method without proper evidence or modification of the financial statements. The Ld.CIT(A) found merit in the assessee's argument that the revised return followed the correct guidelines and should be accepted. However, the Tribunal concluded that the assessee's change in accounting method was not supported by a revised financial statement and that the revenue recognition should align with the joint development agreement, which was based on gross sales by TATA Housing, not the project's completion stage.

Conclusion:
The Tribunal upheld the AO's decision, rejecting the revised return of income and sustaining the addition proposed by the AO. The Tribunal emphasized that any change in the accounting method must be reflected in the financial statements and that the assessee's revenue recognition should be based on the joint development agreement terms, not the project's completion stage. The appeal filed by the Revenue was allowed, and the revised return of income was not accepted.