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TMI Blog2012 (7) TMI 770X X X X Extracts X X X X X X X X Extracts X X X X ..... enjoining that this Accounting Statement also applies to enterprises undertaking construction activities "not as contractors but on their own as a venture of commercial nature where the enterprise has entered into agreement for sale", as was the case here. 2. The ld.CIT(Appeals) erred in holding that it is AS-9 that is applicable to the case of the assessee, without appreciating that AS-9 deals with revenue recognition in general and para 2 of AS-9 specifically excludes construction contractors (including builders selling the units by agreement for sale), and that, in view of peculiar nature of the produce in the case of builders involving considerable gestation period, general rules regarding sale of goods cannot apply. 3. The ld.CIT(Appeals) failed to appreciate that, in the case of builders, each fraction of work completed is embedded with profit and hence the revenue is recognized with reference to the state of completion reached at the end of the accounting year determined as the proportion of costs incurred to the estimated total costs as per para 9.2 of AS-7, which is in conformity with the principles of law regarding accrual when applied to the specific facts of builders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of India is not applicable to it." 2.1. The AO was not convinced and quoted that AS-7 has since been revised w.e.f. 01/04/2003, therefore assessee is not entitled to follow "completed contract method" or "project completion method". As per AO, the assessee is to follow only the "percentage of completion method" now recognized. The AO has also cited few decisions; namely, CIT vs. British Paints India Ltd. 188 ITR 44 (SC), Sukhdev Jalan vs. CIT 26 ITR 617 (Patna), Tirathram Ahuja Pvt.Ltd. vs. CIT 103 ITR 15 (Delhi) and CIT vs. Nandram Huntram 103 ITR 433 (Orissa). 2.2. The AO has thereafter computed the income on the basis of the "booking advance" for both the assessment years, relevant paragraphs reproduced below:- (a) A.Y. 2005-06 "8. The total income of the assessee for the F.Y. relevant to the A.Y. under consideration is therefore worked out at percentage of the advances from members declared during the F.Y. Rate of net profit in the assessee's line of business varies from 10-20%. Looking to the fact that the Complex being constructed by the assessee is located at a very premium location it can safely been estimated that the assessee has earned good margin on sale of unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had undertaken risk and the liabilities and, therefore, entitled for the profits of the project. As per ld.CIT(A) the difference between a developer and a contractor is that a developer assumes the risks relating to the projects, whereas a contractor only undertakes execution of work. Then, ld.CIT(A) has discussed AS-9, according to which revenue is to be recognized when sale is executed in real estate business. He has concluded that no defect was found in the books of account of the assessee and the AO was not justified in estimating the income at 15% of the booking advance receipt. Resultantly, the addition as made by the AO was deleted. Now the Revenue is before us. 4. From the side of the Revenue, ld.Sr.DR Mr.B.L.Yadav appeared and placed reliance on the order of the AO as well as the wordings of the grounds raised as per the grounds of appeal. From the side of the Respondent-assessee ld.AR Mr.Mukund Bakshi appeared and placed reliance on the audited accounts of the assessee enclosed with the compilation. He has also placed reliance on few orders of the Tribunal, listed below:- Sl.No(s) Decision in the case of ... In ITA No(s).... 1. Miraj Construction P.Ltd. vs. ACIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the light of the factual matrix as narrated above, we have to see whether in such a situation the AS-7 is to be applied or not. The objective of AS-7 as prescribed by the Institute is as follows:- "The objective of this Statement is to prescribe the accounting treatment of revenue and costs associated with construction contracts. Because of the nature of the activity undertaken in construction contracts, the date at which the contract activity is entered into and the date when the activity is completed usually fall into different accounting periods. Therefore, the primary issue in accounting for construction contracts is the allocation of contract revenue and contract costs to the accounting periods in which construction is performed. This Statement uses the recognition criteria established in the Framework for the Preparation ad Presentation of Financial Statements to determine when contract revenue and contract costs should be recognized as revenue and expenses in the statement of profit and loss. It also provides practical guidance on the application of these criteria." The definition of a "construction contract" is a contract specifically negotiated for the constr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng periods in which the work is performed. But when an uncertainty arises about the collectibility of an amount already included in contract Revenue and already recognized in the statement of P&L account, the uncollectible amount or the amount in respect of which recovery has seized to be probable, is recognized as an expense rather than as an adjustment of the amount of contract Revenue. In this context, as per para-28, it was suggested that when an enterprise is able to make a reliable estimate as under:- "28. An enterprise is generally able to make reliable estimates after it has agreed to a contract which establishes: (a) each party's enforceable rights regarding the asset to be constructed; (b) the consideration to be exchanged; and (c) the manner and terms of settlement" We may also like to reproduce para-29 through which stage of completion of a contract can be determined. "29. The stage of completion of a contract may be determined in a variety of ways. The enterprise uses the method that measures reliably the work performed. Depending on the nature of the contract, the methods may include: (a) the proportion that contract costs incurred for work performed upto the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ordinary activities of the enterprise from - the sale of goods, - the use by others of enterprise resources yielding interest, royalties and dividends. 2. This Statement does not deal with the following aspects of revenue recognition to which special considerations apply: (i) Revenue arising from construction contracts; (ii) Revenue arising from hire-purchase, lease agreements; (iii) Revenue arising from government grants and other similar subsidies; (iv) Revenue of insurance companies arising from insurance contracts." As per the definition "completed service contract method" is a method of accounting which recognizes Revenue in the statement of P&L account only when the rendering of service under a contract has substantially completed. Right now we are not concerned with the recognition of Revenue on the sale of goods as prescribed in AS-9. We can confine our discussion in respect of recognition of Revenue emerging from rendering of services. Revenue from service transactions is usually recognised as the services performed. As per AS-9, Revenue can be recognised (i) either by the proportionate complete method or (ii) by the completed service contract method. The complet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct when the amount received in advance has not reached certainty and that too the AO has merely estimated 10% as the recognition of Revenue of the construction contract, without assigning any specific basis of such an estimation, the such an estimation is not approved, resultantly the view taken by the ld.CIT(A) is upheld. For both the years under appeal(s), the Revenue-Department has raised the identical grounds, therefore both are dismissed." 6. As far as the facts of the present appeals are concerned, it is an undisputed fact that the assessee has followed the method of recognition of revenue on the basis of the year-wise sales executed. Further we have also noted that ld.CIT(A) has given certain findings which are specifically based upon the facts of the case, such as, that the assessee had undertaken the development work and constructed and thereafter sold offices/shops. The assessee had undertaken risk of the project by deployment of its own finances. On account of such uncontroverted factual finding, we hereby uphold the view taken by the ld.CIT(A) following the decisions cited hereinabove. Resultantly, for both the years grounds raised by the Revenue are hereby dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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