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TMI Blog2013 (11) TMI 721X X X X Extracts X X X X X X X X Extracts X X X X ..... law as well facts that the assessee is not eligible for deduction under section 80IB of the Income Tax Act, while confirming the assessable income for the relevant assessment year. 2. The learned CIT (Appeals) erred in law as well facts by not adjudicating upon, initiation of penalty proceedings initiated under section 271AAA of the Income Tax Act, 1961. 2. Briefly the facts are that the assessee, a private limited company was incorporated on 21/9/2006. It has engaged itself in the business of developing and selling real estate project in the name of 'Krish Vatika' at Bhiwadi. An action u/s 132 of the Act was carried at business premises of the assessee on 17/9/2008. The assessee has filed Nil return of income both for assessment years 2008-09 and 2009-10 by adopting project completion method. The Assessing Officer issued a show cause notice u/s 142(1) of the Act on 1/12/2010 informing him that since it has not followed accounting slandered AS7 and AS-9, which it was required to follow as per the provisions of section 145(2) and 145(3), assessment in the case was proposed to be made as per the provisions of section 144 as has been laid out in section 145 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eed to work out the true and fair picture of accounts by following AS-9 for revenue recognition and AS-7 i.e. percentage completion method for working out the profit. He, therefore, after rejecting the accounts, computed the profit on Percentage Completion Method at Rs. 90,43,688/- and for similar reasons, the income for assessment year 2009-10 stood assessed at Rs. 99,07,650/-. 4. The Ld. CIT(A) upheld the rejection of accounts as well as estimation of income by Percentage Completion Method. He considered various terms of the agreement and agreed with the Assessing Officer that the assessee ought to have prepared his accounts in accordance with AS-7 and AS-9 so that true and correct position of its profits could be presented from the books of account maintained by it. He was of the view that significant risk in the real estate is the price risk and in the agreement, such price is fixed and agreed by the allottees. Accordingly, any subsequent variation in the market price of the flat will affect the buyer/allottee. In case, market price of flat goes up, it is a reward to the buyer and if it goes down it is the risk of the buyer in respect of a flat that has already been booked by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntage of Completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under this method is determined by reference to the stage of completion and can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract. The Apex Court again in the case of CIT v. Hyundai Heavy Industries Co. Ltd., 291 ITR 482 (SC) took the similar view and held at page 495 as under:- "Lastly, there is a concept in accounts which called the concept of contract accounts. Under that concept, two methods exist for ascertaining profit for contracts, namely, "completed contract method" and "percentage of completion method". To know the results of his operations, the contractor prepares what is called a contract account which is debited with various costs and which is credited with revenue associated with a particular contract. However, the rules of recognition of cost and revenue depend on the method of accounting. Two methods are prescribed in Accounting Standard No. 7. They are "completed contract method" and "percentage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in upholding the decision of Ld. Assessing Authority to invoke section 145(3) of the Act and making assessment in the manner provided under section 114 of the Act. We, therefore, set aside the decision in this regard and allow grounds Nos. 2 and 3 raised in appeal by the assessee in assessment year 2003-04." "14. In the light of our decision in assessee's appeal, the grounds raised in appeal by revenue become infructuous and stand rejected." 6. He has also appended a note on applicability of AS-7, AS-9, GN 2006, RGN 2012 as were heavily relied upon by the Ld. Commissioner of Income Tax in upholding rejection of accounts and applicability of percentage profit rate as under:- 1. The Real Estate Developer is not a Pure Contractor but is a seller of flats (goods). The Revenue Recognition in case of sale of goods is triggered on completion of performance as provided in para 11 of AS-9 "Revenue Recognition"- "11. In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled: &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tcome of a real estate project can be estimated reliably and that revenue should be recognized under the percentage completion method only when the events in (a) to (d) below are completed. (a) All critical approvals necessary for commencement of the project have been obtained. These include, wherever applicable: (i) Environmental and other clearances. (ii) Approval of plans, designs, etc. (iii) Title to land or other rights to development/construction. (iv) Change in land use. (b) When the stage of completion of the project reaches a reasonable level of development. A reasonable level of development is not achieved if the expenditure incurred on construction and development cost is less than 25% of the construction and development costs as defined in paragraph 2.2(c) read with paragraphs 2.3 to 2.5. &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance with paragraph 35." 9. The outcome of a contract can be reliably estimated when the conditions prescribed in para 28 are met. "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 the contructed; (b) The consideration to be exchanged; and (c) The manner and terms of settlement. It is also usually necessary for the enterprise to have an effective internal financial budgeting and reporting system. The enterprise reviews and, when necessary, revises the estimates of contract revenue and contract costs as the contract progresses. The need for such revisions does not necessarily indicate that the outcome of the contract cannot be estimated reliably." Thus, any entity which does not have any robust internal financial budgeting system may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellation remains with the allotees. This right remaining with the allottees restricts the risks from developer to the allotees. In the event of fall in prices or project not coming un properly or for any unforeseen feature, the allottees can cancel the booking half way. The reward may be sought to be transferred from the developer to the allottees and in view of the biding agreement the risk continues to be remained with the developer because of the right of allottees to cancel the agreement. For recognizing revenue from the point of view of the developer, it is the risk which must get transferred to the allottee. Then only the profit can only be said to have been earned. AS-9 requires transfer of both risk and rewards of ownership. The observations of the authorities below are not on commercial realities as has clearly been explained in the written submissions placed on record. It, therefore, has been contended that there is no justification in rejecting the accounts of the assessee when right of selecting accounting policy rests with the assessee and the assessee having followed consistently the Accounting Standards on Project Completion Method, the assessment of income by Percen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method of accounting. Hon'ble Delhi High Court in the case of CIT v. Smt. V. Sikka [1984] 149 ITR 73 (Delhi) has entertained a view that even for the first year, the method of accounting is deemed to have been employed if the same is shown to have been regularly employed in subsequent years as is also the case in appeal before us. The real estate developer is not a pure contractor but is a seller of flats/goods. It is not mandatory for all real estate developers to follow Percentage of Completion Method as prescribed by Institute of Chartered Accountants of India under AS-7. Hon'ble Delhi High Court in the case of CIT v. Manish Buildwell (P.) Ltd. by its order dated 15/1/2011 in ITA No. 928/2011 has ruled that Accounting Standard-7 issued by the Institute of Chartered Accountants of India recognizes the position that in the case of construction contracts the assessee can follow either the project completion method or percentage completion method. We also find that neither the revised guidance notes 2012 issued by the Institute of Chartered Accountants of India nor the "Exposer Draft for Guidance Note on recognition of revenue" issued by the Institute of Chartered Accountants of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt which is debited with various costs and which is credited with revenue associated with a particular contract . However, the rules of recognition of cost are revenue depend on the method of accounting. Two methods are prescribed in Accounting Standard No. 7. They are "completed contract method" and "percentage of completion method". Thus, as both the methods of accounting are recognized methods of accounting, the assessee is at liberty to choose any of the above and if any one of the method of accounting is consistently followed by the assessee, the assessing officer cannot change the method of accounting to the "percentage of completion method." 10. The aforesaid view has also been followed by this Tribunal in the case of Unique Builders and Developers, Jaipur (supra) in a recent order dated 14/3/2013 on which appellant has placed strong reliance before us. The issue being similar and on the factual findings as are stated hereinbefore, we find no justification in rejection of accounts by application of provisions of Section 145(3) of the Act and changing the method from Project Completion to Percentage Completion Method by the Assessing Officer. Such an exercise being beyond th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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