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TMI Blog2019 (3) TMI 1942X X X X Extracts X X X X X X X X Extracts X X X X ..... observations of the revenue authority on the incorrectness of the method of accounting adopted by the assessee are not by reference to any Accounting Standards or any provision of the Act - AO has noted that the method of accounting adopted by the assessee cannot over ride the Income tax Act. Here we note that there is no specifications as to which provision of income tax provides that the method of accounting adopted by the assessee is incorrect. We find that the percentage completion method for revenue recognition in case of assessee engaged in real estate development is well recognized as per the ICAI guidelines as well as case laws in this regard. In this regard, we may refer that the Hon ble Supreme Court explained the Project Completion Method or Completed Contract Method and Percentage of Completion Method in the case of C.I.T. Vs. Bilahari Investment Pvt. Ltd. [ 2008 (2) TMI 23 - SUPREME COURT] - Thus, we note that the adverse comments passed on the assessee s method of accounting is in contravention to settled accounting principle and case laws. Assessee submission is quite germane that the sale of TDR cannot be considered in isolation of the assessee obligation under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation with respect to amount received on sale of TDR. 2. The revision order passed u/s 263 by the Learned Pr. CIT is bad in law and deserves to be set aside. 3. The Ld. Pr. CIT erred in alleging that the appellant is engaged in the trading of TDRs without appreciating the fact that the release entitlement and sale of TDR is sine-qua-non for developing, construction, completion, and handover of single, inseparable, indivisible and composite SRA project to the SRA Authority. 4. The Ld. Pr. CIT erred in Facts and in law in concluding that the percentage completion method followed by the appellant for revenue recognition is not applicable to the assessee's business. 5. The Ld. Pr. CIT has grossly erred in directing the LAO to tax the amount received on sale of TDR of ₹ 53,35,24,118/- without appreciating the facts of the case." 2.1 At the outset there is a delay of 96 days in the appeal filed by the assessee. The Ld. Counsel for the assessee submitted that delay was on account of wrong advice of the consultant in this regard. The acceptance letter for wrong advice by the consultant was duly submitted. Upon hearing both counsel and perusing the records in the substa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... project. 7.l….b) the assessee has been consistently following Percentage completion method for revenue recognition./or its real estate project since its incorporation. It can also be referred from note no 2. 7 Revenue recognition of the audited financial statement for the year which clearly mentions that revenue recognition policy of the company for real estate project is Percentage completion method. h) Further, the Institute of Chartered Accountant of India (ICAI), came up with guidance note on Revenue Recognition by Real Estate Developer which prescribed Percentage Completion Method for revenue recognition. As per the guidance note, revenue from construction and development of the project will be recognised only after the work has progressed to the extent of 25% of the total construction cost excluding land cost and other parameters are fulfilled. The total project work completed up to March 31, 2012 is 11%. Accordingly, revenue will be recognised in the year in which the firm fulfils the desired threshold...... 10. We emphatically state that from the records of the hearing taken place during the course of assessment proceedings, the A.O. has passed his order after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRs. The 100% TDRs in respect of land component was given at the time of the signing of the agreement on 24.04.2009. Thereafter, the developers have to construct the tenements in a phase vise manner and based on phase wise and stage wise construction of the same, the assessee will be gaining construction/building component Of TDRs from time to time and the same shall he released by SRA as per the terms of the SRA agreement. 2. From the facts mentioned in the SRA agreement, the assessee shall be granted TotalLand TDRs of 93,623 sq. mts. and Construction TDRs of 4,78,527.75 sqmts. 3. The assessee was granted Land TDRs component of 93,623 sq. mts, on 8th June 2009immediately after execution of the SRA agreement dated 24th April, 2009 with 3RA. The construction TDRs were allotted to the assessee as per clause 21 of the SRA agreement. 5.1 During the assessment proceedings for A.Y. 2014-15 before the assessing officer, the assessee submitted that following details of TDRs received against the ongoing SRA project: DRC No. Date of issue Financial Year Areas as per DRC sqmt. Area sold in sqmt. Sale Consideration received Area unsold sqmts. SRA/8/19/LAND 08.06.2009 2009-10 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance account of real estate transactions which was also referred by the A.O in assessment order of AY.2014-15. Thereafter he observed that: "On perusal of the above mentioned guidance note on Sale of Transferable Development Rights (TDRs), it is clearly established that the assessee has transferred development rights to the buyers. The amount of revenue can also be measured reliably as the sale of TDRs has already been executed by the assessee with its buyers. The cost incurred in respect of sale of TDRs transactions can also be measured reliably. 6.4 In the case of the assessee, there is sale of TDRs entered into by the assessee. Accordingly revenue on sale of TDRs shall he recognized on accrual basis for which rules mentioned in guidance note for accounting of sale of TDRs, as explained above, have been framed. Therefore, the assessee should have recognized the sale of TDRs on accrual basis as and when sale of TDRs agreements were executed. 7. The sum of ₹ 53.35 Cr. is stated to be advanced, and as stated in the submission, the AR is relying on the Guidance note of ICAI of 2012 on revenue recognition by real estate developers. But, the said guidance note is related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14, on similar reasoning the learned CIT has exercised his powers u/s. 263 of the Act. While giving final direction, the learned CIT observed as under: "The assessment made is therefore, set aside with the following directions to the Assessing Officer: 18.1 The assessment be made by de novo by considering one of the following methods of income computation for the year. 18.1.2 (Method 1) (holistic method) 18.1.2.1 The profit realisable based on the Costing of the entire project and estimated sales and revenue according to the project reports as outlined and narrated in Paras 16 to 9 be made afresh, A percentage of the profit which bears the same ratio to the extent of construction cost incurred as a percentage of total costs can be seen and taken as profit for the year. 18.1.2.2 To illustrate if the total profit from the project is estimated at say 700 cr as done in para 9, then , 700 x 155/821cr = 132 cr represents profit till 31/3/2013. From this, profit till 31/3/2012 ca be substracted to arrive at profit for AY 200.3-14. Profit for AY 2012-13 and earlier can be similarly worked out considering the percentage of construction cost incurred till 31/3/12 to the total esti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance Note on Revenue Recognition by Real Estate Developers issued by Institute of Chartered Accountant of India." In the said letter it was duly stated that the AO has passed the assessment order after through examination of all submission and document. Further, the ld. Counsel submitted that assessee is following percentage completion method of accounting of profits. He submitted that this method has been consistently followed. He further submitted that as per the method of accounting by the assessee profit is offered beyond completion of project to a certain stage of 30%. He referred to the architect certificate attached in paper book for the proposition that only 11% of the project was complete during the year hence no profit was offered. The ld. counsel further submitted that the ld. CIT has clearly erred in holding that there is no obligation against the receipt of TDRs. He submitted that the assessee received TDR for the purpose of financing cost of its development work and construction activities. He referred to the agreement for the proposition that the assessee is under undisputed obligation to complete the SRA project in which huge expenditure are to be incurred. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment and directing a fresh assessment. Explanation 1.-For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120; (b) "record" shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Principal Commissioner or Commissioner; (c) where any order referred to in this sub-section and passed by the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He has also held that assessing officer has not examined the tax-ability of TDR. 12. We note that it is undisputed by the revenue that assessing officer has examined the issue of assessee's method of accounting as well as issue of receipts from sale of TDR. 13. This is evident by the submission of the assessee before the AO and the Ld. CIT. Before the Ld. CIT assessee has duly submitted that following materials were submitted before the AO in course of assessment proceedings: " a) Copy of SRA Agreement . b) Copy of TDR sale agreement. c) Copy of Deed of Conveyance for handing over land to SRA authority. d) Architect Certificate for percentage of work completed in respect of SRA project. e)Extract of Guidance Note on Revenue Recognition by Real Estate Developers issued by Institute of Chartered Accountant of India." 14. It was further submitted that assessee method of accounting along with party wise details of sale of TDR made during the year was submitted before the AO. The assessee has also given following note on revenue recognition to the AO vide letter dated 17/03/2015. Under the instructions from our above client in response to details called by your good sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 7. Details of TDR Sales made during the relevant P. Y. are enclosed herewith as Annexure 7. 8. Copy of Assessment Order of A. Y. 2012-13 is enclosed herewith as Annexure 8. 9. Copy of 1TR-V of all the partners of the firm is enclosed herewith as Annexure 9. 10. Note on Revenue Recognition: " The Institute of Chartered Accountants of India has issued Guidance Note on "Recognisation of Revenue by Real Estate Developers" on 11th February, 2012 in consensus with AS-9 Revenue Recognition. To follow the Guidance Note the firm has revised its policies on Revenue Recognition as follows: Revenue from construction and development of the project shall be recognized on the basis of percentage of Completion Method. The initial revenue shall be recognized after the work has progressed to the extent of 25% of the total construction cost excluding cost incurred in relation to acquisition of land and its development rights and at least 25% of the saleable project area is secured by contracts pr agreements with buyers. Further, revenue shall be recognised out of the secured contracts/agreements only if 10% of the revenue as per the enforceable documents is realised and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constitute profit and the profitability of the same can be determined only at the stage when revenue will be recognised in accordance with Percentage completion method on fulfilling the desired threshold. Thus taxability of the same can be considered only at that stage. c) WE would like to inform your good self that, the assessee firm has to construct and complete the entire SRA project with its own fund. Thus the TDRs which is received/to be received is nothing but the contribution by the government to enable the assessee to complete the construction of the SRA project. Thus TDR awarded to the assessee firm are for the purpose of the SRA project the sale proceeds of which is subsequently utilised for incurring the construction cost and other related expenses till the completion of the project. d) Undisputedly, the transfer of land to SRA authority is the part of the composite agreement and sale proceeds of TDR, received on account of transfer of land, was utilised by the assessee for construction of the tenements as per the terms of the agreement. e) Further the government is determined to get these projects completed through the assessee firm and accordingly provide TDRs wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R were duly disclosed in financial statements. We also find that assessee has been following this method of accounting consistently from earlier year. In this regard revenue has not found any defect and the Commissioner of income tax is placing great reliance on the assessment order of 2014-15. In the said order the assessing officer has held that percentage completion method adopted by the assessee is not applicable on the sale of TDR. The AO also held that the accounting method adopted by the assessee cannot over right the provision of the income tax Act. 19. In this regard we note that the AO has further referred to the guidance note on accounting of real estate transaction in case of TDR. The AO has also placed reliance upon ITAT decision in the case of Hillside construction company private Limited. 20. In this regard, we note that the observations of the revenue authority on the incorrectness of the method of accounting adopted by the assessee are not by reference to any Accounting Standards or any provision of the Act. As a matter of fact, as noted above the assessing officer has noted that the method of accounting adopted by the assessee cannot over ride the Income tax Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany to complete the project. In such circumstances the assessee has credited the amount received on sale of TDR to current liability which is utilized in the development of the project. We further note that this treatment by the assessee finds support from ITAT decision in the case of Skylark Build (supra). We may gainfully refer to the following observation of the ITAT in paragraph 8 of the said order. 8. On careful consideration of the entirety of the facts and circumstances we are of the view that approach adopted by the Assessing Officer for assessing the income from TDR independently without deducting the expenses incurred is not justified. The assessee has been following project completion method which is an accepted method of accounting in construction business and also recommended as per accounting standard AS7 of ICAI. Therefore, in such cases the income from the project has to be computed in the year of completion. The TDRs received are directly linked to the execution of the project and therefore, before the completion of the project the income from TDR or any other receipt inextricably linked to the project will only go to reduce costs of the project. Therefore, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nowhere mentions that's sale of TDR should be accounted for in complete disregard to the terms of agreement more particularly the SRA agreement as in this case, and the assessee's obligations therein. In this regard, we may refer to the relevant quotation of learned CIT regarding accounting of real estate transaction in case of TDS as contained in para 6 of his order "6, In this regard, the guidance note on accounting of real estate transactions in ease of Transferable Development Rights is summarised as under: Transferable Development Rights (TDRs) are generally acquired in different ways as mentioned hereunder:- . (a) Direct purchase. (b) Development and construction of built-up area (c) Giving up of rights over existing structures or open land. 6.1 When development rights are acquired by way of direct purchase or on development or construction of built-up area, cost of acquisition would be the cost of purchases or amount spent on development or construction of built-up area, respectively. Where development rights are acquired by way of giving up of rights over existing structures or open land, the development rights should be measured in accordance with the princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the guidance note on which learned CIT is himself placing reliance. For A.Y. 2013-14, the learned CIT has similarly based his order on assessment order of 2014-15 and order u/s 263 passed by CIT for A.Y.2012-13. However, in giving final direction he has further misled himself by specifying method for accounting of TDR sale, with hypothetical example with no reference to any accounting principle or case law it is claimed to be in consonance with. 27. Be as it may, it is abundantly clear that the method adopted by the assessee and accepted by the assessing officer is legally permissible one. Once it is held that the method adopted is a legally permissible one, it has been held in the Catena of case laws that learned Commissioner of income tax cannot exercise of jurisdiction under section 263 of the act if he is of a different opinion. 28. In this regard we may gainfully refer to the Honourable Apex Court decision in the case of Malabar Industrial Co. Ltd. and CIT vs. Max India (2207) 295 ITR 282 (SC) that if two views are possible and the AO has adopted one view, with which the ld CIT is not in agreement, the order cannot be said to be liable to be visited with the revisionary orde ..... 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