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TMI Blog2024 (9) TMI 356X X X X Extracts X X X X X X X X Extracts X X X X ..... l be deemed to be sold on completion of the project and that revenue will be deemed to be realized without actual sale of the flats. Therefore, the addition in respect of cost of construction of 149 unsold flats is found to be based on total wrong presumption. The addition in respect of profit margin of booked flats is also not found correct. CIT(A) has correctly appreciated the principles of Accounting Standards and the methodology adopted by the assessee to recognize its revenue and has rightly allowed the relief in respect of both the additions. It was held in the case of CIT v Shivalik Buildwell P Ltd [ 2012 (10) TMI 1019 - GUJARAT HIGH COURT] that in case of developer of project, profit would arise only on transfer of title of property and the receipt of advance or booking amount cannot be treated as trading receipt of year under consideration. As rightly held by Ld. CIT(A), the guidelines of AS-7 didn t trigger recognition of revenue for booked flats, as the advance received was less than 10%. Hence, the addition was rightly deleted by Ld. CIT(A). Addition in respect of cost of construction of 149 unsold flats was also without any basis. The cost of construction as already in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tage of completion method) and the project had already been completed 100%? 3) Whether the Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs. 1,84,31,150/- being profit on unrecorded sales without appreciating the facts of the case? 4) The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary 5) It is, therefore, prayed that the order of Ld. CIT(A) may be set aside and that of the Assessing Officer be restored . 5. The first ground pertains to disallowance of general expense of Rs. 42,65,761/-. The assessee was engaged in the construction of a project in the name of Casa Vyoma , which was being constructed in two phases. While Phase-1 was 100% complete, Phase-2 was only 22% completed. The assessee was following percentage completion method to recognize its revenue. The assessee had claimed total general expenses of Rs. 1,54,94,955/-, the details of which are as under: Description Phase-1 Phase-2 General Employee Cost 0 0 43,96,826 Finance Charges 9,79,56,947 0 0 Brokerage Comm 28,30,269 0 0 GST Waive off 21,56,830 0 0 Other Expenses 0 0 1,10,98,129 Total 10,29,44,046 0 1,54,94,955 The total general expenses of Rs. 1,54, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 and Ground No.3 pertains to addition of Rs. 1,84,31,150/- being profit margin of flats sold. As both these issues pertain to Phase1 of the construction, we deem it proper to address both the grounds together. In the Phase-1 of the project, the construction of which was complete, there were 158 flats, out of which only 9 flats were booked and revenue of Rs. 6,15,09,143/- was realized. The construction cost of these flats was Rs. 87,62,99,497/-. According to the AO, since the assessee was following percentage completion method and Phase-1 of project was completed 100%, therefore, the revenue should have been recognized for all these flats. Since, the assessee had not recognized the revenue for the unsold flats, the cost of construction of 149 unsold flats was worked out by the AO at Rs. 82,53,21,404/- and was added to income. Further, 9 flats that were booked and for which revenue of Rs. 6,94,09,143/- was realized, the construction cost of these 9 flats was worked out at Rs. 5,09,78,093/-. The profit margin of these 9 flats was, thus worked at Rs. 1,84,31,150/- and was also added to income. The Ld. CIT(A) has deleted both the additions. 9. The Ld. CIT.DR supported the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and for remaining 5 flats the booking amount received were less than 10% of total consideration, therefore, in respect of remaining 5 flats also revenue cannot be recognized considering the specific accounting procedure laid down in AS-9 (Revenue Recognition), AS-7 (Construction Contract) and Guidance Note on Accounting for Real Estate Transactions (Revised) 2012. During assessment proceedings, the AO adopted the view that Phase-I of the project is completed 100%, therefore, revenue in all 158 cases has to be recognized according to Percentage of Completion Method. However, to arrive at proper conclusion one has to deal Accounting Standard-7, Accounting Standard-9 and Guidance Note on Real Estate Business (Revised 2012) simultaneously Accounting Standard-7 (Construction contracts) is applicable for businesses engaged in construction on someone else property on a contract basis and issue a sale bill at the end of the construction containing the cost of materials, labour and other expenses. Sale of developing flats under project, as per agreement to sell, is an example of real estate transaction, which is in substance, similar to construction contracts. Reason for the same is that on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e instant case, the appellant is the owner of all 158 flats, the flats were not transferred to the buyers, therefore, all significant risks and rewards of ownership lies with the appellant. However, 5 flats were booked but revenue recognized in these flats were less than 10%. In respect of remaining 153 flats significant uncertainty exists regarding the amount of the consideration. An entity can also record revenue from such real estate transaction in accordance with the Guidance Note on Accounting for Real Estate Transactions (Revised 2012), This Guidance Note was introduced to specially provide accounting treatment for real estate transactions because of the peculiar nature of transactions. Para 3.3 of the guidance note deals with the accounting for reals estate transaction. 3.3 For recognition of revenue in case of real estate sales, it is necessary that all the conditions specified in paragraphs 10 and 11 of Accounting Standard (AS) 9, Revenue Recognition, are satisfied. As stated above, real estate sales take place in a variety of ways and may be subject to different terms and conditions as specified in the agreement for sale, Accordingly. the point of time at which all signif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, principle of AS-7 will apply. Para 5 of this guidance note deals with application of percentage completion method The relevant portion of para 5 is reproduced as under: 5.3 Further to the conditions in paragraph 52 there is a rebuttable presumption that the outcome of a real estate project can be estimated reliably and that revenue should be recognised 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 costs is less than 25 % of the construction and development costs as defined in paragraph 2.2 read with paragraphs 2.3 to 2.5 (c) At least 25% of the saleable project area is secured by contracts or agreements with buyers. (d) At least 10% of the total re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. These grounds of appeal are allowed. 11. The Ld. CIT(A) has correctly appreciated the principles of Accounting Standards and the methodology adopted by the assessee to recognize its revenue and has rightly allowed the relief in respect of both the additions. It was held by the Hon ble Gujarat High Court in the case of CIT v Shivalik Buildwell P Ltd (2013) 40 taxmann.com 219 (Guj.) that in case of developer of project, profit would arise only on transfer of title of property and the receipt of advance or booking amount cannot be treated as trading receipt of year under consideration. As rightly held by Ld. CIT(A), the guidelines of AS-7 didn t trigger recognition of revenue for booked flats, as the advance received was less than 10%. Hence, the addition of Rs. 1,84,31,150/- was rightly deleted by Ld. CIT(A). Further, the addition of Rs. 82,53,21,404/- in respect of cost of construction of 149 unsold flats was also without any basis. The cost of construction as already incurred by the assessee cannot be disallowed on an arbitrary basis. The books of accounts of the assessee were audited and the Auditor had certified that the assessee was correctly following the Percentage Comple ..... X X X X Extracts X X X X X X X X Extracts X X X X
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