HI-TECH ESTATES & PROMOTERS PVT. LTD.,BHUBANESWAR vs. PRINCIPAL CIT-1, BHUBANESWAR

per statement of profit and loss account also includes amount received

during the earlier years treated as advance brought forward from customers

at the beginning of the year and at the instance of sale of flats and

registration of sale deed therefore, the same is reduced from the advance

amount from customers. Ld A.R. submitted that the value of sales on

account of sale of flats and on account of sale of land has been shown

clearly in the P&L account and the incidence of service tax is the amount

received during the year and, therefore, same shall not tally with that of

the revenue as per statement of profit and loss account.

year 2013-14 alleging that the assessee has not followed mandatory

accounting system of Accounting Standard (AS-7) but the same was not

compulsory and mandatory for present assessment year 2013-14. Ld A.R.

submitted that AS-7 is compulsory and mandatory to be followed for

construction companies w.r.e.f. 1.4.2017 i.e. from assessment year 2017-

is not following proper applicable method of accounting. Further, drawing

our attention towards impugned revisional order u/s.263 of the Act of Pr.

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CIT para -7, ld A.R. submitted that even replying to the show cause notice

u/s.263 of the Act dated 6.3.2018, the assessee through its ld A.R. filed

written submission dated 23.3.2018 explaining the accounting of revenue

on account of sales and reasons of non-applicability of AS-7, which was

also explained before the AO during original assessment proceedings.

Therefore, Ld. Pr. CIT was not correct and justified in holding the

assessment order as erroneous and prejudicial to the interest of the

revenue.

applicable when there exists a contract especially a long-term contract i.e, 5

years between the company and the customers and the company on behalf

of the customers. In the present case, there is no contract between the

customers and the company to construct the residential units on behalf of

the customers. Ld A.R. further referred to page 49 of APB and submitted

that significant accounting policy which was also explained to the AO and

Ld. PCIT shows that the assessee company is recognising revenue by

following accrual system of accounting as required under section 209(3) of

the Companies Act, 1956. Ld A.R. submitted that instalments received from

members/customers shown in ‘advance from customers’ until the last

instalment is received and registration of sale deed of land/flat is done in

favour of the customers/members. Ld A.R. submitted that similarly all

recurring expenses are accounted on accrual basis and, therefore, the

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closing stock of land is valued at cost including the related expenses for

purchase, developments and promotion thereto and the closing stock of

work in progress of residential projects is valued at cost without any

addition or subtraction.

adequate enquiry, hence, the same cannot be tagged as erroneous and

prejudicial to the interest of revenue. The ld A.R. submitted that the AO,

during original scrutiny assessment proceedings, issued show cause notice

u/s.142(1) of the Act vide dated 23.11.2015 and it was compiled by the

assessee through its Authorised Representative and the assessee alongwith

audit report, books of account and other relevant financial statements also

submitted written submissions vide dated 23.3.2016 explaining the

accounting method and policy, which was consistently followed by the

assessee and accepted by the department without any dispute or doubt.

The ld A.R. also submitted that the assessee vide said letter dated

23.3.2016 also explained reason for difference in the amounts shown in the

Service Tax Return and as per statement of profit, thus, there was an

adequate, sufficient and proper inquiry by the AO during scrutiny

assessment proceedings on the various issues including issue of method of

accounting adopted by the assessee for recognition of revenue on sale of

flats/plots and made total addition of Rs.2,11,82,595/- on six issues.

Therefore, ld A.R. submitted that the due to this reason, assessment order

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cannot be alleged as erroneous and prejudicial to the interest of revenue.

Ld A.R. further submitted that the applicability of revised AS-7 to

enterprises undertaking construction on their own account as a venture of

commercial nature and as per the guidelines issued by ICAI, revised AS-7

would not be applicable to the company for accounting for new housing

projects which are undertaken by the company during accounting period

commencing on or after 1.4.2013, and the company can value its

inventories in accordance with AS-2. The ld A.R. also contended that as per

said guideline of ICAI, the definition of inventory as “an asset in the

process of production for the purpose of sale” and thus, the activity of

developing housing projects on its own account as a commercial venture by

the company can be construed as a production activity. Ld A.R. strenuously

contended that as per said guideline of ICAI the revised AS-7 would not be

applicable to the company for accounting for new housing projects which

are undertaken by the company during the accounting periods commencing

on or after 1.4.2003. Therefore, the assessment order cannot be alleged as

erroneous and prejudicial to the interest of the revenue.

revisional order, it is discernible that Pr. CIT only picked up first half part of

sub-para (d) of para 2 of “report on other legal and regulatory

requirements”(APB-43) whereas the assessee has clearly mentioned in the

said para 2(d) that the auditor has clearly mentioned that “ in our

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opinion, the balance sheet and the statements of profit and loss

comply with the Accounting Standards” referred to in sub-section

(3C) of the Section 211 of the Company Act, 1956.”. The ld AR also

contended that for assessment year 2013-14, following AS-7 was not

compulsory and mandatory for the business module of the assessee and the

method of accounting of project completion method was consistently

followed by the assessee and accepted by the department without any

dispute. Therefore, the assessment order cannot be held as erroneous and

prejudicial to the interest of the revenue and, hence, Pr. CIT was not

correct in setting aside the assessment order and the directing the AO to

reframe the assessment order denovo.

and on facts in setting aside the assessment order on the premise that AS-7

(revised) issued by ICAI in 2002 is applicable to the appellant which is

clearly contrary to the facts and circumstances of business modus operandi

of the assessee as the appellant is a builder constructing residential units

on its own land on commercial consideration and AS-7 (revised) is not

applicable to the assessee based on the opinion and guideline issued by

ICAI for assessment year 2013-14. Ld A.R. further submitted that Pr. CIT

has erred in setting aside the assessment order ignoring the method of

accounting regularly and consistently followed by the assessee in

recognising the revenue from sale of residential flats., which was submitted

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and considered during scrutiny assessment proceedings u/s.143(3) of the

Act for assessment year 2013-14 and subsequent assessment year 2015-16.

Hon’ble High Courts and Tribunal:

(i) Manjusha Estates (P) ltd vs CIT, 393 ITR 644 (Guj)

(ii) CIT vs. Principal Officer, Hill View Infrastructure Pvt Ltd.,384 ITR 451 (P&H)

(iii) Paras Buildtech India (P) Ltd vs CIT, 382 ITR 630 (Del)

(iv) Ashoka Hi-tech Builders Pvt Ltd vs DCIT, (ITA Nos.121/Ind/2016 & 686/Ind/2016) A.Y. 12-13 & 13-14 dated 3.8.2018

(v) Bhoomi Construction Projects vs ACIT, 7 NYP TTJ 1472 (Mum)

(vi) Haware Constructions Pvt Ltd vs ITO, (ITA No.5601/Mum/2009 & ors) order dated 5.8.2011

(vii) Unique Enterprises vs ITO, (ITA No.5109/Mum/2008) order dated 20.8.2010

order of ITAT Mumbai ‘B’ in the case of Bhoomi constructions Pvt Ltd

(supra) , the revenue cannot impose different method upon the assessee

unless there is a finding of fact that such a method is not reflecting the true

profits of the assessee. Ld A.R. has placed reliance on the order of ITAT

Indore Bench in the case of Ashoka Hi-tech Builders Pvt Ltd(supra) and

submitted that in this case, ITAT has considered all relevant judgments on

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the issue and clearly held in para 42 that the amendment brought in statute

with retrospective effect w.e.f. 1.4.2017 by way of insertion of Section 43CB

for the purpose of computation of income from construction and service

contract is applicable for assessment year 2017-18 onwards. Therefore, the

revisional order passed by Pr. CIT may kindly be quashed.

assessment proceedings, the case was under comprehensive scrutiny and

the issue of method of accounting for revenue recognition has not been

properly verified by the Assessing Officer. Drawing our attention towards

original assessment order, ld CIT DR submitted that it is not in dispute that

the assessee discloses its accounting policy before the AO during inquiry by

way of letter dated 23.6.2016 but the AO did not apply his mind to this

letter despite the fact that the AO was having tax audit report before him

during said proceedings. Ld CIT DR submitted that the assessee has clearly

violated the accounting standard applicable for revenue recognition for its

business. Therefore, Ld PCIT was right in alleging the impugned

assessment order as erroneous and prejudicial to the interest of the

revenue. Ld CIT DR also contended that if the assessee is following

consistently same method of revenue recognition during earlier and

subsequent assessment year then also principle of res judicata does not

apply to tax proceedings. In such kind of situation, it is open for the

revenue to frame assessment order as per applicable method of accounting

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for the business of the assessee. Ld CIT DR lastly submitted that the

assessee was duty bound to follow AS-7 for revenue recognition.

Therefore, Pr. CIT was right in pressing into service the revisional provision

of section 263 of the Act and directing the AO to reframe assessment order

denovo.

attention towards a sample agreement for sale of flat/apartment placed at

APB 65 to 106 and submitted that the assessee is constructing

flats/residential units on the land owned by it and there is no contract

between the assessee and customers to build flats or residential units on

behalf of the customers. Ld A.R. submitted that the assessee is

constructing flats/residential units on the land owned by it, by incurring

cost from its own resources and simultaneously the assessee entered into

contract with the customers for sale of flats/residential units and on

completion of construction and on receipt of all entire sale consideration,

the assessee transfers the possession and right over the sold units/flats in

favour of the customers and at that point of time, revenue is recognised by

showing the entire sale consideration in the books of account of the

assessee. Ld A.R. explained that the assessee shows work in progress at

cost and completed units are shown as stock in hand, therefore, there is no

point that the assessee be compelled to follow percentage completion

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method in stead of project completion method for recognition of revenue in

its books of account.

Bench of the Tribunal in the case of Ashoka Hi-tech Builders Pvt Ltd(supra)

and submitted that the Co-ordinate bench of the Tribunal in its order has

elaborately considered all relevant orders and judgments of Hon’ble

Supreme Court, High Courts and Tribunal and the final proposition clearly

culled out therefrom is that the assessee cannot be compelled to adopt

percentage completion method in the facts and circumstances of the

present case and the recognition /identification of revenue income and

under the Income tax Act can be attained by several method of accounting

and same result could be attained by any one of the accounting methods

and completed contract method is one of such method which could not be

held as non-applicable to the assessee’s case only on the basis of whims

and surmises. Ld A.R. also drew our attention towards the decision of

Hon’ble Supreme Court in the case of CIT vs Bilahari Investment (P) Ltd,

(2008) 299 ITR 1 (SC) and submitted that the percentage completion

method tries to attain periodic recognition of income in order to reflect

current performance and the amount of revenue recognised under this

method is determined by reference to the stage of completion of the

contract and this method is only applicable and suitable in the case of the

assessee where undertaking contract work which spread over several years

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and revenue is recognised on the basis of percentage of completed part of

project. Ld A.R. submitted that Their Lordships speaking to Hon’ble

Supreme Court in the said judgment clearly held that under completed

contract method, the revenue is not recognised until the contract is

complete and costs are accumulated during the course of contract. The

said methods determine results only when the contract is completed and

this method leads to objective assessment of the results of the contract.

Therefore, following the completion method by the assessee for assessment

year 2013-14 cannot be held as wrong or incorrect method of revenue

recognition.

considered view that undisputedly the assessee is a construction company,

which is constructing flats/residential units on the land owned by it. It is

also not in dispute that the assessee company is following completion

method for recognising revenue, wherein, the revenue recognition is made

on transfer of flats/residential units to the respective customers by way of

registered sale deed and completed flats/residential units have been shown

as stock in trade at cost and work in progress is also shown in the balance

sheet at cost.

ld A.R. on behalf of the assessee that at the time of initiation of revisional

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proceedings, issuing notice u/s.263 of the Act and while passing revisional

order u/s.263 of the Act, the ld PCIT has not considered and applied his

mind to the relevant assessment record for assessment year 2013-14 and at

the time of initiation of said proceedings and passing order u/s.263 of the

Act, ld PCIT had taken into consideration the irrelevant assessment order of

assessment year 2015-16 and record thereof. On careful and vigilant

perusal of the copy of the notice u/s.263 of the Act dated 6/15.3.2018 and

impugned order passed u/s.263 of the Act, it is clear that the Pr. CIT

wanted to revise assessment order of A.Y. 2013-14 but from para 3 of said

notice & para 3 of the impugned order, it is clear that the Ld PCIT has

considered the assessment order in which the case was selected for limited

scrutiny on four issues including the issue of mismatch of turnover reported

in Audit report & ITR and Real Estate Business with high closing stock, etc.

From copies of the assessment order for A.Y,. 2013-14 (APB 27-35) and for

A.Y. 2015-16 (APB 36 to 39), it is clear that the AO picked up the case of

A.Y. 2013-14 for comprehensive complete scrutiny whereas for A.Y. 2015-

16, the case was selected for limited scrutiny on four issues including issue

of mismatch of sales turnover reported on the audit report & ITR. From

para 3 of notice & para 3 of impugned order u/s.263 of the Act, it is amply

clear that the Ld. PCIT mentioned that the case was selected for limited

scrutiny with reason to examine “Real State Business with high closing

stock” (to verify whether the assessee has adopted percentage completion

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method) and he proceeded to revise assessment order for A.Y. 2013-14.

proper to revisit provision of section 263 of the Act, which reads as follows:

“ 263. Revision of orders prejudicial to revenue (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the 2 Assessing] Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he, may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.”

humble understanding, in this section, the legislature, in its wisdom, has

given a minicode/procedure to be followed by the revisionary authority i.e.

ld Pr.CIT for revision of assessment order, wherein, first of all, he would call

and examine the record of any proceedings under the Act, and if he

consider that any order passed therein by the AO is erroneous and so far as

prejudicial to the interest of revenue, then he may, after allowing due

opportunity of being heard to the assessee and after making or causing to

be made such enquiry as he deems necessary pass such order thereon as

the circumstances of the case justify including an order of enhancing or

modifying the assessment or cancelling the assessment and directing the

AO for fresh assessment. Meaning thereby, at the very first stage, the ld

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PCIT is required to call and examine the assessment record, including

assessment order, of relevant assessment year which the revisionary

authority, wants to revise. But in the present case, para 3 of notice & para

3 of impugned order u/s.263 of the Act clearly shows that the ld PCIT called

& examine the assessment record and assessment order of A.Y. 2015-16

and not relevant assessment year 2013-14, which is a very fatal act on the

part of the revisionary authority. In view of above, we are compelled to

hold that the ld. Pr.CIT initiated proceedings u/s.263 of the Act, issued

notice u/s.263 of the Act and pass impugned order u/s.263 of the Act by

calling and examining irrelevant record and assessment order of A.Y. 2015-

16 and by not calling and examining record of A.Y. 2013-14 and thus, the

impugned order cannot be held valid and sustainable only on this count.

Thus, the contention of ld A.R. is allowed on this issue.

is clearly discernible that Pr. CIT noticed that the revenue was not

recognised under percentage completion method as per AS-7 and the issue

was not examined by the Assessing Officer erroneously in the scrutiny

assessment despite the fact that one of the reasons for selection of case

through CASS for limited scrutiny was to verify whether assessee has

adopted percentage completion method or not. From careful reading of the

impugned order of ld Pr. CIT u/s.263 of the Act part 6 reveals that ld Pr.

CIT picked up the auditor’s report first part of para 2(d) and proceeded to

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hold that the assessee company has also not made “disclosure” as required

by paragraphs 38 to 43 of AS-7. In this regard, the moot question for our

adjudication as to whether it was mandatory for the assessee to follow AS-7

for recognition of revenue in assessment year 2013-14 as per modus

operandi of business adopted and followed by the assessee.

Chartered Accountants of India (ICAI), it is clear that the Institute opined

that revised AS-7 would not be applicable for new housing projects which

are undertaken by the company during the accounting periods commencing

on or after 1.4.2003. Institute also opined that the activity of developing

housing project on its own account as a commercial venture by the

company is of the nature of production activity and, therefore, should be

considered as such. The inventories should be valued by the company in

accordance with AS-2, which is relevant for valuation of inventories

including construction work and progress and not recognition of revenue.

The Institute has also made it clear that in such a situation the AS-9 would

be relevant and appropriate method for recognition of revenue.

Act, 2018, has inserted Section 43CB to the Act w.e.f. 1.4.2017, which

provides the profits and gains arising from a construction contract or a

contract for providing services shall be determined on the basis of

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percentage completion method (PCM) in accordance with the income

computation and disclosure standards notified under sub-section (2) of

Section 145 of the Act. Thus, this provision is applicable from assessment

year 2017-18 onwards and the ld CIT DR, in all fairness, agreed that the

provisions of section 43CB is applicable from assessment year 2017-18. On

being asked by the Bench, the ld. CIT DR could not controvert the fact that

same is not mandatorily applicable to assessment year 2013-14, which is

under consideration.

regulatory requirements available at page 43 of APB, it is ample clear that

the auditor opined that “ in our opinion, the balance sheet and the

statements of profit and loss comply with the Accounting

Standards” referred to in sub-section (3C) of the Section 211 of

the Company Act, 1956.”.

observe that the revisionary authority only picked up first half part of said

clause 2(d) of auditor’s report and thereafter held that the company has not

made disclosure as required by paragraphs 38 to 43 of AS-7. This is not a

reasonable and justified approach of revisionary authority that first half part

of clause 2(d) of auditor’s report is picked up but second half part is ignored

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to take an objective decision but real meaning can be gathered only by

considering entire clause 2(d) in toto.

recognising revenue by following percentage completion method of

accounting standard but from the statement submitted before the AO

during the assessment proceedings and reply filed by the assessee to show

cause notice u/s.263 of the Act vide letter dated 23.3.2018, which has also

been reproduced by Pr. CIT in para 7 of the impugned order that the

assessee clearly explained both the issues viz; (i) “accounting of revenue

on account of sales” and (ii) Regarding applicability of AS-7. But from last

operating para 8 of the impugned revisional order of ld Pr. CIT, it is clear

that the revisionary authority did not make any observation on the

contention of the assessee regarding non-applicability of AS-7 or did not

point out any defects in the recognition of revenue on account of sales,

neither brought out facts and legal situation on record showing that AS-7

and percentage completion method (PCM) was mandatory and applicable

for recognition of revenue for assessment year 2013-14 in the assessee’s

case. From para 8 of impugned order, we clearly observe that the ld Pr.

CIT held that the assessee company is not following percentage completion

method (PCM) of accounting for recognition of revenue as per relevant AS-7

and complete and proper verification to correctly recognise the revenue was

not done at the time of assessment and not at all the requisite evidences

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were also brought on record leading to erroneous assessment which was

prejudicial to the interest of revenue. With these observations, Ld Pr. CIT

set aside the assessment order and directed the Assessing Officer to pass

denovo assessment order on the issue.

the Act dated 29.3.2016 for A.Y. 2013-14, it is clear that the Assessing

Officer issued notice u/s.142(1) of the Act alongwith questionnaire on

23.11.2015 and in response to the same, ld A.R. of the assessee appeared

and furnished reply vide dated 23.3.2016 alongwith related documents and

ledger copy and detailed information as called for and same was verified by

the AO.

assessee before the AO, it is clear that the assessee explained the method

of accounting of revenue recognition on account of sales by explaining that

the company has developed residential flats on the land owned by it and

selling the same to the customers. It was also explained by the assessee

that there is no contract between the assessee and the customers for

constructing the residential units on behalf of the customers and the

company constructed residential flats on its own land and sold it to the

customers after completion of the building. It was also explained that so

long as the flats are not sold the same are treated as stock in trade and,

accordingly, the closing stock and work in progress have been worked out

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at the end of the year at cost at the end of the year. It was also explained

that the company follows mercantile system of accounting and follows

completion method of accounting in case of residential projects developed,

constructed and sold to the customers as the flats are treated as goods.

The revenue from the sale of flats is recognised in the accounts after the

title in the property is transferred to the buyer through conveyance of

registered sale deeds.

that the gross revenue as per service tax was Rs.44,51,17,424/- for the

impugned assessment year which is the amount received by the assessee in

instalments during the year. However, sales as per statement of profit and

loss account is the value of flats sold i.e. the flats registered in the name of

the customers during the year. The sale value as per statement of profit

and loss account includes amount received during the earlier years treated

as advance from customers at the beginning of the year. Thus, the value

on account of sale was recognised at Rs. 40,61,35,655/- and on account of

sale of land was Rs.1,68,79,000/- during the year. The assessee also

explained that as the incidence of service tax is on the amount received

during the year, same shall not tally with that of the revenue as per

statement of profit and loss account. These explanations and the modus

operandi adopted by the assessee for recognition of revenue was accepted

by the Assessing officer after due verification & examination during scrutiny

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assessment proceedings. Therefore, it is not a case of Pr. CIT that the

Assessing Officer has not made any inquiry on this issue but the main

allegation of the Pr. CIT is that proper verification to correct recognisation

of the revenue was not done at the time of assessment and the requisite

evidences were also not brought on record. But the Pr. CIT has not made

any verification and examination of the method adopted by the assessee for

recognisation of the revenue and neither any deliberation has been made

by pr. CIT regarding applicability or non-applicability of AS-7 to the business

modules of the assessee in the impugned revisionary order passed u/s.263

of the Act.

opined that revised AS-7 is not applicable for new housing projects which

are undertaken by the company during the accounting periods commencing

on or after 1.4.2003. The inventories should be valued by the company in

accordance with AS-2, which is relevant for valuation of inventories

including construction work and progress and not recognition of revenue. It

is also explained that AS-9 would be relevant for recognition of revenue.

The legislative intent, as noted by us in earlier paragraph of this order,

clearly reveals that the percentage completion method is mandatory for

construction company from assessment year 2017-18 and not for

assessment year 2013-14 and this point has not been considered and

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adjudicated by Pr. CIT in this revisionary impugned order u/s.263 of the

Act.

High Court held that the Tribunal was not justified in rejecting the

projection completion method which was followed consistently by the

assessee and instead applying work-in-progress method and taxing 80 per

cent thereon as net profit.

High Court held that the assessee developer consistently following project

completion method, the CIT(A) and the Tribunal rightly deleted the addition

made by the AO by applying percentage completion method and in absence

of any prohibition or restriction under the Act for doing so, it cannot be held

that the approach of the ld CIT(A) and the Tribunal was erroneous or illegal

in any manner so as to call for interference by the Hon’ble High Court.

Delhi High Court held that the Tribunal having accepted the findings of ld

CIT(A) that the assessee was a developer and not contractor, was not

justified in holding that advance amount received by the assessee should be

treated as income in its hands in the year in which the advance amounts

were received and in applying AS-7 i.e. percentage completion method by

the assessee.

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(supra) held as under:

“The sole reason for making the addition by the AO is that, at the time of search the assessee had offered to disclose the income on the basis of percentage completion method which has been retracted alter on. However, there is no finding that the assessee has been following percentage completion method regularly since beginning or in any other project. There is no such evidence or documents which have been found during the course of search indicating that the assessee had been following percentage completion method regularly. If the assessee has been following one of the recognised methods as prescribed by AS-9, then it cannot be held that the revenue can impose a different method up0on the assessee unless there is a finding of fact that such a method is not reflecting the true profits of the assessee. Now, it has also been brought on record by the ld counsel that in the subsequent year i.e. in the year of completion of the project in assessment year 2012-13, the revenue itself has accepted the project completion method for recognition of revenue and, accordingly, has assessed the income of the project on the same method.”

M/s. Haware Constructions Pvt Ltd. (supra).

Mumbai ‘F’ Bench in paras 13 to 25 held as follows:

“13. The assessee in this case is a builders and real estate developer. The undisputed fact is that the assessee follows project completion method of accounting since its inception in the year 1996. It has been offering income by this method of accounting and the department has been accepting the same over the years. The other undisputed fact is that the assessee has declared that the project is completed in the assessment year 2005-06 and the assessee has offered M/s Unique Enterprises the income on project completion method in that year. Thus, only the year of taxation is under dispute. The issue is whether the method of accounting followed by the assessee has been rightly rejected by the A.O. The A.O's contention, which is affirmed by the CIT(A) is that AS-7 issued by the Institute of Chartered

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Accountants of India is applicable to the builders and real estate developers. This finding in our opinion is erroneous. AS-7 prior to its revision in the year 2002 dealt with the Accounting for Construction Contracts, in the financial statements of enterprises. We extract a part of this statement for ready reference:

"This statement deals with accounting for construction contracts in the financial statements of enterprises undertaking such contracts thereafter referred to as "contractors"). The statement also applies to enterprises undertaking construction activities of the type dealt with in this statement not as contractors but on their own account as a venture of a commercial nature where the enterprise has entered into agreements for sale."[Emphasis own]

"Scope (1) This statement should be applied in accounting for construction contracts in the financial statements of contractors". A Construction contract is defined as follows: "A construction contract is a contract specifically negotiated for the construction of an asset or a combination of asset that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use."

From reading of the above makes it clear that revised AS-7 issued in the year 2002, does not apply to builders and real estate consultants. The Institute of Chartered Accountants of India has in reply to a query given in the Compendium of Opinions - Vol.XXIII - 95 Query No. 15 as stated as follows:

"B. Query 5. In the light of the above, the querist has sought the opinion of the Expert Advisory Committee on the following issues: (a) Whether the revised AS-7 would be applicable t the company for accounting for new housing projects, which may be undertaken by the company on or after 01.04.2003 on the same business model as mentioned in the facts of the case. (b) In case revised As-7 is not applicable to the company, whether the company can value its inventories in accordance with Accounting Standard (AAS)2, "Valuation of Inventories', issued by the Institute of Chartered Accountants of India, considering the definition of inventory as 'an asset in

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the process of production for the purpose of sale', i.e. whether the activity of developing housing projects on its own account as a commercial venture by the company can be construed as a production activity. (c) If the activities of the company cannot be considered as a production activity and consequently AS -2 is also not applicable, which Accounting Standard should be followed for recognition of revenue and valuation of its construction work-in-progress?

C. Points considered by the Committee

"Accounts - Accounting system - Project completion method consistently followed - Assessee developer had been regularly employing project completion method which is an accepted method of accounting - Accounting Standard -7 has not been specified by the Central Government under s.145(2) - Hence, AO could not reject the accounts under s.145(3) on the ground that the assessee had not followed the prescribed method of accounting - Moreover, assessee was under bona fide belief that it was adopting a method of accounting which was applicable to it as per the report of the Expert Committee of the ICAI - Therefore, revised AS-7 cannot be applied in the case of the assessee - Even otherwise, in case revised AS-7 is to be applied, the opening inventories are to be valued as per revised AS-7- That apart, on the principle of consistency, Revenue should have accepted the method of accounting adopted by the assessee

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as the same was being followed for many years - Hence AO is directed to accept the project completion method of accounting.

"Revenue in case of real estate sales should be recognized when all the following conditions are satisfied: (i) The seller has transferred t the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with ownership; (ii) No significant uncertainty exists regarding the amount of the consideration that will be derived from the real estate sales; and (iii) It is not unreasonable to expect ultimate collection."

From the above discussion, it is clear that the first appellate authority was not in error in upholding the view taken by the AO, that the revised AS-7 is applicable to builders and real estate developers.

"We have examined the facts of the case from this point of view. We find that out of the total accommodation of 58,970 sq.ft. constructed, the assessee was able to sell only 25,530 sq.ft. during the previous year relevant for the assessment year 1977-78. Neither the construction of the multi-storeyed building was complete nor even the half portion of the building sold. The net sale proceeds received were much less than the total expenditure/cost incurred by the assessee upto date. In the circumstances so far as the assessment year 1977-78 is concerned we accept the assessee's submission that it would be in order if no profits or losses are estimated from the venture for the assessment year 1977-78. the assessment for this year is, therefore, cancelled even on this score."

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substantially completed the project, so as to recognize income under the project completion method of accounting.

"However, the position as regards the assessment year 1978-79 is materially different. The construction of the building is completed in that year. Total area earmarked for sale is 61,396/- sq.ft. out of which upto the end of that year the assessee had sold 49,965 sq. ft. i.e. about 80 per cent of the area. The net receipts have far exceeded the total cost or expenditure to the assessee. Assuming there is any possibility of the assessee's incurring some liability in future in connection with the completion of the project or otherwise, the unsold portion comprising of 12,331/- sq.ft. and the difference between the net receipts and the total expenditure and the amount actually treated as the assessee's income are more than sufficient to take care of any such contingency."

Thus, the methodology followed by the assessee in recognizing the income from the project under project completion method in the next year is in accordance with the propositions laid down by the Tribunal in the case of Champion Construction Co. (supra).

"15. Recognition/identification of income under the 1961 Act, is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. Completed contract method is one such method. Similarly, percentage of completion method is another such method. 16. Under completed contract method, the revenue is not recognized until the contract is complete. Under the said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to P&L a/c. The said method determines results only when contract is completed. This method leads to objective assessment of the results of the contract.

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period of time). He also relied upon the concept of timing difference introduced by As 22. It may be stated that all these developments are of recent origin. It is open to the Department to consider these new accounting standards and concepts in future cases of chit transactions. We express no opinion in that regard. Suffice it to state that, these new concepts and accounting standards have not been invoked by the Department in the present batch of civil appeals." [Emphasis own]

The Co-ordinate Bench of this Tribunal in this order held that when the

method of accounting followed by the assessee company cannot be said to

be an unreasonable method and that in such a case, even if a better

method could be visualised, the method consistently followed by the

assessee can be accepted.

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(supra) after considering all the judgments on the issue held that before

insertion of section 43CB of the Act, there was no legal obligation on the

part of the assessee to follow percentage completion method only. Before

insertion of this section person engaged in construction and service

contracts were free to follow either the project completion/completed

project method or percentage completion method in accordance with the

provisions of section 145 of the Act. In this order, the ITAT has held thus:

“41. From perusal of all the judgments it has been consistently held rather a settled law that the action of revenue authorities cannot be held justified if they substitute another method of accounting on the assessee which in the instant case was imposing of percentage completion method on the assessee even when it has been consistently maintaining the regular books of accounts on mercantile basis u/s 145 of the Act adopting project completion method to account for the revenue and the revenue authorities have failed to bring forth any inconsistency in the books of accounts. The Assessing Officer in the instant case has merely applied the method of percentage completion adopted by the Developer JSM DPL and calculated the income of the assessee completely ignoring the fact that the assessee was merely the owner of land and he was entitled to 32% of saleable area only on completion of construction and the deadline of which was 60 months from the date of agreement i.e. from 1.4.2009. The Ld.A.O also ignored the fact that right to sale its share of constructed area with the assessee was only from April, 2014 onwards and the assessee has offered the revenue for taxation from F.Y 2014-15 onwards as and when the sale deed has been registered. As held by various courts as discussed above that the method of adopting project completion method is not ultra virus and the assessee is free to adopt either the percentage completion method or project completion method with the only rider that it should be consistently adopted and in case of any deviation the effect of profit or loss should be offered to tax as the case may be. Revenue has not disputed this fact that assessee has offered the impugned advances to tax in the subsequent years i.e. from financial year 2014-15 based on sale deed registered which proves that there has been no loss to the revenue. Mere postponement of tax as a result of method employed by assessee has not been viewed adversely by courts so long as the method is regularly and

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consistently employed as held by Hon'ble Apex Court in the case of Excel Industries Ltd (2013) 358 ITR 295.

"43CB. Computation of income from construction and service contracts.-- (1) The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with the income computation and disclosure standards notified under sub- section (2) of section 145:

Provided that profits and gains arising from a contract for providing services,--

(i) with duration of not more than ninety days shall be determined on the basis of project completion method;

(ii) involving indeterminate number of acts over a specific period of time shall be determined on the basis of straight line method. (2) For the purposes of percentage of completion method, project completion method or straight line method referred to in sub-section (1)--

(i) the contract revenue shall include retention money;

(ii) the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains.".

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construction company engaged in the construction of flats/residential units

on the land owned by it without any contract with the customers for

construction of flats/residential units. It is ample clear that the assessee

company is consistently following revenue recognition method by adopting

completed project method, wherein, the revenue is recognised at the time

of sale of flats/residential units by way of registered sale deed in favour of

the customers and advance from customer and work in progress is

recognised at cost in the balance sheet. In the present case, the assessee

has recognised revenue on two broad heads viz; sale of flats and sale of

plots/land and amount of advance is transferred to the sales account when

the registered sale deed is executed in favour of the customers adding the

amount of advance pertaining to flats/residential units/plots sold during the

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relevant financial year and further adding the amount of advance received

during the year.

the ld. PCIT could not point out any defect in the revenue recognition

method i.e. completed project method/percentage completion method

adopted by the assessee and we are satisfied that the method consistently

followed by the assessee and accepted by the department for recognition of

revenue by following AS-2 alongwith AS-9 is a reasonable and right method

for recognition of revenue on sale of flats/residential units/land.

construction company arising from construction contract or a contract for

providing services shall be determined on the basis of percentage

completion method and the same is mandatory for revenue recognition

w.e.f. 1.4.2017 i.e. assessment year 2017-18 and this method of revenue

recognition was not mandatory and compulsory to be followed for

assessment year 2013-14. Therefore, ld. PCIT cannot revise or revisit the

assessment order(s) by pressing into service the provisions of section 43CB

of the Act in the present case. Therefore, the findings arrived at by ld.

PCIT in the impugned order at para 8 without any deliberation of

explanation of the assessee explaining the method of accounting of

revenue on account of sales and regarding non-applicability of AS-7 cannot

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be held as valid and sustainable without any further examination and

exercise. In our humble understanding, Ld PCIT cannot direct the AO for

denovo assessment without assigning any defects or deficiencies in the

method of accounting of revenue recognition on account of sale of

flats/residential units/land and regarding non-applicability of AS-7 as

contended by ld counsel for the assessee during the proceedings u/s 263 of

the Act.

revisionary order passed by the Ld. Pr. CIT is without jurisdiction and has to

be quashed on legal issue as well as on merit. Hence, we quash the order

u/s. 263 of the Act as well as notice u/s.263 of the Act and all proceedings

and orders, if any, in pursuant thereto.

Order pronounced on 20 /07/2020.

Sd/- sd/-

(Laxmi Prasad Sahu) (Chandra Mohan Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER

Cuttack; Dated 20 /07/2020 B.K.Parida, SPS

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Copy of the Order forwarded to : 1. The Appellant : Hi-tech Estates & Promoters Pvt Ltd., Plot No.A/103, Saheed Nagar, Bhubaneswar.

By order

Sr.Pvt.secretary ITAT, Cuttack

Date Initial 1. Draft dictated on 2/17.7.20 Sr.PS 2. Draft placed before author 17.7.20 Sr.PS 3. Draft proposed & placed before the AM second member 4. Draft discussed/approved by Second AM Member. 5. Approved Draft comes to the Sr.PS/PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. File sent to the Bench Clerk Sr.PS 8. Date on which file goes to the OS 9. Date on which file goes to the SPS 10. Date of dispatch of Order.

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