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Income Tax Appellate Tribunal, DELHI BENCH ‘D’ : NEW DELHI
PER SHAMIM YAHYA, ACCOUNTANT MEMBER :
This appeal by the assessee is directed against the order of the ld. CIT (Appeals)-15, Gurgaon dated 02.02.2016 pertaining to assessment year 2012-13.
The grounds of appeal
raised by the assessee read as under :- “1. On the facts and circumstances of the case, the order passed by the learned CIT (Appeals) upholding the additions in the returned income of the appellant, made by the assessing officer, is totally illegal on the facts of the case and as per law.
2. That the learned CIT (Appeal) erred in upholding the contentions of the assessing officer for treating the 70% salaries as part of the Project cost instead of 50% as taken by the appellant company. The appellant ./2016 has been following percentage completion method for computing its income and accordingly income was computed accordingly on consistent basis.
3. That the orders of the Assessing Officer & CIT (A) are not based on the facts of the case & as per law and hence additions sustained by the CIT (A) are totally illegal.”
3. The assessee in this case is a real estate developer and said to be following percentage completion method as per Accounting Standard-7 of ICAI. The Assessing Officer (AO) made an ad hoc disallowance/addition as under :-
“5. It is noticed form the P&L account form the assessee company that it is not showing any revenue income from operations. It was specifically asked as to why the same has not been shown as per accounting standard 7. The reply of the assessee is submitted as under : As per architect certificate the status of work done upto 31.03.2012 is (i) project construction flat @ 5%, (ii) colony development is @ 10%. As per accounting standard 7 at least 25% of salable project area is secured by contract or agreement with buyer. However during the year under consideration assessee debited Rs.39,65,954/- for salaries and incentives and out of this only 50% has been transferred to project account-WIP. Keeping in view the reply filed by the assessee w.r.t. revenue income shown during the year under consideration, 70% salaries and incentives is transferred to project A/c hence Rs.7,91,191/- added to the income of the assessee.”
Upon assessee’s appeal, ld. CIT (A) referred to the assessee’s financials and observed that it can be analyzed that over a period of four years there have been spending on the project and the inventories have piled up but the assessee has not recognized revenue in accordance with the completion of project which is indicated from a snap shot of the above financials :-
2011 2012 2013 2014 (i) Revenue recognized from 158.27 0 23.00 0.89 operations (ii) Expenses on material 3209.39 3918.35 1184.16 1518.78 (iii) %age of revenue over 4.93 - 1.94 0.58 expense (iv) Inventories 3055.00 7127.34 7983.16 9501.95 Or 7046.17 Thereafter ld. CIT (A) made a theoretical observation that assessee is not permitted to postpone the revenue recognition as under and confirmed the addition :-
“5.4 The appellant is not permitted to postpone the revenue recognition due to the following settled preposition of accounting principles: a) Section 145 of the Act provides for the method of accounting because Sub-section (1) states that income chargeable under the head "Profits and gains of business or profession” or “Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. However, sub- section (2) of section 145 stipulates that the Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income and Sub-section (3) of section 145 provides that where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144. It transpires from the prescription of section 145 that only the accounting standards issued by the Central Government under this section are mandatory and have a bearing on the computation of total income. Any other Accounting standard issued by any statutory or non-statutory body may be only guiding factors for the computation of total income under the provisions of the Act. The Accounting standards etc. issued by the Institute have relevance in the manner of maintenance of accounts, even though it cannot override the mandate of the provisions of the Act. b) For the purpose of taxability, the Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. The taxation principle relevant for present purpose is contained in section 5 in the form of scope of total income which includes all income from whatever source derived which accrues or arises or is deemed to accrue or arise. Under the mercantile system of accounting, an income becomes taxable when right to receive an income is finally acquired. c) Income becomes taxable only when it accrues and it accrues when right to receive it is finally acquired. In consideration of this concept, Institute of Chartered Accountant was propelled to come out with guidance note in 2006 requiring the adopting of the percentage completion method alone for the recording of accounting transactions by developers so that the accounts give a true and fair view of its profits. Similar view has been reiterated in the guidance note issued in 2012. Under the percentage completion method, income accrues matching with the stage of completion reached up to the end of the year. Caveat is that the risks and rewards in the construction must have been transferred and in the absence of such a transfer, there can be no question of accrual of income simply on the basis of the owner constructing his property meant for sale on completion at a later stage. Income is computed under this method by deducting the costs incurred in reaching the stage of completion from the proportionate sale price attributable to the work completed. d) In contrast to that, under the project completion method, the completed contract method, income accrues only when the contract is completed or substantially completed. Substantially completed means that when only minor construction work is left to be done. Under this method, the costs incurred on year to year basis up to the stage of completion or substantial completion of construction is treated as work-in-progress. Similarly the payments received are also accumulated during the course of the contract and shown as liability in the balance sheet. Income accrues only upon the completion or substantial completion of the construction activity. Here again, the same caveat applies that the developer should have transferred the risks, and rewards of ownership and If there is a prior agreement but, there is no transfer of risks and rewards of ownership to the buyer, then no income would accrue till the passing of risks and rewards at the time of completion or substantial completion of the construction activity. On the other hand, if there is no prior agreement for sale, then income accrues only when sale is actually made, which event may happen after the completion or substantial completion of construction. e) The essence of the project completion method is the completion on the substantial completion of construction. But when such a developer, having initially transferred all the risks and rewards of ownership, offers income at the time of the handing over of the project or registration of sale deed, then this manner of offering income fails to accord with the project completion method. Such a course of action, obviously, results into shifting of income from the year of completion or substantial completion of construction contract to later year(s), which is impermissible. 5.5 The action of the Assessing Officer is justified in taking the expense on revenue side in addition to already recognized revenue. The ground of appeal is devoid of merits and hence dismissed.”
Against the above order, assessee is in appeal before us. We have heard the ld. DR and perused the record. None appeared on behalf of the assessee despite notice.
Upon careful consideration, we note that assessee in this case is a real estate developer and claims to be following percentage completion method of accounting. The assessee has debited 50% of its salaries and incentive to project account- WIP. The assessing officer has held that assessee should have debited 70% to the project account without any cogent reason. What is the basis of assessing officer's action is not at all specified. The ld. CIT (A) has analyzed the financials of the assessee. He is of the opinion that assessee is not recognizing the revenue despite the fact that continuous expenses have been incurred and inventory is piling up which according to the ld. CIT (A) indicates that the project is being substantially completed on year to the basis. Thereafter ld. CIT (A) has held that assessee is not permitted to postpone the revenue recognition. He has even mentioned that assessing officer can pass order under section 144 of the Income-tax Act, 1961. Thereafter, he has confirmed the AO’s action.
We find that the above order of ld. CIT (A) does not exhibit proper application of mind. As per ld. CIT (A), the project has been completed more than what the assessee has reflected. In such case, the addition should have been made according to the stage of completion as per the Revenue authorities. The ld. CIT (A) has made no examination or remanded the ./2016 matter to the AO for finding of the actual completion. What is the justification of AO holding that 70% of the salary and wages should be debited to project account and not 50% is not at all spelt out by the AO or the ld. CIT (A). If the authorities below were of the opinion that assessee is falsifying his records than the books should have been rejected. This has not been done. Even if books have been rejected the estimation of income has to be done on a reasonable basis as per past performance or the prevalent industry norms. Devoid of any reasoning, addition of 20% of salaries and incentive to project account is solely based upon surmises and conjectures, hence not sustainable in law. Accordingly we set aside the orders of authorities below and delete the disallowance/addition made by the AO. 7. In the result, appeal by the assessee stands allowed Order pronounced in the open court on this 9th day of June, 2022.