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Income Tax Appellate Tribunal, [ DELHI BENCH “C”: NEW DELHI ]
Before: MS. SUSHMA CHOWLA, VICE– & SHRI N. K. BILLAIYA
O R D E R PER N. K. BILLAIYA, A. M. :
This appeal by the assessee is preferred against the order of the CIT (Appeals)-35, New Delhi, dated 5.09.2019 pertaining to Assessment Year 2014-15.
The solitary grievance of the assessee is that the CIT (Appeals) erred in confirming the addition of Rs.17,32,78,878/-made by the Assessing Officer on grounds of revenue recognition of the work completed to the returned income.
The representatives of both the sides were heard at length. Case records carefully perused and with the assistance of the counsel we have carefully gone through the relevant documentary evidences brought on record in the form of paper book in the light of Rule 18(6) of the ITAT Rules.
The assessee is the group company of M/s. Gaur Group and is engaged in the business of real estate development. During the year under consideration the 2 assessee is developing housing project in Sector 79, Noida, U.P. The return for the year was filed on 28.09.2014 declaring net taxable income of Rs.12,59,710/-. The return was selected for scrutiny assessment under CASS and accordingly statutory notices were issued and served upon the assessee.
During the course of the scrutiny assessment proceedings the assessee was asked to explain why no revenue related to the project have been recognized. In its reply the assessee explained that the work was not completed to the extent of 30% and following the accounting policy no revenue was recognized during the year under consideration.
The assessee submitted the working of the cost of the project as under :-
Phase-wise details of Project cost Rs. in Crores incurred up to 31.03.2014 Particulars Project Phase-1 Rs. Project Phase-2 Rs. Total cost Rs. Land 93.32 53.03 40.29 Interest to Noida Authority 2.50 1.90 4.40 Construction & Development Cost 54.35 51.93 2.43 (including selling expenses)
Total Cost 107.45 44.62 152.07 362.60 Total Estimated Cost of Completion %age of Phase-wise Cost Incurred to 29.63 12.30 41.94 Total Estimated Cost of Completion
The Assessing Officer was of the opinion that the afore-mentioned working is fudged only to create a working so that the compLETION of Phase-1 is less than 30% and the income as per the project completion method followed by the assessee does not trigger off.
The assessee was further asked to furnish details of project completed as on 31.03.2015 and 31.03.2016. The assessee furnished the necessary details and on perusal of the same the Assessing Officer found that as on 31.03.2016 the total cost of project has been shown at Rs.349.56 crores which is less than the total cost of project shown as on 31.03.2014 which was Rs.362.60 crores. The Assessing Officer was of the firm belief that the total cost of project cannot get
3 reduced in the subsequent year and was of the opinion that the total cost of project at Rs.349.56 crores was completed as on 31.03.2014 and according to this the percentage of completion comes to 30.74% and, therefore, the assessee should have recognized the revenue as on 31.03.2014 itself. To a specific query the assessee vide letter dated 29.12.2016 which is at page 85 of the paper book explained “as per requirement of income computation and disclosure standard assessee company have selling and marketing expenses (including brokerage) and from cost estimating sale to this estimated cost has come to Rs.345.55 crores from Rs.374.61 crores.
The Assessing Officer was of the opinion that the assessee could not furnish any basis for the above reduction. The Assessing Officer further observed that the FAR from 109826.232 sq. mts. Sanctioned earlier by the Noida Authority increased to 115473.01 sq. mts., but failed to notice that this revision was made vide order dated 21.06.2016 which cannot have any bearing in return filed for Assessment Year 2014-15 which was filed on 28.09.2014. Discarding all the submissions and documentary evidence filed by the assessee during the course of assessment proceedings the Assessing Officer rubbished the figure of Rs.362.60 crores and adopted Rs.349.56 crores as under :-
On taking total Project cost at On taking total Project cost at Rs.362.60 Crores) Rs.349.56 Crores) Total Saleable Area 9,59,770 9,59,770 Total sold area till 31.03.2014 5,08,150 5,08,150 Total sale consideration of Area 241,43,45,761 241,43,45,761 Sold Total amount received till 67,63,25,582 67,63,25,582 31.03.2014 Total Estimated Cost 362,60,00,000 349,56,00,000 Total land cost incurred till 53,02,52,576 53,02,52,576 31.03.2014 Total construction cost incurred till 54,42,42,206 54,42,42,206 31.03.2014 Total cost incurred till 31.03.2014 107,44,94,782 107,44,94,782 Percentage completion till 29.63% 30.74% 31.03.2014 with working.
Re-working the total cost of project the Assessing Officer made the addition of Rs.17,32,78,878/- as under :-
Total Sale Consideration as per the Agreeent to Sell executed Rs.241,43,45,761 (as stated by the assessee) 30.74% of the above. Rs.72,21,69,887 Total Cost Incurred 107,44,94,782 (as stated by the assessee) Proportionate Cost = Total Cost x Area Sold / Total Area 56,88,91,009 Income for the period ending 31.03.2014. 17,32,78,878
Aggrieved by this the assessee carried the matter before the CIT (Appeals), but without any success.
At the outset, let us first consider the revenue recognition which is mentioned under significant accounting policies as part of the audited statement of accounts of the assessee which is at page 33 of the paper book and the same reads as under :-
“ Sale of Flats :
The Company is following “Percentage of Completion Method” of Accounting for construction projects. As per this method, the Sales and Revenue in the Profit & Loss Account at the end of the Accounting year is recognized in proportion to the actual cost incurred as against the total estimated cost of project under execution with the Company subject to actual cost of project incurred being 30% or more of the total estimated cost of project. The estimates of the costs are reviewed periodically by the management and any effect of changes in estimates is recognized in the period such charges are determined. Further, revenue is recognized only for the confirmed booked flats / stocks as on the date of Balance Sheet & appropriate contingency provision is made till the project is finally completed. “
From the above it is clear that the assessee is recognizing revenue on completion of 30% of the project cost. A perusal of the details furnished by the assessee shows that in Assessment Year 2015-16 the assessee has ACHIEVEDcompletion of 30% of the cost of project and accordingly returned income of Rs.14.46 crores. The returned income was accepted as such vide assessment order dated 29.12.2017 framed under Section 143(3) of the Act. Similarly in Assessment Year 2016-17 returned income of Rs.5.28 crores was 5 accepted so far as the project is concerned though some petty disallowances were made which were not related to the construction activities of the assessee. This assessment order is placed at page 94 of the paper book. In Assessment Year 2017-18 the returned income of Rs.14.86 crores was accepted by the assessment order dated 23.12.2019 framed under Section 143(3) of the Act and the said assessment order is placed at page 98 of the paper book wherein the Assessing Officer has categorically mentioned that calculation of revenue and cost of project booked as percentage completion method was furnished by the assessee.
At this juncture it would not be out of place to consider Accounting Standard 7 issued by the Institute of Chartered Accountants of India. The objective of AS 7 is to prescribe the accounting treatment of revenue and costs associated with construction contracts. Because of the nature of the activities undertaken in construction contract the date at which the contract activity is entered into and the date when the activities completed shall fall into different accounting periods. The relevant para of the said Accounting Standards read as under :-
“ Contract Costs :
15. Contract costs should comprise: (a) costs that relate directly to the specific contract; (b) costs that are attributable to contract activity ill general and can be allocated to the contract; and (c) such other costs as are specifically chargeable to the customer under the terms of the contract.
16. Costs that relate directly to a specific contract include:
(a) site labour costs, including site supervision; (b) costs of materials used in construction; (c ) depreciation of plant and equipment used on the contract; (d) costs of moving plant, equipment and materials to and from the contract site; (e) costs of hiring plant and equipment; (f) costs of design and technical assistance that is directly related to the contract;
6 (g) the estimated costs of rectification and guarantee work, including expected warranty costs; and (h) claims from third parties. These costs may be reduced by any incidental income that is not included in contract revenue, for example income from the sale of surplus materials and the disposal of plant and equipment at the end of the contract.
Costs that may be attributable to contract activity in general and can be allocated to specific contracts include: (a) insurance; (b) costs of design and technical assistance that is not directly related to a specific contract; and (c ) construction overheads.
106 AS 7 (revised 2002)
Such costs are allocated using methods that are systematic and rational and are applied consistently to all costs having similar characteristics. The allocation is based on the normal level of construction activity. Construction overheads include costs such as the preparation and processing ot construction personnel payroll. Costs that may be attributable to contract activity in general and can be allocated to specific contracts also include borrowing costs as per Accounting Standard (AS) 16, Borrowing Costs.
18. Costs that are specifically chargeable to the customer under the terms of the contract may include some general administration costs and development costs for which reimbursement is specified in the terms of the contract.
19. Costs that cannot be attributed to contract activity or cannot be allocated to a contract are excluded from the costs of a construction contract. Such costs include: (a) general administration costs for which reimbursement is not specified in the contract; (b) selling costs; (c) research and development costs for which reimbursement is not specified in the contract; and 7 (d) depreciation of idle plant and equipment that is not used on a particular contract. “
So far as changes in estimates are concerned the following para explains :
“ Changes in Estimates : 37. The percentage of completion method is applied on a cumulative basis in each accounting period to the current estimates of contract revenue and contract costs. Therefore, the effect of a change in the estimate of contract revenue or contract costs, or the effect of a change in the estimate of the outcome of a contract, is accounted for as a change in accounting estimate [see Accounting Standard (AS) 5. Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies]. The changed estimates are used in determination of the amount of revenue and expenses recognized in the statement of profit and loss in the period in which the change is made and in subsequent periods. “
As explained hereinabove the assessee has recognized the revenue in Assessment Year 2015-16 onwards when the completion exceeded 30%. The reasons for the reduction in the estimated cost of project from Rs.362 crores as on 31.03.2014 to Rs.349.53 crores as on 31.03.2016 has been well explained at para 37 of the AS 7 which is mentioned elsewhere and the reason for reduction in the estimated cost so far as the case in hand is concerned is due to selling cost which was earlier taken at Rs 25 crores which was reduced rs. 12.35 crores.
17. It is pertinent to note that the assessment order for Assessment Year 2014-15 was filed on 29.09.2015. This means that the Assessing Officer was well aware of the revenue recognition in Assessment Year 2015-16 and, therefore, grossly erred in making additions in Assessment Year 2014-15 for income which has been duly recognized in subsequent assessment year.
The Hon’ble Supreme Court in CIT Vs. Excel Industries Ltd. (2013) 358 ITR 295 (SC) has observed as under :-
“ 29. In Radhasoami Satsang Saomi Bagh v. Commissioner of Income Tax, [1992] 193 ITR 321 (SC) this Court did not think it appropriate to allow the reconsideration of an issue for a subsequent assessment year if the same "fundamental aspect"
8 permeates in different assessment years. In arriving at this conclusion, this Court referred to an interesting passage from Hoystead v. Commissioner of Taxation, 1926 AC 155 (PC) wherein it was said: "Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken."
Reference was also made to Parashuram Pottery Works Ltd. v. Income Tax Officer, [1977] 106 ITR 1 (SC) and then it was held: "We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
"On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter - and if there was no change it was in support of the assessee - we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income Tax in the earlier proceedings, a different and contradictory stand should have been taken."
It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest
9 rather than spend the tax payers' money in pursuing litigation for the sake of it.
Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers. “
Considering the totality of the facts discussed hereinabove in the light of the subsequent assessments of the assessee the assessment orders of which are placed on record and considering the observations of the Hon’ble Supreme Court (supra) we are of the considered view that the Assessing Officer / CIT (Appeals) were not justified in substituting the cost as on 31.03.2014 with the cost on 31.03.2016. The addition made by the Assessing Officer is not justified on the facts of the case. We accordingly direct the Assessing Officer to delete the addition of Rs.17,32,78,878/-. The appeal is accordingly allowed.
Order pronounced in the open court on : 30/06/2020.