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Income Tax Appellate Tribunal, MUMBAI BENCHES “A”, MUMBAI
Before: S/Shri Shamim Yahya & Ram Lal Negi
O R D E R
Per Shamim Yahya, Accountant Member:
This is an appeal by the Revenue directed against order of learned CIT(A)-16, Mumbai, dated 11.06.2015, and pertains to assessment year 2011-12.
The grounds of appeal read as under: i) "Whether in the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that assessee was justified in not offering any income, ignoring the facts that the assessee has been consistently following the method of revenue recognition @ 8% of the cost of construction." ii). "Whether in the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition made ignoring the facts that the AS-7 does not allow in change of method of recognition of revenue for a particular project during its lifetime." iii) "Whether in the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition holding that as per concept of prudence, the expected loss, if any, has to be recognized as expenditure, ignoring the fact that substantial amount of construction was completed in both the projects and substantial consideration has been received by the assessee, hence there was no uncertainty in revenue recognition and litigation, if any, was temporary."
Brief facts of the case are that the assessee is engaged in the business of land development and builder. During the course of assessment, the Assessing Officer noticed that the assessee has changed its method of account from percentage method to project completion method. Upon Assessing Officer’s inquiry assessee gave following response vide its letter dated 24.03.2014:
"As we explained in detail vide our letter dated 18th February 2014 earlier your honour that we follows the project completion method and revenue from the project is recognized only once the entire project is completed or necessary approvals from the government authorities has been received, In our case though we have received advance payments from customers to whom we have sold the flats the same is shown as current liabilities as the project is not complete and the same is followed for the expenses side as well and hence all the expenses are shown as work in progress. We have also paid tax in the earlier years on the estimated basis which was approximately 8% of the expenses made by us towards the construction cost. In the previous two assessment years i.e. assessment years 2009-10 and assessment year 2010-11 we have declared the income on estimated basis of Rs.1,97,24,298/- and Rs.92,31,538/- and paid the tax on the same. Thus, the total income for both the earlier years was Rs.2,89,56,036/- We have two projects, one is at Vile Parle and other is at Jogeshwari. The Vile Parle project is comprising of three wings namely A, B & D wing. The work at A and B wing was approximately 80% complete while the work at D wing was approximately 30% complete. The Vile Parle project is an SRA project and due to some litigation especially with relation to environmental issues, the stop work order is issued for the site. As a result of this order no construction activity can be commenced on this site and hence losses were incurred due to recurring, administrative and other expenses. The construction work at Jogeshwari site was also affected due to the property disputes and hence the construction at the site could also not be carried out in that year for full swing. The work at Jogeshwari site was completed approximately 50% till March 2011. Due litigation at both the places our project was in problem and the future was dark at that time we ourselves were not known when can we complete the project in this situation.
As can be seen from the above explanation both our construction projects were badly stuck up due to litigation and disputes in the current financial year. This severely impacted the project feasibility of the construction works. We are making loss as our entire sale value of Parle project for A & B wing was Rs.18,47,36,200/- on which 80% works was completed and for D wing the advance booking value was 15,91,44,000/- on which 30% was completed accordingly, when we determine the figures of profitability we found that we are in loss, The total expenses till 31.03.2011 was Rs.27,75,62,862/- inclusive of profit declare by us in earlier years and if we calculate the profitability this comes in loss of (Rs.18,47,36,000 * 80% Rs.14,77,88,800/-) and (Rs.15,91,44,000 * 30% Rs.4,77,43,200) and (Rs.14,77,88,800 + Rs.4,77,43,200 - 27,75,62,869/) Rs.8,20,30,869/- the same was the position for Jogeshwari site too. Due to stop work litigation in both projects we were unable to declare any till settlement of the matters.
The current year position for Vile Parle project is still stop work is not open and work for the site is still not commenced, for Jogeshwari site, we made settlement with land owner's and start the work from October 2011. In this current year, the work is complete for Jogeshwari site. But after paying the cost of litigation and others, we are still in loss. Due to this reason, we have not paid any tax on construction WIP and declare the other income as our income. Pay tax on that only."
However, the Assessing Officer was not convinced and proceeded to add 8% of the work-in-progress as income.
On appeal, the learned CIT(A) accepted that there was bonafide and genuine reason for change in the method of accountancy. He also found that on the facts circumstances of the case the method of accounting adopted by the assessee was correct. Hence, he deleted the addition observing as under:
4.2 The Honorable 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. (299 ITR 1) as under:
Under the Project Completion Method or Completed Contract Method, the revenue is not recognized until the project/contract is complete. Under the said method, costs are accumulated in a WIP Account during the course of the project/contract. The profit and loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the project/contract is completed. This method leads to objective assessment of the results of the project/contract.
On the other hand, the percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under the method is determined by reference to the stage of completion of the contract. The stage of completion can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract 4.3 As per Revised Guidance on Note Accounting for Real Estate Transaction issued by ICAI in February 2012, the profit under 'Percentage of Completion Method' can be estimated on satisfaction of several conditions e.g. expenditure incurred on construction and development cost is more than 25% of total construction and development cost, at least 25% of saleable project area is secured by contracts or agreements with buyers, at least 10% of the total revenue as per the agreement of sales are realized on the date of reporting etc. Under this method, the revenue as well as cost is recognized as a percentage of project completed and from the profit so estimated, cost such as general administrative cost, selling cost, depreciation of plant and equipments, etc. should be reduced as these costs are not part of construction and development cost. The method is applied on cumulative basis for each reporting period to the current estimates of project revenues and project cost. The method further provides that the project revenue by reference to the stage of completion of the project activity should not exceed the estimated total revenue from the eligible and legally enforceable contracts. If it is probable that the total project costs will exceed total eligible project revenues, the expected loss should be recognized as expenditure immediately.
4.4 From the Guidance Note on Accounting for Real Estate Transaction (Revised 2012) issued by the Institute of Chartered Accountants of India, it clearly emerges that current project revenue, current project cost and cumulative profits have to be reviewed regularly in the light of updated estimated total project cost and project revenue and in accordance with the concept of prudence, the expected loss, if any, has to be recognized as expenditure immediately.
4.5 The case of the appellant is that it reviewed the viability and profitability of its projects at Vile Parle and Jogeshwari in the light of several adverse developments. These developments consisted of work stoppage notice at Vile Parle project by Municipal Corporation of Greater Mumbai, delay in completion of projects, sluggish demand in the real-estate market, increased cost of finance, severe liquidity issues, court cases filed by several tenants in relation to title of the property, extortion, tenant eligibility issues, etc. These adverse development seriously affected viability and profitability of projects as well as their timely completion. Because of it, the appellant was of the view that these projects were unviable, the ultimate result on completion of these projects would be loss and the profit already offered for taxation in the assessment year 2009-10 and 2010-11 would be more that the actual results on completion of projects. On being asked, the documentary evidences in support of the above adverse factors were also filed during appellate proceedings. The counsel of the appellant pointed out in the course of hearing that in case of Vile Parle Project and occupation and completion certificate has not been issued by the Municipal Corporation in respect of other A, B and C buildings. These developments showed that the viability of the building projects at Vile Parle and Jogeshwari and profitability therefrom were quite doubtful and uncertain. Meanwhile the appellant consulted other professional accountants on the method of accounting i.e. Project Completion Method' who opined that under the Project Completion Method or Completed Contract Method, the revenue is not recognized until the project/contract is complete. Under the said method, costs are accumulated in a WIP Account. The profit and loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the project/contract is completed. There was no method of accounting which permitted estimation of income from business at 8% of the 'work-in-progress completed during the year’.
4.6 On perusal of facts of the case and documents filed during appellate proceedings, the appellant was fully justified in deviating from the method of estimating income followed by it and not estimating any income from the building projects during the year under consideration under these extra- ordinary developments, particularly when the assessing officer could not point out to any defect in recording of revenues, expenses, assets and liabilities in the books of account regularly maintained by the appellant. A business man is the best judge of its affairs. If on bonafide consideration of facts as a prudent man, he comes to a conclusion that the projects undertaken by him were not viable, there may be loss on completion thereof and does not estimate any income as was done in the past, his judgement cannot be questioned by the assessing officer unless it is shown that his conclusion was malafide. The accounting concept of prudence requires that the income and assets should not be overstated and liabilities and expenses should not be understated. While revenues and profits are recognised only when realised or there is reasonable certainty of their realisation, the liabilities, expenses and losses are recognised when there is reasonable possibility of incurring them.
4.7 The honourable Hyderabad bench of I.T.A.T. held in the case of Addl. C.I.T. vs. Hill County Properties Ltd. (57 taxmann.com 400) as under:
In the present case, as a result of extra-ordinary events witnessed by the Satyam group of companies to which the assessee company belonged in the month of January, 2009, there was uncertainty with regard to the completion of project by the assessee company and delivery of units booked. Keeping in view this uncertainty, some of the agreement holders tendered applications for cancellation of the units booked and demanded refund of the advances paid. Some of the agreement holders also filed cases against the assessee company for cancellation the agreements and refund of the amounts paid by them. The ultimate collection from these agreement holders thus became uncertain and the assessee company, in our opinion, rightly decided to postpone the revenue recognition to the extent of such uncertainty, by adopting the new method of recognition of income on the basis of registration of agreements for sale or handing over of possession of the units, as the same enabled it to assess the ultimate collection with reasonable certainty. As a matter of fact, the claim made by some of the agreement holders for cancellation of agreements for sale already executed and for refund of the advances already paid created uncertainty relating to collectability which arose even after the execution of the agreements for sale, and this uncertainty was also provided for by the assessee by reversing the income already recognized on the basis of execution of the agreements for sale. The change in the method of recognition of income, as adopted by the assessee company in the year under consideration as well as the consequent reversal of income on the basis of cancellation/legal cases thus was in terms of the relevant Accounting Standard laying down prudential norms of revenue recognition, and as held by the coordinate bench of the Tribunal in assessee's own case for assessment year 2008-09, the same was legally correct under the mercantile system of accounting followed by the assessee company. It is pertinent to note here that the AP State Consumer Dispute Redressal Commission, Hyderabad (vide its order at pages 38 to 55 of the paper book) as well as National Consumer Disputes Redressal Commission, New Delhi (vide order at pages 56 to 87 of the assessee’s paper-book) subsequently allowed the claim of the agreement holders seeking cancellation of the agreements for sale and also directed the assessee company to refund the amounts paid by them along with interest, and even the SLP filed by the assessee against the order of the National Consumer Dispute Redressal Commission was dismissed by the Hon'ble Supreme Court. These subsequent events clearly show that there was an uncertainty in assessing the ultimate collection and revenue recognition was rightly postponed by the assessee company to the extent of such uncertainty involved by changing the method of recognition of income as well as providing for reversal of revenue already recognised earlier on the basis of cancellations/ legal cases.
As such, considering all the facts of the case, we are of the view that the learned DRP was fully justified in directing the Assessing Officer to accept the change in the method of revenue recognition adopted by the appellant and consequential reversal of revenue on the basis of the cancellations/legal cases, and upholding its order giving relief to the appellant on this issue, we dismiss ground No.7 of the Revenue's appeal.
4.8 Considering the facts and circumstances of the appellant's case, the appellant was fully justified in not estimating income from business at 8% of the work in progress completed during the year. Accordingly, the addition of Rs.1,20,66,260/- is hereby deleted and the appellant gets a relief of Rs.1,20,66,260/-.”
Against the above, the revenue is in appeal before us.
We have beard both the counsel and perused the records. We find that in this case assessee has changed its method of accounting as compared to earlier year on the ground that on the facts and circumstances of the case assessee has evaluated its performance and due to the circumstances it was prudent to change e the method of accounting from percentage completion method to the project completion method. There were some legal disputes, hence the project works was stalled. Hence assessee considered at appropriate to change the method of accounting of project revenue. The assessing officer has not accepted the submission. It is not the case that assessing officer has found any fallacy in the submission of the assessee. The AO has not found the assessee’s submission regarding the project being stalled to be incorrect. The assessing officers case is that assessee cannot change its method of accounting.
Ld. CIT-A on the other hand has examined the issue and found that there was reasonable cause for the assesse to change the method of accounting. The learned CIT-A has found that there were some legal disputes, as a result of which the assessee’s project had been stalled. In these circumstances learned CIT-A has referred to the accounting guidelines in this regard which provide that in case of real estate transaction the assessee should periodically review its method of accounting. 8. As there was a stoppage of work the assessee was forced to change the method of accounting. The factual detail submitted by the assessee’s counsel duly show that subsequently upon the completion of the project, in accordance with the project completion method adopted, the assessee has offered the remaining amount to taxation. In this view of the matter we do not find any infirmity in the order of learned CIT-A. The ground raised
by the revenue is totally misplaced that any of the accounting standard or guideline provide that method once adopted can never be changed howsoever the circumstances change.
9. It is settled law as well as well accepted accounting standard that if the facts and circumstances warrant, method of accounting may be duly changed and the change in method will be accepted. In these circumstances in our considered opinion there is no infirmity in the order of learned CIT-A, who has duly recorded the circumstances warranted for the change in the method and has found the same acceptable. Hence, the addition made by the AO which is not based upon cogent basis has rightly been deleted by the Ld. CIT(A). We do not find any infirmity in the order of learned CIT-A. Accordingly, we uphold the same
In the result revenues appeal stands dismissed Order pronounced in the open court on 15 th March, 2019.