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Facts
The Revenue appealed against the deletion of two additions made by the Assessing Officer. The first addition concerned the non-recognition of revenue from flat sales amounting to ₹2,23,94,370/-, as the AO argued the assessee had crossed the 25% threshold for revenue recognition under ICAI guidelines (AS-7) but failed to report income. The second addition was for ₹3,93,600/- as deemed interest receivable from a related party, M/s Shri Sriram Keshrimal, on payments made, which the AO treated as loans.
Held
The Tribunal upheld the CIT(A)'s decision to delete both additions. For the first issue, it noted the assessee consistently followed the project completion method (AS-9) and recognized revenue in subsequent years, thus the AO's addition would lead to double taxation. For the second issue, the Tribunal found that the transactions with the related party were current account in nature, not pure loans, and the assessee had capitalized any interest, not claimed it as an expense, making the addition unwarranted.
Key Issues
1. Whether the assessee, following the project completion method (AS-9), is required to recognize revenue under the percentage completion method (AS-7) to avoid double taxation. 2. Whether deemed interest income can be added under sections 36(1)(iii) and 40A(2)(a) on advances to a related party when the transactions are current account in nature and any interest is capitalized.
Sections Cited
133(6), 36(1)(iii), 40A(2)(a)
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Income Tax Appellate Tribunal, “Guwahati” BENCH, Guwahati
This is an appeal preferred by the Revenue against the order of the Commissioner of Income-tax (Appeals), Guwahati-2, (hereinafter referred to as the “Ld. CIT(A)”] dated 17.07.2018 for the AY 2015-16.
The issue raised by the Revenue in in ground no.1 is against the order of ld. CIT (A) deleting the addition of ₹2,23,94,370/- as made by the ld. AO on the ground that the assessee did not recognize the revenue during the year when the area of flat sold exceeds the threshold limit of 25% as per ICAI guidelines.
2.1. The facts in brief are that the assessee filed the return of income on 29.09.2015, declaring the total income of ₹1,13,010/-. The case 2.2. In the appellate proceedings, the ld. CIT (A) allowed the appeal of the assessee after taking into consideration the reply and the contentions of the assessee by observing and holding as under:-
“I have gone through the assessment order, submissions made by the appellant and the provisions of Accounting Standard 7 & Accounting standard 9. In real estate projects revenue is recognized as per the Percentage of Completion method as specified in Accounting Standard 7 issued by the Institute of Chartered Accountants of India. I have gone through the conditions mentioned in AS 7 for recognition of Revenue. One of them being: At least 25% of saleable project area is secured by contracts or agreements with buyers. In the case of appellant, the sale percentage has not exceeded 25% and hence the assessee had not recognized the income in the current year. I have gone through the balance sheets & Computation of subsequent years: i.e. AY 2016-17 & AY 2017-18 and found that the appellant is following the same method of accounting every year following the Percentage Completion. Method. Also the appellant had crossed the 25% limit in the AY 2016-17 and recognized revenue. for the year and also paidtax of Rs. 90Lacs. Thus 100% Revenue will be recognized when all the flats would be sold. Thus, the contention of the AO inmaking the addition completely wrong. the completely Again there is no dispute that Contracts or 'Agreements as mentioned in the Accounting Standard 7 refers to legally enforceable contract The Guidance Nota on Accounting for Real Estate Transactions (Revised 2012) clearly mentions that “………This agreement for sole is also considered to have the effect of transferring all significant risks and rewards of ownership to the buyer provided the agreement is legally enforceable and subject to the satisfaction of conditions which signify transferring of significant risks and rewards even though the legal title is not transferred or the possession of the real estate is not given to the buyer…………..” Thus, the action of the AO treating merely allotment letters as Agreement to Sale is totally incorrect and is against the Guidance Note issued by ICAI, which is issued only for this type of business. Thus, the method of calculating percentage of flats sold by the AO is totally wrong. Also on what basis the calculations are made by the AO is also not clear. He had also violated the second condition of AS 7 that: "At least 10% of the total revenue as per agreements of sale or any legally enforceable documents are realized at reporting date in respect of each of the contracts;" The AO had also recognized revenue of advances received of even those buyers whose 10% of sale value had not been received by the assessee. Thus 1" two conditions of AS 7 had been violated by AO in making the addition. The action of the LdAOis even voilative of the settled principles of Double Taxation and Consistency. The appellant had contended that it is following the Percentage of Completion Method in letter and Spirit and ITR for and wef A/y 2016-17 & 2017-18 have been filed by recognizing the income based on Percentage of Completion Method and incase, the action of the Ld AO would be upheld, this would amount to unsettling the incomes, taxes and other affairs of the appellant for the subsequent assessment years, needless to mention by involving the revenue as well as the appellant in unwanted litigation. In this regard, I derive support from the ratio of the following judicial pronouncements: TheHon'ble Supreme Court in the case of United Commercial Bank vs. CIT [240 ITR 355(SC)), held that the method followed consistently for thirty years and accepted by Revenue Method was valid and could not be rejected. In the case of CIT vs. Sarangpur Cotton Mfg. Co. Ltd. 16 ITR 36 (PC)], the Hon'ble Privy Councilheld as follows: "The Income Tax Officer is bound by the method of accounting regularly employed by the assesse. It was submitted that if an assessee's method of 3.1. The facts in brief are that during the assessment proceedings the ld. AO had observed that the assessee had made payment of ₹4,20,61,352/- to M/s Shri Ram Keshrimal, who is a related party within the meaning of Section 40A(2)(b) of the Act. The ld. AO noted that during the year the assessee made payment of the above amount to M/s Shri Sriram Keshrimal against the purchase of ₹98,11,275/- which is not reasonable. Accordingly, the ld. AO noted that the assessee failed to provide the interest receivable by him from M/s Shri Sriram Keshrimal on day-to-day basis and accordingly, computed the addition at ₹3,93,600/- on account of interest receivable from the related party and added the same in the income of the assessee.
3.2. In the appellate proceedings, the ld. CIT (A) allowed the appeal of the assessee by observing and holding as under:-
“I have gone through the assessment order, submission of the assesse and the balance confirmation of loan accounts and ledger of Sriram Keshrimal submitted by the appellant From the ledger account it is clear that funds are advanced and received as when required by both the parties and sometimes some statutory payments are also made on behalf of each other and there are some purchase transactions also. Thus all the transactions seems tobe in the nature of current account transactions only. Sometimes money is advanced by the appellant, then is received back and again advanced. Also there is a Payable balance at the end of the year. Thus these transactions can in no way be in the nature of Loan & Advances on which Interest is required to be charged. Moreover the AO had also not provided any calculation for the disallowance, but had disallowed the entire Interest paid by the appellant on Loans Liability acquired by assesse which is also wrong. Also there is no relation found from the ledger confirmations of the loan accounts and Sriram Keshrimal as regards to date of loan received and then advanced to Sriram Keshrimal. As such the disallowance of interest paid by assuming any purported interest income in not understandable.
The appellant had also contended that the disallowance of Interest is not claimed as expense in the Profit & Loss Account of the appellant but the appellant had capitalized it and shown as Building-in-construction in the Balance Sheet.I have gone through the balance sheet & Profit & Loss Account and found the contention of the assessee to be true. Thus, the action of Ld. AO adding the disallowance amount to the profit of the assessee is also wrong. Hence, I hereby delete the disallowance of interest made by the AO. This ground of appeal is, accordingly, allowed.” 3.3. After hearing the rival contentions and perusing the materials available on record, we find that the assessee was maintaining a current account with M/s Shri Sriram Keshrimal and frequently receiving and paying money as and when required. We note that sometimes the assessee makes payment for the purchase made from the said related party. We note that the ld. AO disallowed the entire amount of interest paid on the loans. We also note that the assessee has not claimed any interest in the profit and loss account but capitalized the interest under the head building under the construction in the balance sheet. Therefore, the order of the ld. AO was rightly reversed by the ld. CIT (A) on this issue and consequently, we uphold the order of ld. CIT (A) by dismissing the appeal of the Revenue.
3.4. The ground no.2 of the Revenue’s appeal is dismissed.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 18.12.2025.