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Facts
The assessee, engaged in real estate development, consistently recognized revenue using the Project Completion Method (PCM) as per AS-9 for Assessment Year 2015-16. The Assessing Officer (AO) disregarded this, applying the Percentage of Completion Method (POCM) and making an addition. The CIT(A) deleted the addition, following a previous order for AY 2014-15, leading to the Revenue's appeal.
Held
The Tribunal upheld the CIT(A)'s decision, affirming that POCM was not mandatory under Section 145 for the relevant assessment year, especially prior to the finalization of ICDS in May 2017. Furthermore, even under POCM, the conditions for revenue recognition (such as transfer of significant risks/rewards of ownership and achievement of 25% project completion) were not met. Consequently, the AO's addition was correctly deleted.
Key Issues
Whether the Assessing Officer can unilaterally disregard the assessee's consistently followed Project Completion Method (PCM) and impose the Percentage of Completion Method (POCM) for revenue recognition, and whether the conditions for applying POCM were met for the assessment year.
Sections Cited
143(3), 145, 144
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Income Tax Appellate Tribunal, DELHI BENCHES : A : NEW DELHI
Before: SHRI G.S. PANNU, HON’BLE & SHRI ANUBHAV SHARMA
ORDER
PER ANUBHAV SHARMA, JM:
This appeal is preferred by the Revenue against the order dated 24.10.2019 of the Commissioner of Income Tax (Appeals)-22, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in Appeal No.273/19-20/CIT(A)-22, New Delhi arising out of the appeal before it against the order passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’), by the ACIT, Circle 2(2), Delhi (hereinafter referred to as the Ld. AO).
Heard and perused the records. Ld. AR has relied the order of Co- ordinate Bench in the case of assessee for AY 2014-15, in to contend that the issue is covered in favour of assessee by the order dated 29/10/2021. Ld. DR could not dispute this factual aspect.
What comes thereby is that the assessee Company is engaged in the business of Real Estate Development and has claimed that it is recognizing revenue in accordance with AS-9 and is following project completion method to recognize the revenue from the ongoing project. The AO has however, disregarded the method but in appeal the CIT(A) has followed the order in case of assessee for AY 2014-15 where such addition was deleted at the stage of first appeal. The appeal preferred by the Revenue is dismissed by Co-ordinate bench, by the order dated, 29/10/2021 (supra). We consider it advantageous to reproduce the relevant findings of order dated 29/10/2021, as follows:- “7. We have heard the rival contentions and perused the material available on records. The grievance of the Revenue before us that Ld. CIT(A) committed gross error in deleting the addition as made by the Assessing Officer. It is the case of the Revenue that the assessee ought to have recognized Revenue on the principles of POCM. The Ld. CIT(A) decided the issue by observing as under:- "Decision: I have considered the submission of the appellant and observations of the assessing officer made in the assessment order. It is seen that appellant is constructing a project known as 'French Apartments' at Noida Extension. The appellant company started this project in F.Y. 2010-11. For recognizing revenue from this project, the appellant company is following project completion method as per AS-9. However, in the assessment proceedings, Assessing Officer has held that accounting policy followed by the appellant is not acceptable as it is prescribed by the ICAI and has 2 applied the percentage of completion method (POCM) for recognizing the revenue. The issue in the appeal is whether it is mandatory for the appellant to follow the POCM Method. As per the observation of the Assessing Officer, it is mandatory for the appellant to follow POCM, whereas as per the submission of the appellant it is not mandatory. The Assessing Officer while holding that POCM is mandatory for the appellant has placed reliance on the Guidance Note on Revenue Recognition for Real Estate Transactions issue by CAI in May 2012. The AR of the appellant submitted before me that taxable income has to be computed as per the provision of Income Tax Act / Rules and not according to the Guidance Note issued by ICAI. The projection completion method is a recognized method of accounting for computing the taxable income as per provisions of Income Tax Act. The provisions of section 145 of Income Tax Act, 1961 states as under: "145. (1) 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. (2) The Central Government may notify in the Official Gazette from time to time 2 [income computation and disclosure standards] to be followed by any class of assessees or in respect of any class of income. (3) 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) 3[has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under subsection (2)], the Assessing Officer may make an assessment in the manner provided in section 144.]" As per aforesaid provisions of section 145, it is apparent that income of the assessee has to be computed as per method of accounting regularly employed by the assessee. It is provided in sub-section (3) 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 has not been regularly followed or the income has not been computed in accordance with the standards notified under sub-section (2), the assessing officer may make an assessment in the manner provided in section 144 of the I.T. Act. In the present case, the assessing officer has disregarded the appellant's regularly followed method of accounting of project completion method and has applied percentage of completion method for recognizing revenue. However, while doing so, the Assessing Officer has not invoked the provisions of section 144 of the I.T. Act which is mandatory if the Assessing Officer is not satisfied with the method of accounting regularly followed by the appellant. It is seen that Assessing Officer has framed the assessment u/s 143(3) of the I.T. Act without rejecting the books of accounts. It is observed from the assessment order that Assessing Officer has not pointed out any deficiency with reference to computation of income and disclosure of accounting standards notified by CBDT. It is seen that the appellant has been following the project completion method since its inception from AY. 2011-12 and has recognized revenue in accordance with AS-9 of the ICAI. It is also observed that this method of accounting followed by the appellant has been accepted in the past assessments including the assessment made u/s 143(3) for AY. 2012-13. While rejecting the appellant's project completion method, the Assessing Officer has not pointed out as to how the method of accounting followed by appellant was not in accordance to the provisions of section 145 of the Income Tax Act, 1961. It was not justified on the part of the Assessing Officer to disregard the method of accounting regularly followed by the appellant without pointing out any defects and violation of provisions of section 145 of the Act. It is seen that as per the provisions of Section 145, it is not mandatory for the appellant to follow POCM which is evident from the fact that the CBDT has issued Draft Income Computation And Disclosure Standard (ICDS) of Real Estate Transactions in May 2017 for discussion wherein it has been proposed to provide for recognition of revenue in real estate transaction based on percentage of completion method. This ICDS proposal is only at discussion stage and has not been finalized as yet, therefore, it is not mandatory for the appellant to follow percentage of completion method in AY. 2014-15. It is also seen that Section 145 has not prescribed any such conditions for recognizing the revenue in the real estate transactions. Had the percentage of completion method been mandatory earlier, there would have been no need for the CBDT for releasing the draft of ICDS in May 2017. This implies that POCM is not mandatory for the assessment years prior to 2017-18. In view of these facts, it is held that observation of the Assessing Officer with regard to POCM in the case of appellant is not based on correct appreciation of facts. Accordingly, the POCM method applied by the AO for recognizing revenue in the case of appellant for the year under consideration is rejected and addition made on the basis of such method of Rs.15,65,60,883/- is deleted. In this regard, reliance is placed on the following judicial pronouncements on the issue: The Hon'ble Supreme Court in the case of Commissioner of Income Tax v. Bilahari Investment P Ltd. (2008) 299 ITR 1 (Hon'ble Supreme Court) held as under :- "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 anyone of the accounting methods. The completed contract method is one such method. Similarly, the percentage of completion method is another such method. Under the 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 the profit and loss account. The said method determines results only when the contract is completed. This method leads to objective assessment of the results of the 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 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. The above indicates the difference between the completed contract method and the percentage of completion method." Reliance is also placed on the decision of Hon'ble Delhi High Court in the case of Paras Buildtech India Pvt. Ltd. vs. CIT [ITA NO. 602/2015] wherein it is held as under :- "18. Section 145 (1) of the Act states that the income chargeable under the heads 'Profits and gains of business or profession' shall be computed in accordance with either cash or mercantile system of accounting "regularly employed by the Assessee". It is only with effect from 1st April 2015 that a change has been brought about in Section 145 (2) which permits the central government to notify in the Official Gazette from time to time the income computation and disclosure standards to be followed by any class of Assesses or in respect of any class of income. That change is prospective and in any event does not apply to the case on hand.
The settled legal position as far as Section 145 of the Act is concerned is that it is not open to an AO to reject the accounts of an Assessee unless hecomes to a determination that notified accounting standards have not been regularly followed by the Assessee. As pointed out by the CIT (A) in the order dated 2nd July, 2010, the AS of the ICAI did not have any statutory recognition under the Act although it was binding under the Companies Act, 1956. The method of accounting followed by the Assessee in the present case i.e. project completion method was certainly one of the recognized methods and has been consistently following by it. In para 22 of the above judgment, the Court observed as under:
"22. The other aspect that appears to have escaped the attention of the ITAT is that the Assessee offered to tax in the subsequent FY the amounts received and therefore there was no actual loss to the revenue. In similar circumstances, the Supreme Court in CIT v. Excel Industries Limited 2013 ITR 295 (SC) observed that the dispute if any raised at the instance of the Revenue would be at best academic. The stand of the Assessee in the present case also finds support in the decision of the Gujarat High Court in CIT-IV v. ShivalikBuildwell (P) Ltd. (2013) 40 taxmmann.com 219 (Gujarat). It was held that the Assessee in that case, who was a developer, was entitled to book the amount received as booking advance as income on transfer of the property. Till then the advance booking amounts could not be treated as his trading receipt. The High Court recognized that the Assessee in that case was entitled to apply the project completion method in terms of the applicable AS.
This Court too has by order dated 7th January 2015 in ITA 111/2014 (CIT v. SABH Infrastructure Ltd.) held likewise, after noticing the decisions of the Supreme Court in CIT v. Bilahari Investment P. Ltd. (supra) and the order dated 15th November 2011 in of 2011 (CIT v. Manish Buildwell Pvt. Ltd.)." The reliance in this regard is also placed on the judgment of Hon'ble Madras High Court in the case of Pr. CIT v Santha Buildtech Pvt. Ltd. [2017][4)TMI 826 vide its decision dated 04.04.2017 wherein the Court has held that where the assessee has been consistently following the project completion method, revenue was not justified in substituting the same with percentage completion method. The Hon'ble Allahabad High Court in the case of Pr. CIT v Friend Land Developers [2017] [4] TMI 1153 has held that there are no provisions under the income tax act or the rules which may compel the assessee to follow percentage completion method. In view of the factual as well as legal position discussed above, it is held that Assessing Officer was not justified in applying POCM instead of Project Completion Method regularly followed by the appellant. Accordingly, the addition of Rs.15,65,60,883/- made by the assessing officer is deleted. The appellant has alternatively submitted that even if the revised Guidance Note issued by ICAI on which the Assessing Officer has placed reliance, no revenue was required to be recognized by the appellant during the year. The appellant submitted that in para 3.4 of the assessment order, the Assessing Officer has admitted the position that for recognizing revenue as per the said guidance note one of the condition required to be fulfilled is that "Seller has transferred to the buyer all significant risks and reward of ownership." In this regard, the appellant has submitted that this condition is not fulfilled in the case of appellant. In the case of appellant neither all the significant risks nor the reward of ownership has been transferred to the buyer. The risk of the property still vests with the appellant and has not been transferred to the buyer. If something happens to the building structure, the loss will be of the appellant and not the buyer. Similarly, the reward of ownership has not been transferred to the buyer. Only a builder buyer agreement has been signed as per which it has been clearly provided that conveyance deed / lease deed shall be executed only after full and final payments including all additional charges are paid by the buyer and until that, the ownership of the property shall remain vested with the appellant. The relevant clause of Para 3 of builder-buyer agreement is reproduced here under :- "The Sub-Lease Deed / Conveyance deed shall be executed, only after the Allottee(s) has made full & final payments, including all other additional charges which are due and payable to the Company. Till the execution of the Sub-Lease Deed / Conveyance Deed and handing over the possession of the Unit, the ownership of the Unit shall remain vested with the Company." This clause clearly establishes that all significant risk and reward of ownership has not been transferred to the buyer, therefore, even as per revised guidance note and AS-9, no revenue could be recognized by the company as the primary condition has not been fulfilled. The assessing officer in Para 3.8 of the assessment order has held that percentage of completion method has to be adopted for recognizing revenue irrespective of the percentage of completion. To this, the appellant has submitted that even if the guidance note of accounting of real estate transactions are taken into account for recognizing the revenue, no revenue could be recognized in the case of appellant for the year under consideration as for applying POCM, certain percentage of the work has to be completed which as per the guidance note issued is 25%. Therefore, the observation made by the Assessing Officer for recognizing revenue as per POCM is not based on correct understanding of the POCM method. In this regard, para 5.3 of the guidance note for recognizing the revenue is reproduced hereunder: "5.3 Further to the conditions in paragraph 5.2 there is a rebuttable presumption that the outcome of a real estate project can be estimated reliably and that revenue should be recognised under the percentage completion method only when the events in (a) to (d) below are completed. (a) ........
(b) When the stage of completion of the project reaches a reasonable level of development. A reasonable level of development is not achieved if the expenditure incurred on construction and development costs is less than 25 % of the construction and development costs as defined in paragraph 2.2 (c) read with paragraphs 2.3 to 2.5. (c) ......... (d) ......... Construction and development costs as defined in paragraph 2.2 (c) read with paragraphs 2.3 to 2.5. is as under :- "2.2(c) Construction and development costs - These would include costs that relate directly to the specific project and costs that may be attributable to project activity in general and can be allocated to the project. 2.3 Construction costs and development costs that relate directly to a specific project include: (a) land conversion costs, betterment charges, municipal sanction fee and other Charges for obtaining building permissions; (b) site labour costs, including site supervision; (c) costs of materials used in construction or development of property; (d) depreciation of plant and equipment used for the project; (e) costs of moving plant, equipment and materials to and from the project site; (f) costs of hiring plant and equipment; (g) costs of design and technical assistance that is directly related to the project; (h) estimated costs of rectification and guarantee work, including expected warranty costs; and (i) claims from third parties. 2.4 The following costs should not be considered part of construction costs and development costs if they are material: (a) General administration costs; (b) selling costs; (c) research and development costs; (d) depreciation of idle plant and equipment; (e) cost of unconsumed or uninstalled material delivered at site; and (f) payments made to sub-contractors in advance of work performed.
2.5 Costs that may be attributable to project activity in general and can be allocated to specific projects include: (a) insurance; (b) costs of design and technical assistance that is not directly related to a specific project; and (c) construction or development overheads; and (d) borrowing costs." From the above stated facts, it is clear that for recognizing revenue as per the guidance note, one of the prime condition is that no revenue should be booked until the expenditure incurred on construction and development cost reached to the level of 25% of the construction and development costs. According to the appellant construction and development cost incurred by the appellant upto the year ending 31.03.2014 was only 18.40% of the total estimated construction and development cost. On consideration of the facts, calculations given by AO and the submission of the appellant, it is seen that the assessing officer has erred in applying the percentage completion of the project. Since the construction and development cost incurred by the appellant till 31.03.2014 was only 18.40% of the total estimated construction and development cost, no revenue could have been booked even as per the guidance note issued by ICAI. In view of the facts discussed above, it is held that it was not mandatory for the appellant to follow POCM method as per guidance note issued by ICAI. Further even as per guidance note issued by ICAI, no revenue was required to be booked by the appellant for the year under appeal as appellant has not transferred all significant risks of ownership to the buyer and the level of completion of the construction is less than 25% of the estimated cost of construction and development till 31.03.2014. Accordingly, the addition of Rs.15,65,60,883/- made by the Assessing Officer is deleted. This ground of appeal is allowed."
8. We do not see any infirmity into the above findings of Ld.CIT(A) as the assessee has been applying consistently the same method since inception. Moreover, Ld.CIT(A) has recorded the fact that the assessee has been adopting the same method of accounting which was accepted by the Revenue. Further, it is also recorded by Ld.CIT(A) that the Assessing Officer committed error in computing the construction and development cost incurred by the assessee till 31.03.2014. As per Ld.CIT(A), the cost was only 18.40% of the total estimated construction and development cost. Therefore, no revenue could have been booked even as per the guidance note issued by ICAI. This finding of fact is not rebutted by the Revenue. Thus, Ground No.1 raised by the Revenue is devoid of any merit hence, dismissed.”