ACIT CC-3, THANE, THANE vs. JAGDALE INFRASTRUCTURE PVT. LTD, THANE

The CIT(A) in this regard placed reliance on his own order in assessee's own case for AY 2018-19 and also on Shankala Realtors (P.) Ltd. -vs- ITO, 111 taxmann.com 96 (Mumbai) (2019). The assessee has recognized revenue based on the percentage of cost incurred as compared to total project cost as applied on the confirmed sale agreement. The CIT(A) held that the percentage is to computed based on the area of construction completed to rework the revenue to be recognized. Since the revenue offered by the assessee for the year under consideration was more, the CIT(A) gave relief to the assessee accordingly. The revenue is appeal against the order of the CIT(A) before us.

The ld. Departmental Representative (DR) relied on the order of the AO to submit that the assessee has not followed the guidance issued by ICAI properly while recognizing revenue under POCM.

The ld. Authorized Representative (AR) submitted that the Co-ordinate Bench in assessee's own case for AY 2018-19 has considered a similar issue and upheld the order of the CIT(A). The ld. AR drew our attention to the relevant findings of the CIT(A) for the year under consideration (page no.22 to 37 of CIT(A) order) to submit that the CIT(A) has relied on his own order for earlier AY Jagdale Infrastructure Pvt. Ltd to give relief to the assessee and therefore, the decision of the Co-ordinate Bench is clearly applicable for the year under consideration also.

We heard the parties and perused the material on record. We notice that the Co-ordinate bench in assessee's own case for AY 2018-19 (ITA No.963/Mum/2014 dated 16.08.2024) has considered a similar issue and held that “8. With regard to the merits of addition, we noticed earlier that the assessee had considered the amount received from prospective buyers with whom Agreement for sale has been executed. According to the assessee and also as per Accounting Standards, the profit could be estimated only when the risk and rewards attached to a flat is transferred and such a transfer shall took place only when Agreement for sale is registered. While the AO’s view was that the letter of allotment would give enforceable right to the buyer and hence the advances received against issuing letter of allotment should also be taken into consideration.

We notice that the above said issue came to be considered by the coordinate benches of Tribunal and it has been held that the profit has to be estimated only in the cases where risk and reward has been transferred. The Ld CIT(A) firstexamined the terms of “Allotment Letter” issued by the assessee. The discussions made by him in this regard are extracted below:- 31. On the other hand, the appellant has submitted that Accounting Standard AS-7 is to be read along with Accounting Standard AS-9 because para 3.3 of AS-7 clearly provides that revenue is to recognized when the conditions specified in paragraph 10 & 11 of AS-9 are fulfilled. As per AS-9, one of the most important requirements is ‘transfer of all significant risks and reward of ownership’ which is required to be determined on the basis of terms and conditions of the Agreement for Sale. As per para 3.3 of AS-7, this agreement for sale is considered of having the effect of transferring all significant risk and reward of ownership to the buyer, provided the agreement is legally enforceable. The AS-7 further provides that once such legally enforceable agreement is entered with the buyer, the revenue is to be recognized subject to fulfillment of other conditions, irrespective of the fact whether legal title is transferred or not or possession is given or not. So, one of the important conditions is presence of a legally enforceable agreement to sell. 32.1 The appellant has contended that Assessing Officer has erroneously considered the allotment letter as an enforceable contract/agreement to sell. Accordingly, the appellant was asked to file a copy of ‘allotment letter’ on Jagdale Infrastructure Pvt. Ltd sample basis. The allotment letter (for flat no. B-1905) as filed by the appellant is as under: ALLOTMENT/ RESERVATION LETTER To, Mr.Akshay Chandrakant Patil &Mrs.Tanuja Murlidhar Chaudhari, Flat No: B-1905 comprised in on the Nineteenth floor Floor, approximately admeasuring about 54.76 Sq Mt Carpet area , in the proposed Complex namely ' Amizra', situated on land Thane, Survey No. 170/1, Thane (W), Maharashtra, is allotted to you, subject to you/ all of you, in addition to paying Consideration of Rs.83,00,000,/-(Rupees Eighty Three Lakh Only) more particularly mentioned in the 'Schedule of Payment' annexed hereunder, also complying with and/or accepting all the terms and conditions mentioned herein and/or laid down by concerned Government/semi Government Authority/ies Body/ies. The Consideration mentioned herein excludes contribution towards the Maintenance Charges, Government Stamp Duty, Registration Charges, Administration Charges, Legal Charges, Service Tax, Value Added Tax (VAT, Gst) and/or any taxes applicable with respect to the proposed transfer of the said Apartment/Flat). As per the approved Sanctioned Plans, we as 'Developer/ Promoter/ Builder' are entitled to develop the 'Said Land', thereby constructing multistoried buildings thereon and being entitled to sell Flats/Units comprised in the proposed Complex namely 'Amizra' to be developed/ constructed by us, on the 'Said Land' and to also enter into 'Articles of Agreement'/ 'Sale Deed 'etc. to and in favor of the Applicant/s i.e. proposed Purchasers/ Buyers of the said Flats/Units and to also receive/ collect/ accept money towards the total Sale Price and other charges, in respect of the said respective Flats/Units thereof. Timely Payment as per the 'Schedule of Payment' annexed hereunder shall be the essence of this provisional allotment/ reservation, whether you are availing the loan facilities from any financial institution or not, you are liable to pay all the installments due within 7 days from the date of the respective demand letter, failing which the you shall have to pay interest at the rate of 21% p.a. till the payment of the installments. In case you (or) any one of you, commits a default in payment on the respective due date/s of any amount/s due and payable by you (or) any one of you, to us, under this ‘Allotment/ Reservation Letter' (including your proportionate share of taxes levied by the Concerned Authority and other outgoings) and on you committing any breach of any of the terms and Jagdale Infrastructure Pvt. Ltd conditions herein contained, we as 'Developer/ Promoter/ Builder' shall at our sole option, be entitled to terminate/cancel this 'Allotment/ Reservation Letter' and subsequently refund the amount received from you (or) all of you, without any interest thereon, albeit, subject to deduction there from a sum of 2% of agreement value along with brokerage charges,-administrative charges and other charges and towards all or any loss, compensation and damages caused to us as the 'Developer/ Promoter/ Builder' or suffered by us as the 'Developer/ Promoter/ Builder', on account of the said breach committed by you (or) any one of you. In case of cancellation by "you, 2% of the agreement value will be deducted as administration charges. Service tax / any other taxes and brokerage, if already paid will be recovered from the customer additionally. The balance amount shall be refunded, one month after the resale of the flat. This provisional allotment' reservation is made subject to the following terms and conditions:- If for any reason, any changes in the plans of the proposed building are made by the sanctioning Authorities or by the Architects or by us as the "Developer/ Promoter/ Builder', resulting in reduction or an "increase in the above mentioned area or change in its location, no claim monetary or otherwise will be raised or accepted except that the above mentioned lump sum price will be reduced or increased on pro-rata basis. In case of absolute deletion of a Flat/Unit no claim, monetary or otherwise, will be raised or accepted except that the amount received will be refunded in full; In the event you do not execute an Agreement for sale on payment of 20% of the Agreement value as required under MOFA (Maharashtra Ownership of flats Act) in respect of the above referred flat premises and there is an increase in the market value of the said flat premises i.e. the ready reckoner rate then in such event you shall be solely liable to pay for the incidental taxation or penalties ,if any, that shall become payable by us in relation thereto i.e. you shall be responsible for additional taxation or penalties that may be levied to us as a consequence of delay in execution of agreement between us. If for any reason whether within or outside our control the whole or part of the said Project is abandoned, no claim will be preferred, except that your money will be refunded without interest and without any damages or compensation in any form whatsoever.

Thus, in the case of Shankala Realtors (supra), the jurisdictional ITAT after considering AS-7 and AS-9 has held that while applying the percentage completion method, the date of execution of ‘agreement to sell’ is the point which determines the point of recognition of revenue because passing of risks and rewards by virtue of ownership is an essential condition for revenue recognition. The Hon’ble ITAT has further held that it is the date of execution of agreement which is important and not the date of registration of agreement, as canvassed by the assessee. Accordingly, the ITAT directed the assessing officer to bring to tax, the revenue out of the remaining executed agreements, if any, during the impugned assessment year, by applying the percentage completion method. It is seen that the facts of the present case are similar to the case of Shankala Realtors (supra).” Following the above said decision, the Ld CIT(A) has concluded that the money received from prospective buyers with whom Agreement for sale has been entered should alone be considered for recognizing the revenue under Percentage completion method.

We notice that the Ld CIT(A) has followed the decision rendered by co- ordinate bench in the case of Shankala Realtors (P) Ltd (supra), wherein it has Jagdale Infrastructure Pvt. Ltd been held that the significant risk and reward shall get transferred only when “Agreement for sale” is entered between the parties. Though the Letter of Allotment may give enforceable right to the prospective buyer, yet it does not transfer the significant risk and reward, which is a condition prescribed for recognizing income under the Accounting Principles. Before us, no other contrary decision of higher judicial forum was cited by the revenue.Hence, we do not find any infirmity in the order so passed by Ld CIT(A). Accordingly, we uphold the order passed by Ld CIT(A) on this issue.”

We further notice that the CIT(A) for the year under consideration has followed his own order for AY 2018-19 and therefore there is merit in the submission that the impugned issue is covered by the above decision of the coordinate bench in assessee's own case. It is also relevant to note that the assessee has offered the balance revenue from the project in the subsequent years. Considering these facts and respectfully following the decision of the Co-ordinate Bench in assessee's own case for AY 2018-19, we are of the view that there is no infirmity in the order of the CIT(A).

In the result, the appeal of the revenue is dismissed.