THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-3(1), VIJAYAWADA vs. RAMA KRISHNA HOUSING PRIVATE LIMITED, VIJAYAWADA

PER S. BALAKRISHNAN, Accountant Member :

Commissioner of Income Tax (Appeals), Vijayawada in appeal

No.10129/CIT(A)/VJA/2017-18 and DIN No.

ITBA/APL/M/250/2019-20/1023408347(1), dated 30/12/2019

passed arising out of the order passed by the Ld. AO U/s. 143(3)

of the Income Tax Act, 1961 [the Act] for the AY 2015-16. Cross

Objection is filed by the assessee.

being a company is engaged in the business of purchasing and

developing land, converting into plots and selling them and also

construction of apartments, Villas and selling them to various

customers, e-filed its return of income for the AY 2015-16

admitting a total income of Rs. 1,77,28,840/-. The return was

summarily processed U/s. 143(1) of the Act. Subsequently, the

case was selected for scrutiny under CASS for the following

issues:

“Large squared up loans during the year (Form 3CD)

“Real estate business with high closing stock (verify whether the assessee has adopted percentage completion method)

“Mismatch in expenditure of personal nature reported in Audit report and ITR.”

“Mismatch in amount paid to related persons U/s. 40A(2)(b) reported in Audit report and ITR. Accordingly, notice U/s. 143(2) was issued and was duly served on the assessee. Further, notice U/s. 142(1) was also issued in this case calling for the books of account and certain other information.”

issued and served on the assessee. In response to the notices,

the Authorized Representative of the assessee-company appeared

from time to time and submitted the details called for by the Ld.

AO. Further, the survey operation U/s. 133A was conducted on

the assessee on 30/03/2015 by ADIT (Inv), Vijayawada and

thereafter the case was converted into complete scrutiny. During

the course of survey it was found that there is a difference

between the value of closing stock as shown in the books of

accounts of the assessee as on 30/05/2015. The Managing

Director of the assessee-company did not have any explanation to

the difference in closing stock and agreed to pay taxes on the

profit as per the valuation made by the Valuer. Further, the Ld.

AO also observed difference in the turnover reported by the

assessee and sought explanation from the assessee. In response,

the Assessee’s Representative submitted that as per the Guidance

4 Note on Accounting for Real Estate Transactions issued by the

Chartered Accountants of India [ICAI], the assessee has adopted

percentage of completion method which is mandatory for the

companies. In this regard, the assessee was issued a show cause

notice on 11/12/2017 seeking explanation for the discrepancies

in the turnover to the extent of Rs. 2,05,10,865/- and requested

the assessee to show cause why this amount should not be added

to the total income of the assessee. In response the assessee

made various submissions before the Ld. AO but the Ld. AO not

convinced by the replies and made addition of Rs. 2,05,10,865/-

and added the same to total income of the assessee. Further, the

Ld. AO also made an addition of Rs. 6,60,73,755/- on account of

difference in closing stock of land and work-in-progress.

Aggrieved by the order of the Ld. AO, the assessee filed an appeal

before the Ld. CIT(A), Vijayawada.

submissions regarding the adoption of percentage of completion

method as mandated by the Guidance Note on Accounting for

Real Estate Transactions issued by the ICAI. Before the Ld. CIT

(A), the Ld. AR also submitted the details of computing the

turnover of the assessee at Rs. 16,91,19,135/-. Considering the

replies furnished by the Assessee’s Representative, the Ld. CIT(A)

relying on the decision of the ITAT, Jaipur in Vastukar Township

Pvt Ltd vs. DCIT in ITA Nos.105, 119, 172, 106 & 120/JP/2017,

dated 22/12/2017, allowed the appeal of the assessee. Aggrieved

by the order of the Ld. CIT(A), the Revenue is in appeal before the

Tribunal.

“1. The Ld. CIT(A) has not justified in allowing the appeal without taking into account the facts and merits of the case. 2. The Ld. CIT(A) failed to identify that the assessee is supposed to recognize revenue at the percentage of the total consideration as per agreements of sale executed but not the consideration / advance received as per the S.No. 5 of the Guidance Note of ICAI, whereas in the present case, the assessee has recognized 57.52% of the amount as per the sale deed executed and the advances received instead of 57.52% of the total consideration as per the agreements. 3. The CIT(A) failed to recognize that the assessee did not fulfill the criteria mentioned at SlNo.4 of the Guidance Note of ICAI as the assessee has transferred the legal title over the plots by way of registered sale deeds and collected an amount of Rs. 18.96 Crs and thereby the assessee has no effective control of the said plots to a degree usually associated with the ownership and there is no uncertainty regarding the amount of consideration and also ultimate collection of the Revenue from the buyers. 4. Any other grounds that may be urged at the time of hearing.”

made a sale undivided share of the land to various customers

aggregating to Rs. 18.96 Crs. The Ld. DR further pointed out

6 that the Ld. AO has rightly considered the sale of land as

turnover of the assessee as against the turnover reported based

on the percentage of completion method. The Ld. DR supported

the order of the Ld. AO and pleaded that the order of the Ld. AO

be upheld.

Per contra, the Ld. AR submitted that the assessee being a

company has rightly followed the Guidance Note issued by the

ICAI and has recognized the Revenue by following the percentage

of completion method. The Ld. AR further submitted that when

the activity is not fully completed following the percentage of

completion method in recognizing the revenue is also accepted by

the Department. The Ld. AR further submitted that in the

subsequent Assessment Year, the assessee has recognized the

revenue based on the completion of the project. The Ld. AR

further argued that even though the sale deed was registered in

favour of customers for the AY 2016-17 amounted to Rs.

5,13,54,000/- the assessee has recognized revenue in Profit &

Loss Account for an amount of Rs. 13,39,94,988/- by following

the same percentage of completion method. The Ld. AR further

submitted that the Ld. AO has not objected to this in the

subsequent assessment year. The Ld. AR therefore pleaded that

7 the assessee has rightly computed the recognition of revenue as

mentioned in the Accounting Standard issued by the ICAI for

Real Estate business. The Ld. AR therefore pleaded that the order

of the Ld. CIT(A) be upheld.

available on record as well as the orders of the Ld. Revenue

Authorities. Admittedly the only dispute by the Revenue is with

respect to adoption of percentage of completion method followed

by the assessee for recognizing the turnover during the impugned

assessment year. We find from the submissions of the Ld. AR

that the assessee has followed the Guidance Note on Accounting

for Real Estate Transactions issued by the Institute of Chartered

Accountants of India. Para 4 of the Guidance Note specifies that

“transfer of legal title is condition precedent to the buyer who

takes significant risks and rewards of ownership and accepting

significant completion of the seller’s obligation, revenue should not

be recognized till such time legal title is validly transferred to the

buyer”. Further the Guidance Note also specifies that “if there is

no significant uncertainty exists regarding the amount of consideration

that will be derived from the real estate sales; and (d) It is not

unreasonable to expect ultimate collection of revenue from buyers”. The

percentage of completion method should be followed based on the

agreement of sale or any other legally enforceable document. In the

instant case, we find that the assessee has registered sale deeds in

favour of various buyers of plots. It has recognized the revenue based on

the amounts received from the sale of undivided share of the land and on

the basis of a percentage computed in accordance with the Guidance

Note issued by the ICAI. Similarly, we find that the assessee has

recognized the revenue with respect to advances received from customers

for sale of plots, at the same rate adopted for recognition of the revenue

from registered sale deeds. We also find merit in the argument of the Ld.

AR that the balance revenue has been recognized in the subsequent

Financial Year by consistently following the percentage of completion

method. We therefore find that the Ld. CIT(A) has rightly examined the

issue in detail and has recorded his findings as below:

“21. The development expenses debited to the P & L account amounted to Rs. 29,57,44,304/-. The said expenses included the land purchases, the material purchases and direct expenses incurred for development. As the aid expenses were incurred towards the development of plots as well as construction of villas, the development expenses incurred in respect of the project for development of plots upto 31/3/2015 was worked out by the assessee Rs. 20,26,78,056/- after excluding the work in progress of villas of Rs. 9,61,35,000/- from the total development expenses of Rs. 29,57,44,304/- debited to the P & L account during the year and after including the opening work in progress of plots of Rs. 30,68,752/-. As the total estimated project cost in respect of the project of development of plots amounted to Rs. 35,23,57,562/- as against the cost of Rs. 20,26,78,056/-

incurred in respect of the said project upto 31/3/2015, the percentage of completion of the project was worked out at Rs. 57.52%

CIT(A) thereby dismissing the grounds raised by the Revenue.

10 10. With respect to the Cross Objection raised by the assessee (C.O. No. 24/Viz/2020) since it is supportive in nature, considering the outcome of the Revenue’s appeal, no separate adjudication is needed. Accordingly, the CO raised by the assessee is dismissed as infructuous.

Pronounced in the open Court on the 04th May, 2023.

Sd/- Sd/- (दु�वू� आर.एल रे�डी) (एस बालाकृ�णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) �या�यकसद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER Dated :04.05.2023 OKK - SPS आदेश क� ��त�ल�प अ�े�षत/Copy of the order forwarded to:- �नधा�रती/ The Assessee – M/s. Rama Krishna Housing Pvt Ltd., 1. D.No.54-15-20, Srinagar Colony, Vijayawada, Andhra Pradesh – 520008. राज�व/The Revenue – Asst. Commissioner of Income Tax, Circle- 2. 3(1), 2nd Floor, Annexe, Central Revenue Building, MG Road, Vijayawada – 520002. 3. The Principal Commissioner of Income Tax, Vijayawada. आयकर आयु�त (अपील)/ The Commissioner of Income Tax 4. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, �वशाखापटणम/ DR, ITAT, 5. Visakhapatnam गाड� फ़ाईल / Guard file 6. आदेशानुसार / BY ORDER Sr. Private Secretary ITAT, Visakhapatnam