2012 (7) TMI 770 - AT - Income Tax

ITAT affirms AS-9 over AS-7 for real estate revenue recognition

The ITAT upheld the CIT(A)'s decision that AS-9 applies to the real estate developer, not AS-7. The assessee correctly used the 'Completed Contract ... Addition made on the basis of percentage of completion method as per revised Accounting Standard-7 (AS-7) - CIT(A) deleted the addition holding that AS-9 is applicable - the method of accounting employed by the assessee is ‘Completed Contract Method’ - Held that:- As per the revised AS-7 of 2002 which is effective from 01/04/2003, a project completion method has been recognized and AS-7 has not approved completed contract method, although with certain riders, but in a situation when a contractor is also working as a developer, then the basis for recognition of Revenue should be relied on AS 9. AS-9 has prescribed that the recognition of Revenue requires that Revenue is measurable and that at the time of rendering of service it would not be unreasonable to expect ultimate collection. Where the ability to assess the ultimate collection with reasonable certainty is lacking, then Revenue recognition is to be postponed to the extent of uncertainty involved. It has therefore been prescribed vide para-9 that it is appropriate to recognize revenue only when it is reasonably certain that the ultimate collection will be made. As per the statement made from the side of the assessee, it was wrong on the part of the AO to assess the income irrespective of the year of completion of project when the amount received in advance has not reached certainty and that too the AO has merely estimated 10% as the recognition of Revenue of the construction contract, without assigning any specific basis of such an estimation, the such an estimation is not approved, resultantly the view taken by the ld.CIT(A) is upheld - in favour of assessee. Issues Involved:1. Applicability of Accounting Standard-7 (AS-7) vs. Accounting Standard-9 (AS-9)2. Method of revenue recognition for builders3. Estimation of income by the Assessing Officer (AO)4. Legal precedents cited by the AO and their relevanceIssue-wise Detailed Analysis:1. Applicability of Accounting Standard-7 (AS-7) vs. Accounting Standard-9 (AS-9):The primary issue revolves around whether AS-7 or AS-9 should be applied to the assessee, who is a builder and not a construction contractor. The Revenue argued that AS-7 applies because the assessee undertakes construction activities of a commercial nature. However, the CIT(A) held that AS-7 pertains to construction contracts awarded to contractors, and since the assessee is a developer and not a contractor, AS-7 does not apply. Instead, AS-9, which deals with revenue recognition in general, was deemed applicable by the CIT(A).2. Method of Revenue Recognition for Builders:The assessee followed the 'Completed Contract Method' for revenue recognition, recognizing revenue upon the completion of the sale of units. The AO disagreed, asserting that the 'Percentage of Completion Method' should be applied as per the revised AS-7. The CIT(A) concluded that the assessee, being a real estate developer, should recognize revenue as per AS-9, which recognizes revenue when the sale is executed. The CIT(A) found no defects in the assessee's books of accounts and held that the AO was unjustified in estimating income at 15% of booking advances.3. Estimation of Income by the Assessing Officer (AO):The AO computed the income based on booking advances received, estimating the income at 15% of these advances for both assessment years. For AY 2005-06, an addition of Rs. 7,93,050/- was made, and for AY 2006-07, an addition of Rs. 45,30,900/- was made. The CIT(A) rejected this estimation, emphasizing that the AO's basis for estimation lacked justification and was not supported by the facts of the case.4. Legal Precedents Cited by the AO and Their Relevance:The AO cited several legal precedents to support the application of AS-7 and the estimation of income, including CIT vs. British Paints India Ltd., Sukhdev Jalan vs. CIT, Tirathram Ahuja Pvt. Ltd. vs. CIT, and CIT vs. Nandram Huntram. However, the CIT(A) and the ITAT found these precedents inapplicable to the assessee's case, as they pertained to contractors rather than developers. The ITAT upheld the CIT(A)'s view that the assessee, being a developer, should follow AS-9 for revenue recognition.Conclusion:The ITAT upheld the CIT(A)'s decision, confirming that AS-9, not AS-7, applies to the assessee, a real estate developer. The CIT(A)'s findings that the assessee correctly followed the 'Completed Contract Method' for revenue recognition and that the AO's income estimation was unjustified were upheld. Consequently, the appeals by the Revenue were dismissed for both assessment years.