2021 (4) TMI 27 - HC - Income Tax

High Court upholds completed contract method over percentage completion in real estate revenue recognition case

The High Court of Karnataka dismissed the Revenue's appeals challenging the non-application of Accounting Standard AS-7 to a real estate developer and the ... Method of accounting - accounting standards application - eligibility of completed contract method for computation adoption - Tribunal held that accounting standard, namely Accounting Standard-7 is not applicable to the assessee on the ground that it does not apply to real estate developers even when assessee has received significant advances and also project is completed upto 97% and as such, the date of completion of registration becomes insignificant, as it is a tactic to postpone the payment of income tax which is due for taxation for the period under consideration - HELD THAT:- On perusal of the decisions rendered by this court in the case of PRESTIGE ESTATE PROJECTS[2020 (5) TMI 239 - KARNATAKA HIGH COURT], BANJARA DEVELOPERS & CONSTRUCTIONS (P) LTD. [2020 (7) TMI 285 - KARNATAKA HIGH COURT], VARUN DEVELOPERS [2021 (2) TMI 997 - KARNATAKA HIGH COURT], S.N. BUILDERS & DEVELOPERS[2021 (1) TMI 789 - KARNATAKA HIGH COURT]as well as the decisions of the Hon'ble Supreme Court in EXCEL INDUSTRIES [2013 (10) TMI 324 - SUPREME COURT] and in BILAHARI INVESTMENTS [2008 (2) TMI 23 - SUPREME COURT] and taking into account the fact that the Revenue itself has recognized the completed contract method for computation of the subsequent Assessment years, that is 2013-2014 and 2014-2015, we answer the substantial questions of law against the Revenue and in favour of the assessee. Issues:1. Applicability of Accounting Standard AS-7 to real estate developers.2. Validity of the percentage completion method over the project completion method.3. Revenue neutrality and postponement of tax payment.Analysis:Issue 1: Applicability of Accounting Standard AS-7 to real estate developersThe appeals were filed by the Revenue regarding the Assessment years 2010-2011, 2011-2012, and 2012-2013, challenging the order passed by the Income Tax Appellate Tribunal. The Tribunal was questioned on whether the assessing authority was correct in not applying Accounting Standard AS-7 to the assessee, a real estate developer, who had received significant advances and completed the project around 97%. The Tribunal held that the assessee's tactic to delay tax payment was not justified. The Revenue argued that the Tribunal erred in law by considering the tax effect as neutral and that the project completion method should have been followed as per Accounting Standards.Issue 2: Validity of the percentage completion method over the project completion methodThe assessee, a partnership firm engaged in construction and development, followed the completed contract method for revenue recognition as per Accounting Standard-9. However, the Assessing Officer applied the percentage completion method for the Assessment years 2010-2011 to 2012-2013, leading to disputes. The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's decision, prompting the assessee to appeal to the Income Tax Appellate Tribunal. The Tribunal, in its order, did not consider the validity of the addition made under Section 153-A of the Act. The Senior counsel for the assessee argued that the substantial questions of law were settled by previous decisions involving similar issues.Issue 3: Revenue neutrality and postponement of tax paymentThe Revenue contended that the completed contract method was correctly adopted by the Assessing Authority and that the assessee's actions were aimed at postponing tax payment. On the other hand, the assessee argued that the chosen method was permissible under the law and would not affect the overall revenue of the Department. The assessee emphasized that the completed contract method had been accepted by the Revenue for subsequent assessment years, indicating consistency in approach. The Court, after considering relevant decisions and the Revenue's acceptance of the completed contract method in later years, ruled in favor of the assessee, dismissing the appeals filed by the Revenue.In conclusion, the High Court of Karnataka dismissed the Revenue's appeals, upholding the completed contract method chosen by the assessee for revenue recognition and emphasizing the revenue neutrality of the transactions. The judgment highlighted the importance of consistency in applying accounting standards and methods of computation, ultimately ruling in favor of the assessee based on legal precedents and the Revenue's own practices in later assessment years.