Revenue fails in appeal against POCM income recognition and section 14A disallowance without exempt income

The ITAT Delhi dismissed the revenue's appeal on two grounds. Regarding revenue recognition under percentage of completion method (POCM), the tribunal upheld CIT(A)'s deletion of addition, noting the assessee began offering income under POCM from AY 2015-16 onwards with same tax rates applying to both years, making the revenue's attempt to shift taxability year purely academic. On disallowance under section 14A, the tribunal followed Era Infrastructure Ltd precedent holding that without exempt income, section 14A disallowance cannot apply. Both revenue grounds were dismissed.

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Issues Involved:
1. Deletion of addition of Rs. 3,26,00,000/- on account of revenue recognition following the percentage of completion method (POCM).
2. Deletion of disallowance u/s 14A where there is no exempt income.

Summary:

Issue 1: Deletion of Addition on Account of Revenue Recognition (POCM)

The revenue challenged the deletion of an addition of Rs. 3,26,00,000/- made by the AO on account of revenue recognition following the percentage of completion method (POCM). The AO observed that the assessee, a promoter and builder, had incurred substantial expenses on a residential project but had not recognized revenue based on POCM. The AO computed a profit of Rs. 3.26 crores on this basis. The assessee contended that the project, initially planned for 10 towers, was restricted to 6 towers due to market conditions, and hence, the revenue was not required to be recognized as the construction cost was less than 25% of the total cost. The CIT(A) found that the project was indeed planned for 10 towers and later restricted to 6 towers due to adverse economic conditions. The CIT(A) observed that the assessee had shown 98.62% of the total revenue in subsequent years and that recognizing revenue in the current year would lead to complications without any benefit to the revenue. The CIT(A) deleted the addition, and the ITAT upheld this decision, noting that the rate of tax remained the same in both years and the issue was academic in nature, referring to precedents like CIT Vs. Vee Gee Industrial Enterprises and CIT Vs. Excel Industries Ltd.

Issue 2: Deletion of Disallowance u/s 14A

The revenue challenged the deletion of disallowance u/s 14A where there was no exempt income. The ITAT referred to the decision of the Hon'ble Jurisdictional High Court in PCIT Vs. Era Infrastructure Ltd, which held that if there is no exempt income earned by the assessee, disallowance u/s 14A cannot be applied. Respectfully following this precedent, the ITAT dismissed the revenue's ground.

Conclusion:

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

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