Revenue recognition under Percentage Completion Method requires ICAI Guidance Note para 5.3 compliance for real estate transactions

ITAT Bangalore held that revenue recognition under Percentage Completion Method for real estate transactions must comply with ICAI Guidance Note para 5.3. The case involved dispute over land cost valuation in PCM calculations. Tribunal found that saleable area percentage (19.89%) was below required 25% threshold, making conditions under clause (c) unsatisfied. Matter remitted to AO with directions to recompute percentage of cost and saleable area per ICAI guidelines, ensuring all cumulative conditions in para 5.3 are satisfied before revenue recognition. Appeal allowed for statistical purposes.

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Issues:
Recognition of revenue under the Percentage Completion Method (PCM) as per Accounting Standards (AS) issued by the Institute of Chartered Accountants of India (ICAI).

Detailed Analysis:

Issue 1: Recognition of Revenue under PCM
The appellant, a company engaged in property development, filed an appeal against the order of the CIT(Appeals) for the assessment year 2015-16, specifically contesting the recognition of revenue under PCM. The Assessing Officer (AO) had directed the appellant to adopt PCM for revenue recognition as per AS-9. The AO observed discrepancies in the percentage of completion submitted by the appellant, leading to a revised calculation of revenue recognition. The CIT(Appeals) upheld the AO's decision, citing concerns about the revised cost of construction by the appellant to defer tax payments. The appellant argued that the conditions for revenue recognition under PCM are cumulative and not all were met. The Tribunal noted the conditions outlined in the ICAI Guidance Note, emphasizing the need for critical approvals, a reasonable level of project completion, and a minimum percentage of the saleable project area secured by contracts. The Tribunal found that the condition related to the saleable area percentage was not met, and the cost calculation was based on the revalued land cost instead of the original cost, affecting the percentage of construction cost. Consequently, the Tribunal remitted the issue back to the AO for recomputation based on the ICAI Guidance Note, ensuring all conditions are met for revenue recognition under PCM. The appeal by the appellant was allowed for statistical purposes.

This detailed analysis provides a comprehensive overview of the legal judgment, focusing on the issue of revenue recognition under PCM and the Tribunal's decision based on the ICAI Guidance Note and factual considerations presented in the case.

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