Method of revenue recognition in development projects: tribunal rejects percentage of completion and restores project completion method and profits

Method of revenue recognition for development projects: dispute over AO's switch from project completion method to percentage of completion method and consequent addition to business income. Tribunal examined applicability of Accounting Standard 7, AS 9 and Guidance Note, and noted that ICDS-III (applicable from 01.04.2015) on construction contracts did not apply to the assessment year in question or to the development project at hand. Tribunal found the assessee consistently applied and the department previously accepted the project completion method, concluded the Revenue's change to percentage of completion was unsustainable, and directed acceptance of the assessee's reported net profits.

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Issues: Whether the Assessing Officer could rejig the assessee's method of revenue recognition from the project completion method to the percentage of completion method for AY 2014-15 and sustain an addition computed accordingly.

Analysis: The Tribunal examined (i) the accounting policy consistently followed by the assessee (project completion method) in preceding and subsequent assessment years, (ii) documentary evidence in audited financial statements and reconciliations showing revenue from sale of flats being recognised on registration of sale deeds, (iii) the distinction between developers and construction contractors and the consequent inapplicability of AS-7/ICDS-III to the assessees developer transactions, and (iv) relevant judicial precedents of the jurisdictional High Court and coordinate benches holding that project completion (completed contract) and percentage of completion methods are recognised methods but that revenue cannot, without justification, force a change in a consistently followed method where such change results in pre-collection or double taxation. The Tribunal adopted and applied the reasoning of a coordinate-bench decision (Trishul Buildtech) and decisions of the Karnataka High Court, noting that: the assessee had consistently followed and the Department had accepted the project completion method in other years; the transactions resulted in income being taxed in subsequent years upon completion and registration; ICDS/Section 43CB (inserted later) was not applicable for the year under consideration; and applying percentage completion in the impugned year caused revenue-neutral timing differences and double taxation.

Conclusion: The change of accounting method by the revenue is not sustainable; percentage of completion method cannot be applied for the impugned year and the Assessing Officer is directed to accept the project completion method and the net profits reported by the assessee.

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