2024 (11) TMI 160 - AT - Income Tax

Revenue appeal dismissed as AS-9 excludes construction contracts; section 43CB inapplicable for pre-2016 residential projects

The ITAT Pune dismissed the Revenue's appeal regarding addition of profit on advances received from customers for sale of flats/shops. The AO had applied ... Income recognition - Addition of profit on advances received from customers as revenue on sale of flats /shops - Scope of accounting standard AS-9 - as per AO assessee, having executed the sale agreements and having received 100% of the consideration in most of the cases, the condition ‘transferring to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with ownership' laid down in AS-9 stood fulfilled in the case - CIT(A) deleted addition - HELD THAT:- CIT-DR’s first and foremost argument before us quotes the relevant accounting standard AS-9 to reiterate the Revenue’s stand that the Assessing Officer herein had rightly adopted percentage than project completion method to assess the impugned advances in assessee’s hands. The assessee on the other hand invites our attention to the above AS-9 wherein clause 2(i) makes it clear that “This statement does not deal with the following aspects of revenue recognition to which special condition apply (i) Revenue arising from construction contracts”. We thus see no merit in the Revenue’s instant first plea seeking to invoke AS-9 in very terms. Section 43CB also gets attracted in assessee’s case for the purpose of revenue recognition w.r.e.f. 01.04.2017, attracting percentage completion only - We note that section 43CB itself envisages revenue recognition in light of the “income computation and disclosure standards/ICDS” notified u/s 145(2) of the Act, which in turn, take us to“ICDS-3” containing not only clause 9 that “contract revenue shall be recognized when there is reasonable certainty of its ultimate collection” but also clause 22.2 in the nature of “Transitional Provisions” making it explicitly clear that only the regular method followed ought to be adopted for revenue recognition relating to construction contracts commenced on or before 31.03.2016 and not completed upto this clinching date, as the case may be. Learned counsel at this stage highlights the point that the assessee’s impugned residential project admittedly commenced prior to the said cut of date and had not attained completion upto 31.03.2016. This being the assessee’s clinching case, we hold that neither AS-9 nor section 43CB r.w.s. 145(2) r.w. ICDS-3, apply and therefore the CIT(A)’s impugned findings deleting the impugned addition stand upheld. Revenue appeal dismissed. Issues Involved:1. Deletion of addition of Rs. 7,57,32,042/- as revenue on sale of flats/shops.2. Applicability of Accounting Standard AS-9 for revenue recognition.3. Applicability of Section 43CB and the requirement of the Percentage Completion Method for revenue recognition.4. Allegation of double taxation due to the method of revenue recognition.Detailed Analysis:1. Deletion of Addition of Rs. 7,57,32,042/-:The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 7,57,32,042/- which was treated as taxable income from advances received from customers. The CIT(A) found that the addition was made by estimating gross profit on the proposed sale of flats/shops, which was not justified as the revenue was recognized only upon completion and possession transfer. The appellant consistently followed the Project Completion Method, recognized by the department in earlier years, and the addition would result in double taxation since the income was already offered in subsequent years.2. Applicability of Accounting Standard AS-9:The Revenue argued that AS-9 required revenue recognition when significant risks and rewards were transferred. However, the CIT(A) observed that the sale deeds were not executed, and control remained with the appellant, indicating that significant risks and rewards were not transferred. Therefore, AS-9 was not applicable. The Tribunal agreed, noting that AS-9 does not apply to construction contracts, thus rejecting the Revenue's plea.3. Applicability of Section 43CB and Percentage Completion Method:The Revenue argued that Section 43CB mandated the Percentage Completion Method for revenue recognition from 01.04.2017. However, the CIT(A) and the Tribunal found that Section 43CB, read with ICDS-3, allowed for the regular method followed before 31.03.2016 to continue. The appellant's project commenced before this date and was incomplete, justifying the continued use of the Project Completion Method.4. Allegation of Double Taxation:The appellant argued that accepting the AO's stand would lead to double taxation as the income was already declared in subsequent years. The CIT(A) accepted this argument, noting that the revenue recognition method consistently followed was reasonable and accepted by the department in other years. The Tribunal upheld this finding, emphasizing that the method did not distort profits and was tax-neutral.Conclusion:The Tribunal dismissed the Revenue's appeal, supporting the CIT(A)'s decision to delete the addition and maintain the appellant's method of revenue recognition. The Tribunal found no merit in the Revenue's arguments concerning AS-9 and Section 43CB, affirming that the appellant's consistent method was appropriate and did not result in revenue loss.