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 percentage completion method under AS-9 to recognize revenue, but the CIT(A) deleted the addition. The ITAT held that AS-9 specifically excludes construction contracts from its scope. Additionally, section 43CB and ICDS-3 were not applicable since the residential project commenced before 31.03.2016 and remained incomplete as of that date, allowing the assessee to continue following its regular accounting method for revenue recognition.

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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.

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