Revenue recognition under AS 7/AS 9: unsold units not recognised absent contractual obligations; addition deleted accordingly.

Revenue recognition under the project completion method and AS-9 was determinative: revenue cannot be recognised for unsold units where no agreement created enforceable contractor contractee obligations and substantial risks had not transferred; documentary evidence and prior acceptance of accounts undermined the AO's rejection of books and extrapolation of sales to unsold area. The appellate authority, supported by a High Power Committee finding that the AO's extrapolation was unsound, deleted the addition and the Revenue's appeal was dismissed.

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Issues: Whether the Assessing Officer was justified in rejecting the assessee's books of account and extrapolating sales to the unsold area-thereby making additions by treating 100% of project sales as taxable-in AY 2016-17.

Analysis: The matter involves application of accounting principles for recognition of revenue under the project completion method (AS-7) read with revenue recognition principles (AS-9) and the factual question whether contractual obligations existed for unsold units. Documentary material, prior acceptance of the assessee's accounting in the preceding year, and the findings of a High-Power Committee identifying the AO's extrapolation as unsound were examined. The appellate authority accepted that revenue could not be recognized for unsold units where no agreement creating contractor-contractee obligations existed and where substantial risk had not transferred. The AO's method of extrapolating sales to the unsold area and rejecting the books resulted in a high pitched assessment without adequate basis. The appellate authority's deletion of the addition was supported by the committee's recommendations and the accounting framework applicable to recognition of revenue.

Conclusion: The addition made by the AO by rejecting books and extrapolating sales to unsold units is deleted; the Revenue's appeal is dismissed.

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