TaxTMI 
TaxTMI 
2018 (2) TMI 97
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....P/2017 & 119/JP/2017 for A.Y. 2012-13 may be taken as a lead case. With the consent of both the parties, the matter pertaining to Vastukar Township has been taken as a lead case for the purpose of present discussion and adjudication of the issues that have been raised before us. In this case, the respective grounds of appeal taken by the assessee and the Revenue are as under:- Assessee's grounds of appeal (ITA No. 105/JP/17) "1. The ld. CIT(A) has erred on facts and in law in determining the gross profit in respect of the sale for which registry has been executed at Rs. 1,17,80,367/- as against gross profit of Rs. 1,17,24,318/- declared by the assessee and thus confirming the addition of Rs. 56,049/-. 2. The ld. CIT(A) has erred on facts and in law in confirming the action of the AO in holding that revenue on percentage completion basis should be recognized in respect of advance received from the customers where such advance is more than 10% of the consideration even when the conditions of revenue recognition are not satisfied and thereby determining the income in respect of such advance at Rs. 1,73,71,778/- " Revenue's grounds of appeal (ITA No. 119/JP/17) ....
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....ercentage of work completed (D=A/C*100) Projected Sales revenue of the project (E) Sales proceeds realised till 31.03.2011 (F) Sales proceeds realised during the year (G) Total Sales realisation up to 31.03.2012 (H=F+G) Sales to be recognised till date (I=H*D) Sales already recognised till 31.03.2011 Sales to be recognised in the current year (J) Unearned Revenue to be carry forward in next year (K=H-I) Percentage of cost (L=C/E*100) Total expenditure to be booked against the total sales (M=L*I) Expenditure already booked till 31.03.2011 (N) Expenditure to be booked against Current year sales (O=M-N) Profit (J-O) 8,70,501 86,603 1,52,333 94,28,079 4,50,18,026 2,48,98,204 37,59,918 3,27,65,943 11,09,437 3,16,56,506 3,75,69,614 6,92,26,120 45.73% 15,63,59,936 5,44,46,105 2,11,38,286 2,95,47,901 44.27% 1,10,23,323 16,09,355 94,13,968 1,17,24,318 5. The AO however didn't find the submission of the assessee as acceptable, he rejected the books of accounts of assessee and calculated profit on the sales as per the registered sale deeds a....
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.... of booking of Revenue on "Advance received from customers" 7. The assessee follows mercantile/accrual system of accounting. Income is said to be received when it reaches the assessee. When the right to receive income become vested in the assessee, it is said to accrue or arise. Income may accrue to an assessee without actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on. Further, it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise, but also he must have acquired a debt in his favour. A debt must have in existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment, it cannot be said that any income had accrued to him. 8. From the terms and condition of the plot buyer agreement, it is clear that income has accrued/ arisen to the assessee in lieu of the sale of plots to the customer. The customer is very much bound by the payment schedule and the assessee is en....
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....nsideration that will be derived from the sales. The assessee and other constitutent companies have acquired land which is being sold as such, after development of roads and other basis amenties, significant risks and rewards devolve to the customer once he pays a substantial amount against the agreed amount/consideration of the plot. 13. In view of above, he concluded that assessee has not declared complete and correct profits and has not followed AS-9 & AS-7 which tantamount to not following AS-1, as per Section 145(2). Therefore, he rejected the books of accounts u/s 145(3) and applied percentage completion method and computed the income on advance received from customers as under:- Working of profit on advance received from customers Amount (Rs) Advance received from customer as on 31-03- 2012 4,44,28,514 Percentage of work completed (45.73%) (D) 2,03,17,159 Less: Cost @ 44.27% (E) 89,95,131 Profit (F=D-E) 1,13,22,028 Findings of the ld CIT(A) 14. Being aggrieved, the assessee carried the matter in appeal before the ld CIT(A). The Ld. CIT(A) stated that it is clear from the Guidance Note issued by ICAI that the revenue ....
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....s: Advances where receipt is less than 10% 6,03,22,432 12,14,340 185 Advance to be considered for Bifurcation in all the three companies 35,43,85,302 23,09,84,829 Share in Gross Value in the ratio of Advance shown in the financial statements Shakuntlam Colonizers P Ltd. 25,98,61,932 16,93,75,433 Vastukar Colonizers P Ltd. 2,92,78,084 1,90,83,165 Vastukar Township P Ltd. 6,81,63,838 4,44,28,514 b) The income as per PCM on the above advance from customer works out as under:- Gross Advance from Customer 6,81,63,838/- Percentage of work completed (45.73%) 3,11,71,323/- Less: Cost %= 44.27% (B) 1,37,99,545/- Profit (A-B) 1,73,71,778/- Profit computed by the AO 1,13,22,028/- Difference 60,49,750/- Accordingly, the Ld. CIT(A) enhanced the income by Rs. 60,49,750/-. 16. The relevant detailed findings of the ld CIT(A) are as under: "(viii) I have duly considered the submissions of the appellant....
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.... is generally considered to be one of the most significant risks. (b) The buyer has a legal right to sell or transfer his interest in the property, without any condition or subject to only such conditions which do not materially affect his right to benefits in the property. (xi) Once the seller has transferred all the significant risks and rewards of ownership to the buyer and other conditions for recognition of revenue specified in paragraphs 10 and 11 of AS 9 are satisfied, any further acts on the real estate performed by the seller are, in substance, performed on behalf of the buyer in the manner similar to a contractor. Accordingly, in case the seller is obliged to perform any substantial acts after the transfer of all significant risks and rewards of ownership, revenue is recognized by applying the percentage of completion method in the manner explained in AS 7, Construction Contracts. (xii) It may be mentioned that as per para 24 of AS-7 'Construction Contract' the recognition of revenue and expenses by reference to the stage of completion of a contract is often referred to as the Percentage Completion Method. Under this method, contract revenue is ....
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....icant risks and rewards of ownership have been transferred. It would be appropriate to reproduce the relevant terms and conditions of the 'Plot Buyer's Agreement' executed with the buyers as under:- "4. That at present there is no subsisting notification, or order by the State Government or any other Government or Local Authority regarding acquisition or requisition or otherwise for taking over of the area in which the plot is located. In case any such development happens or takes place hereafter, the same shall be at the cost and risk of the Buyer who will be bound to carry out and implement all the terms of this Agreement, including payment of the outstanding instalments and will also thereafter be entitled to receive the compensation paid by the Government or Local Authority in respect of the plot. The Promoter shall not be responsible or liable in any manner whatsoever on account of any such development. 5. That the Buyer agrees that, if as a result of any legislation, order, rule or regulation made or issued by the Government or any other Competent Authority or if any matter, issue relating to such approvals, permission, notices, notifications by the Competen....
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....eived from customers, which is not in consonance with the Percentage Completion Method, as claimed to be followed by it. Therefore, in view of the above discussion, it is held that the AO was justified in rejecting books of accounts of the appellant u/s 145(3) of the Act as the appellant did not apply Percentage Completion Method in respect of all cases wherein the significant risks and rewards of ownership have been transferred and no significant uncertainty exists regarding the amount of the sale consideration on executing of "Plot Buyer Agreement' and it has selectively followed Percentage Completion Method, which cannot be approved. (iv) It is pertinent to mention here that in the assessment order, the AO has taken only the amount actually received by the appellant as advances from customers, whereas, the total amount of contract in respect of the plots, for which 'Plot Buyer Agreements' were executed was to be taken into account for computing profit of th appellant thereof as the significant risks and rewards of ownership have been transferred and no significant uncertainty exists regarding the amount of the sale consideration and then the Percentage Completion Method....
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.... in case of real estate sales, it is necessary that all the conditions specified in paragraphs 10 and 11 of Accounting Standard (AS) 9, Revenue Recognition, as reproduced below, are satisfied: "10. Revenue from sales or service transactions should be recognised when the requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed. 11. In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled: (i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and (ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods." Para....
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....evenue and expenses by reference to the stage of completion of a contract is often referred to as the percentage completion method. Under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. This method provides useful information on the extent of contract activity and performance during a period. Para 9.2 of AS 9 provides as follows: Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale or rendering of service even though payments are made by installments." Accordingly, in case it is unreasonable to expect ultimate collection, the revenue recognit....
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....nized as revenue rather the proportionate sale consideration attributable to the cost incurred can only be recognised as revenue. As assessee has incurred only 45.73% of the total cost and it is obliged to perform substantial act even after the transfer of significant risk and reward of the ownership to the buyer, revenue is correctly recognized at 45.73% of the sale consideration realised where the sale deed has been executed. c) The Ld. CIT(A) has correctly appreciated these facts and therefore, he rightly held that revenue in respect of completed sales can be recognized only at 45.73% of the amount received, i.e. Rs. 2,11,28,286/-. However, in respect of the expenditure to be allowed against such revenue, he considered 44.27% of Rs. 2,11,38,286/-, i.e. Rs. 93,57,919/- as against Rs. 94,13,968/- worked out by the assessee which also tallies with the expenditure recognized in P&L A/c. Therefore, gross income where sale deed is executed would work out at Rs. 1,17,24,318/- as against Rs. 1,17,80,367/- worked out by the CIT(A). 21. Booking of revenue in respect of advance from customers: a) In case of advance received from customers, revenue, as per Para 3 of the....
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....in respect of transfer of immovable property can be recognized only when the risks, rewards and ownership of the property is transferred to the buyer. Therefore, the matter requires fresh examination by Assessing Officer in light of the above position of law. Therefore, court remand this matter back to the file of Assessing Officer with a direction that the income in respect of sale of plots can be recognized only in the year in which conveyance deed executed is registered in favour of the buyers and to allow the development expenditure incurred as expenditure or the expenditure likely to be incurred on the plots sold as expenditure. And this direction also goes in line in consonance with the provisions of accounting standard 9 which clearly lays down that matching is required to be done on accrual basis in respect of the income offered to tax and upheld by Hon'ble Supreme Court in the case of CIT Vs. Taparia Tools Ltd. ACIT Vs. Happy Home Corporation (2017) 50 CCH 0076 (Ahd.) (Trib.): AO did not dispute with regard to stand of assessee that amounts which had been accounted in regular books of accounts would be taxed when sale deed would be executed or possession ....
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.... head notes from the judgment are referred as under:- "The land purchased by the assessee which forms part of its stock- in-trade would continue to be so until and unless it sells it. The business deal in respect of the land would be complete only when the assessee executed a sale deed. Since it was only on completion of the sale transaction that the assessee could be said to have earned profit or suffered loss, the earnest money and part payment of price would not constitute trading receipts for the assessment year in which they were received unless the title of the assessee is extinguished, the title to the purchaser cannot arise. Both cannot be the exclusive owners of the same property at the same time. It was axiomatic that an agreement to sell does not create any interest in favour of the purchaser. It is on completion of the transaction of purchase and sale culminating in the extinguishment of the title of the vendor and simultaneous creation of the title in the vendee that the assessee earns profit or suffers loss. A transaction which may or may not ultimately result in a completed sale by executing a registered conveyance is no transaction at all for the purpose of....
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....o AYs 2004-05 and 2005-06- CIT(A) held that percentage completion method would not apply in assessee case- ITAT reversed order of CIT(A) and accepted plea of revenue that percentage completion method would apply since assessee had transferred risks and rewards to buyers even prior to commencement of construction activities-Held, action 145 (1) of the Act states that income chargeable under heads 'Profits and gains of business or profession' shall be computed in accordance with either cash or mercantile system of accounting "regularly employed by assessee"- It was only with effect from 1st April 2015 that change had been brought about in Section 145 (2) which permitted central government to notify in Official Gazette from time to time income computation and disclosure standards to be followed by any class of assesses or in respect of any class of income-- That change was prospective and in any event did not apply to case on hand-It is settled legal position that it is not open to an AO to reject accounts of assessee unless he comes to determination that notified accounting standards have not been regularly followed by assessee- As pointed out by CIT(A) in order dated 2nd July, 2010,....
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....by the Ld. CIT(A) with reference to the advance received from customer is unjust. 23. In view of above, it was submitted that the addition of Rs. 1,13,22,628/- made by the AO and enhanced by the Ld. CIT(A) to Rs. 1,73,71,778/- in respect of advanced received from the customer is uncalled for & be directed to be deleted. 24. On the other hand, ld. D/R vehemently argued the matter. He took us through the findings of the AO and the ld CIT(A) which we have noted above. Further, ld DR submitted that even though assessee claims that it follows percentage completion method of recognition of revenues, in reality, revenues in terms of advance received from the plot buyers have not been recognized at all and in respect of duly executed sale deeds, again the revenues have been recognized to that extent of work completed, thus the assessee has followed a mix approach which cannot be accepted. He drawn our reference to the decision of the Hon'ble Supreme Court in case of CIT vs Bilahari Investment (168 Taxman 95) and CIT vs Shri Goverdhan (69 ITR 675). He also referred to the decision of the Coordinate Bench in case of Paras Build Call (P) ltd (57 Taxmann.com 12) and our reference was dra....
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.... it accrues and it accrues when right to receive it is finally acquired. A right to receive income in the case of sale of commercial unit is acquired when risks and rewards attached to its ownership are transferred to the buyers and not before or after that. It is but natural that no Developer will transfer risks and rewards of ownership to the buyers until he has secured the receipt of sale consideration. This appears to be the reason which propelled the Institute to come out with Guidance Note in 2006 requiring the adoption of the Percentage completion method alone for the recording of accounting transactions by Developers so that the accounts give a true and fair view of its profits. Similar view has been reiterated in the Guidance note issued in 2012. So the litmus test of accrual of income of a Developer under the mercantile system of accounting is the passing of risks and rewards of ownership to the buyers. 12.1 Before applying them, it is sine qua non to note their salient features. Under the Percentage of completion method, income accrues matching with the stage of completion reached up to the end of the year. Caveat is that the risks and rewards in the constructio....
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....n the other hand, when such a Developer follows the Project completion method, income accrues on the completion or substantial completion of the project. The essence of the Project completion method is the completion or the substantial completion of construction. But when such a Developer, having initially transferred all the risks and rewards of ownership to the buyers, offers income at the time of the registration of sale deed, then this manner of offering income fails to accord with the Project completion method. Such a course of action, obviously, results into shifting of income from the year of completion or substantial completion of construction contract to later year(s), which is impermissible." Our findings 25. We have heard the rival contentions and perused the material available on record. The issue in dispute relates to recognition of revenue by the assessee, which has been categorized into two broad categories - revenues where the assessee has entered into registered sale deeds with the plot buyers and secondly, where certain advances have been received from the plot buyers, where the assessee is following percentage completion method of accounting. 26. The ass....
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.... 7. The determination of point of time when all significant risks and rewards of ownership are transferred depends on the facts and circumstances of each case considering the terms and conditions of the agreement. In case of real estate sales, all significant risks and rewards of ownership are normally considered to be transferred when legal title passes to the buyer (e.g., at the time of the registration, with the relevant authorities, of the real estate in the name of the buyer) or when the seller enters into an agreement for sale and gives possession of the real estate to the buyer under the agreement. All significant risks and rewards of ownership are also considered to be transferred, if the seller has entered into a legally enforceable agreement for sale with the buyer and all the following conditions are satisfied even though the legal title is not passed or the possession of the real estate is not given to the buyer: (a) The significant risks related to real estate have been transferred to the buyer. In case of real estate, price risk is generally considered to be one of the most significant risks. (b) The buyer has a legal right to sell or transfer his ....
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....e complete payment. Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time all significant risks and rewards of ownership are transferred to the buyer, revenue recognition is postponed to the extent of uncertainty involved. For example, when the aggregate of the payments received including the buyer's initial down payment , or continuing payments by the buyer, provide insufficient evidence of the buyer's commitment to make the complete payment, revenue is recognized only to the extent of realisation of the consideration provided other conditions for recognition of revenue are satisfied. 12. An enterprise should disclose the accounting policy regarding recognition of revenue arising from the real estate sales, including the timing of transfer of significant risks and rewards of real estate which is the subject matter of sale." Further, it is noted that as per AS 7, the recognition of revenue and expenses by reference to the stage of completion of a contract is often referred to as the percentage completion method. Under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completi....
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....act costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. We find that the AO has not disputed the fact that the assessee is required to carry out the specified development activities and also the application of percentage of completion method of recognition of revenues but has missed this finer nuisance of interconnection between the economic substance of the transaction and application of percentage completion method of recognition of revenues while analyzing the guidance note issued by the ICAI and which has been rightly appreciated by the ld CIT(A). The stage of development of the township project has been determined by the assessee at 45.73% with reference to entire land and development cost for the whole project and is not in dispute before us. The total revenues in respect of executed sale deeds till 31.03.2012 comes to Rs. 5,44,46,105 and 45.73% thereof comes to Rs. 2,48,98,204 and after allowing credit for revenues already recognized in the previous year amounting to Rs. 37,59,918, the revenues for the year have been rightly determined by the ld CIT(A) at R....
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.... yard in South City, Jaipur. It has been further provided that the said agreed price of the plot of land covers development of internal services such as roads, electricity, water and drainage system within the peripheral of the colony and the payment is to be made in installments as prescribed in Schedule 1 annexed to this agreement. It has been further provided that the preferential location charges @ 10% of the basic price will be charged extra in addition to the aforesaid rate determined. It has been further provided that it will be responsibility of the buyer to strictly adhere to the payment schedule as mentioned in Schedule 1 and the buyer also agrees to deposit the post dated cheques for balance installments of the said plot as the per the payment plan. 33. On perusal of the Schedule 1 to the agreement, it provides for the total cost of the plot at Rs. 34,000,00/-, the plot size, the rate, location and the installments which are payable on monthly basis. It provides for a registration amount of Rs. 5,000/-, booking advance of 20% amounting to Rs. 68,000/- and the remaining amount in 24 installments which varies from 2 to 5% of total price and the final installment of 21.5....
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.... to the Buyer for his/her occupation and use, the Buyer agrees that decision of said competent Authority/Court shall be applicable and binding on all the concerned parties thereto." 35. In light of above, it is clear that the significant risk relating to the real estate namely price risk as well as any external regulatory risk relating to acquisition, requisition or taking over area in which plot is located by the State Government or any other local authority has been transferred by the assessee to the buyer. 36. Regarding the 2nd condition as to whether the buyer has a legal right to sell or transfer his interest in the property, we refer to Clauses 7, 8 and 9 of the plot buyer's agreement which reads as under: "7. That it shall be incumbent on the Buyer to comply with all the terms and conditions of this agreement and/or non deposit of instalment and/or default in depositing the instalment amount maximum two times, not more than three consecutives instalments simultaneously. In such circumstances the Promoter shall have right to cancel and/or terminate this agreement after giving a registered notice to the Buyer and shall be entitled to forfeit the entire amount of....
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....all be given in this regard. 8. That transfer of the plot will be at the sole discretion of the Promoter and will need his prior written approval. Administrative charges as prescribed by the Promoter from time to time will be paid by the Transfer at the time of Transfer. Any change in the name (including addition/deletion) registered as plot Buyer with the Promoter will be deemed as transfer for this purpose. No administrative charges for the transfer of the plot amongst family member (husband/wife and own children/mother/father and real brother/sister) will be charged. Claims if any, between Transferor and Transferee as a result of subsequent reduction/increase in the area or its location will be settled between themselves i.e. Transferor and Transferee and the Promoter will not be party to this. 9. That the Buyer shall pay, as and when demanded by the Promoter, the final sale consideration of the plot at the time of possession. Buyer undertakes to take the possession within 30 (thirty) days from the date when the Promoter intimate in writing of the offer of possession, failing which the Buyer authorities the Promoter to cancel the allotment and forfeit the earne....
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....recognition can be postponed to the extent of uncertainty involved. At the same time, it has been provided in the guidance note issued by ICAI that where the aggregate of payments or continuing payments by the buyer provide insufficient evidence of the buyer's commitment to make complete payment, revenue to the extent of actual realisation of the consideration should be recognized provided other conditions for recognition of revenue are satisfied. Therefore, in the instant case in absence of a specific finding by the Assessing Officer to the contrary and the fact that assessee has not realized the full sale consideration at the time of signing of the buyers agreement, a reasonable presumption can be drawn that the ultimate collection of the full amount of the sale consideration with reasonable certainty is lacking. Given that, the revenue recognition is to be postponed to the extent of uncertainty involved in terms of realisation of subsequent installments and the amount which has actually been realized/received during the year in respect of the advance received from customers should only be recognized in the financial statement as revenues accruing for the period, to the extent of....
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.... the percentage completion method, it cannot be allowed to breach the very same method by not offering the advances so received during the year to tax and following a project completion method. The above said decisions therefore don't support the case of the assessee. Further, the decision of Hon'ble Gujarat High Court in case of Ashaland Corporation (supra) was rendered in the context of a dealer of land which had entered into an agreement with a housing society to sell certain plots of land and is thus distinguishable, as in the instant case, the assessee is not merely selling plots of land but has also undertaken carry out the development activities and is a developer. Similarly, other decisions of the Coordinate Bench have been rendered in their peculiar facts and circumstances of the case and are distinguishable. 41. Further, it is noted that in respect of revenues from executed sale deeds, the revenues have been recognized to the extent of work completed and the said principle will apply in respect of advances so received from the buyers. The assessee has therefore to maintain the consistency in its method of accounting where it is following percentage completion of method....