TaxTMI 
TaxTMI 
2019 (11) TMI 698
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....ier date provided it applies this guidance note to all transactions which commenced or were entered into on or after such earlier date. Whereas, no documentary evidence was bought before AO during scrutiny proceedings which suggested that the same principle was applied to transactions which commenced or were entered into on or after such earlier date? 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in ignoring that there is no provision of reversal of profit as per Income-tax Act, 1961. The Assessment 3. Briefly stated, the facts of the case are that the assessee, a real estate developer filed its return of income for the assessment year (AY) 2014-15 on 18.11.2014 declaring current year loss at Rs. 1,43,06,726/-. During the course of assessment proceedings, the Assessing Officer (AO) noticed from the details of Work-in-Progress (WIP) that WIP has been shown at Rs. 97,37,27,944/- and from the same an amount of Rs. 6,81,13,165/- was reduced on account of 'reversal of profits declared in the earlier years on account of estimated loss expected' and the closing WIP as on 31.03.2014 was shown at Rs. 91,07,72,883/-. The same adjustm....
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.... the true status of the project could be reflected in the finalized accounts for AY 2014-15, (vii) therefore, the assessee-firm had no option than to reverse the profits shown in the earlier years, on account of expected estimated loss, by crediting the WIP in the current year (to bring WIP to its actual amount of cost incurred) as the same was inflated by debiting in the earlier years, (viii) further, to reverse the profits declared in AY 2013- 14, it had to add back the proportionate costs to the cost of WIP, by debiting the same to WIP account in the current year which was credited in the earlier years and also by adding back the amount of sales declared in AY 2013-14, to the amount of advances received in the current year, by crediting the same to the advances account, which was earlier reduced from the advances in AY 2013-14. However, the AO was not convinced to the above submissions of the assessee for the reason that the assessee could not justify the criteria laid down in the Guidance Note on which it solely relied. The AO has quoted the following clause 1.5 of the Guidance Note which is as under : 1.5 This Guidance Note should be applied to all projects in real....
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.... account by a profit percentage on the amount of work carried out in each of the years, (ii) when the assessee was finalizing the accounts and revenue working for AY 2014-15, by following the percentage of completion method, there was a total loss of more than Rs. 3.95 crores from the aforesaid project ; the assessee had no option than to declare such a loss by reversing the profits declared in earlier years and arrive at a total correct picture of profitability of the project, (iii) as per the estimated workings of revenue for the said project, the total estimated sales was only Rs. 90.04 crore as against the total estimated costs of Rs. 94.07 crore, thereby resulting into a total estimated loss of Rs. 3.95 crore, (iv) in para 5.7 of the Guidance Note of ICAI, when the total project costs will exceed total eligible project revenues, the expected loss should be recognized as an expense immediately; therefore, the assessee has correctly followed the guidance note and has correctly recognized loss for the year under appeal by recognizing the loss immediately, (v) the AO has interpreted in the assessment order that the said Guidance Note applies only to periods on or after 01.04.2012 ....
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....f the Revenue 5. Before us, the Ld. Departmental Representative (DR) submits that the order passed by the Ld. CIT(A) be set aside for the reason that there is no provision of reversal of profit in the Act. Further, it is argued that the Ld. CIT(A) is not correct in deleting the addition by stating that an enterprise may choose to apply the said Guidance Note from an earlier date provided it applies it to all transactions which commenced or were entered into on or after such earlier date. The Ld. DR further submits that in assessee's case neither the contracts were cancelled nor the property was earmarked for its own use or for rental purposes. This is evident from the fact that the assessee has not reflected any rental income in the P&L account ; further, on perusal of the balance sheet, it is seen that the assessee has not shown any flat/shop from the ongoing project i.e. 'S.S. House' in fixed asset schedule. Thus the Ld. DR supports the order of the AO stating that the assessee has failed to substantiate its claim to reverse the profits. The Ld. DR draws our attention to two sets of working of estimated profits as on 31st March 2014 signed and filed by the assessee. S....
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....d subsequently and the revenues previously recognized can be reversed due to such revision in estimates. Referring to para 5.9 of the said Guidance Note i.e. 'the changes to estimates referred to in paragraph 5.8 above also include changes arising out of cancellation of contracts ...", it is explained that the said words signify that cancellation of contracts and others are included and that by itself does not infer, only in such cases the estimates can be revised as the word mentioned is "include". Thus the Ld. counsels argue that the revision of other accounts are also covered in the interpretation of the said Guidance Note. Thus it is explained that the AO has failed to read that the said Guidance Note which mentions that "an enterprise may choose to apply this Guidance Note from an earlier date provided it applies this Guidance Note to all transactions which commenced or were entered into on or after such earlier date". Thus the Ld. counsels submit that as the Guidance Note issued by the ICAI is applicable to the instant case, the assessee has rightly followed the same and therefore, the order passed by the Ld. CIT(A) be affirmed. Further, the Ld. counsels rely on t....
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....lication of such accounting standards." In M/s ITD Cementation India Ltd. (supra), the facts are that the AO issued show cause notice to the assessee requiring to explain as to why 100% loss was claimed even when the project was not completed 100%. The AO asked the assessee to explain why loss should not be allowed only upto the percent of work completed and why the excessive loss of Rs. 1,58,77,508/- should not be disallowed and added back to the income of AY 2003-04. In response to it, the assessee explained to the AO that it was consistently following the Accounting Standard-7 (AS-7) issued by ICAI for valuation of WIP. It was explained that the valuation figures were based on the actual cost recorded in the books of account and an estimate of the profit/loss on a project on completion. However, the AO observed that the assessee has claimed entire foreseeable losses of future years in AY 2004-05. The Tribunal held that (i) section 145(2) of the Act provides that the Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income; it is a fact that AS- 7 has not been noti....
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.... either actually due or the liability becomes enforeceable. Further, it is held by the Hon'ble Bombay High Court in CIT v. Associated Commercial Corporation, (1963) 48 ITR 1 (Bom) that a mere claim to a profit or to a liability is not sufficient to make the profit to accrue or the liability to be incurred for the purposes of the Income Tax Act. It is also clarified by the Hon'ble Supreme Court in Morvi Industries Ltd. v. CIT, (1971) 82 ITR 835 (SC) that once accrued, it is liable to the charge even if, subsequently, it is forgone and not realized. When a statute brings to charge certain income, its intention is to enforce the charge at the earliest point of time. The same is clarified in decision in T.N.K. Govindarajulu Chetty v. CIT (1973) 87 ITR 22 (Mad), affirmed in (1987) 165 ITR 231 (SC). In exercise of the powers conferred by sub-section (2) of section 145 of the Income Tax Act, 1961 (43 of 1961), the Central Government notified AS-I and AS-II to be followed by all assessees following the mercantile system of accounting. As per it "accrual" refers to the assumption that revenues and costs are accrued, that is, recognized as they are earned or incurred (and not as money ....
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....nd activities of real estate have the same economic substance as construction contracts. In respect of transactions of Real Estate, which are in substance similar to the delivery of goods, the principles laid down in AS-9, Revenue Recognition are applied. The relevant paragraphs of the Guidance Note are as under : "5.7 When it is probable that total project costs will exceed total eligible project revenues, the expected loss should be recognized as an expense immediately. The amount of such a loss is determined irrespective of: (a) commencement of project work; or (b) the stage of completion of project activity. 5.8 The percentage of completion method is applied on a cumulative basis in each reporting period to the current estimates of project revenues and project costs. Therefore, the effect of a change in the estimate of project costs, or the effect of a change in the estimate of the outcome of a project, is accounted for as a change in accounting estimate. The changed estimates are used in determination of the amount of revenue and expenses recognized in the statement of profit and loss in the period in which the change is made and in subse....
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....reements for sale entered till 31/03/20 = 600,448,264.00 Further sale agreements epected in F.Y. 2014 = 300,000,000.00 Total estimated sales = 900,448,264.00 Total cost incurred till 31/03/2014 = 978,886,048.00 Further estimated costs = 3,00,00,000.00 1,008,886,048.00 Say = 1,008,880,000.00 Estimated Loss = 1,008,880,000.00 -900,448,264.00 Total estimated loss = 108,431,736.00 Out of loss of Rs. 10.84 crores, Rs. 6.81 cr. has been recognized and balance Rs. 3.53 cr. has not been recognized." 7.6 But how to calculate the percentage of completion and current revenue from contract? The percentage of completion would be estimated by comparing total cost incurred to date with total cost expected for the entire contract : Percentage of Completion = Cost to date X 100% Cumulative cost incurred + estimated cost to complete Current Revenue from Contract Contract Price X Percentage of completion- Revenue previously recognized. 7.6.1 Let us illustrate it further by arithmetic: Question: On 1st December 2003, XYZ Construction Co.....