TaxTMI 
TaxTMI 
2021 (11) TMI 104
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.... by the AO on account of interest free advance given to group companies. 4. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal." 2. Facts in brief are that the assessee company is engaged in the business of real estate development. In the year under appeal, the assessee was engaged in developing a residential housing project namely "French Apartments" at Noida Extension. The assessee filed its return of income on 27.09.2014 declaring nil income with loss of Rs. 2,58,52,776/-. The case of assessee was taken up for the scrutiny assessment and the assessment u/s 143(3) of the Income Tax Act, 1961 ("the Act") was framed on 30.12.206, assessing the total income at Rs. 14,80,79,340/- against the loss of Rs. 2,58,52,776/-. The Assessing Officer made addition on account of non-recognizing the revenue on the basis of Percentage of Completion Method ("POCM"). Further, the Assessing Officer disallowed brokerage expenses of Rs. 1,63,15,044/-, disallowance of interest expenses of Rs. 9,85,667/- and the disallowance made by invoking the provision of Section 14A of Rs....
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....2010-11. For recognizing revenue from this project, the appellant company is following project completion method as per AS-9. However, in the assessment proceedings, Assessing Officer has held that accounting policy followed by the appellant is not acceptable as it is prescribed by the ICAI and has applied the percentage of completion method (POCM) for recognizing the revenue. The issue in the appeal is whether it is mandatory for the appellant to follow the POCM Method. As per the observation of the Assessing Officer, it is mandatory for the appellant to follow POCM, whereas as per the submission of the appellant it is not mandatory. The Assessing Officer while holding that POCM is mandatory for the appellant has placed reliance on the Guidance Note on Revenue Recognition for Real Estate Transactions issue by CAI in May 2012. The AR of the appellant submitted before me that taxable income has to be computed as per the provision of Income Tax Act / Rules and not according to the Guidance Note issued by ICAI. The projection completion method is a recognized method of accounting for computing the taxable income as per provisions of Income Tax Act. The provisions of section 145 of Inc....
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....ng the project completion method since its inception from AY. 2011-12 and has recognized revenue in accordance with AS-9 of the ICAI. It is also observed that this method of accounting followed by the appellant has been accepted in the past assessments including the assessment made u/s 143(3) for AY. 2012-13. While rejecting the appellant's project completion method, the Assessing Officer has not pointed out as to how the method of accounting followed by appellant was not in accordance to the provisions of section 145 of the Income Tax Act, 1961. It was not justified on the part of the Assessing Officer to disregard the method of accounting regularly followed by the appellant without pointing out any defects and violation of provisions of section 145 of the Act. It is seen that as per the provisions of Section 145, it is not mandatory for the appellant to follow POCM which is evident from the fact that the CBDT has issued Draft Income Computation And Disclosure Standard (ICDS) of Real Estate Transactions in May 2017 for discussion wherein it has been proposed to provide for recognition of revenue in real estate transaction based on percentage of completion method. This ICDS pro....
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..... The above indicates the difference between the completed contract method and the percentage of completion method." Reliance is also placed on the decision of Hon'ble Delhi High Court in the case of Paras Buildtech India Pvt. Ltd. vs. CIT [ITA NO. 602/2015] wherein it is held as under :- "18. Section 145 (1) of the Act states that the income chargeable under the heads 'Profits and gains of business or profession' shall be computed in accordance with either cash or mercantile system of accounting "regularly employed by the Assessee". It is only with effect from 1st April 2015 that a change has been brought about in Section 145 (2) which permits the central government to notify in the Official Gazette from time to time the income computation and disclosure standards to be followed by any class of Assesses or in respect of any class of income. That change is prospective and in any event does not apply to the case on hand. 19. The settled legal position as far as Section 145 of the Act is concerned is that it is not open to an AO to reject the accounts of an Assessee unless hecomes to a determination that notified accounting standards have not be....
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....ch may compel the assessee to follow percentage completion method. In view of the factual as well as legal position discussed above, it is held that Assessing Officer was not justified in applying POCM instead of Project Completion Method regularly followed by the appellant. Accordingly, the addition of Rs. 15,65,60,883/- made by the assessing officer is deleted. The appellant has alternatively submitted that even if the revised Guidance Note issued by ICAI on which the Assessing Officer has placed reliance, no revenue was required to be recognized by the appellant during the year. The appellant submitted that in para 3.4 of the assessment order, the Assessing Officer has admitted the position that for recognizing revenue as per the said guidance note one of the condition required to be fulfilled is that "Seller has transferred to the buyer all significant risks and reward of ownership." In this regard, the appellant has submitted that this condition is not fulfilled in the case of appellant. In the case of appellant neither all the significant risks nor the reward of ownership has been transferred to the buyer. The risk of the property still vests with t....
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.... (a) ........ (b) When the stage of completion of the project reaches a reasonable level of development. A reasonable level of development is not achieved if the expenditure incurred on construction and development costs is less than 25 % of the construction and development costs as defined in paragraph 2.2 (c) read with paragraphs 2.3 to 2.5. (c) ......... (d) ......... Construction and development costs as defined in paragraph 2.2 (c) read with paragraphs 2.3 to 2.5. is as under :- "2.2(c) Construction and development costs - These would include costs that relate directly to the specific project and costs that may be attributable to project activity in general and can be allocated to the project. 2.3 Construction costs and development costs that relate directly to a specific project include: (a) land conversion costs, betterment charges, municipal sanction fee and other Charges for obtaining building permissions; (b) site labour costs, including site supervision; (c) costs of materials used in construction or development of property; (d) depreciation of plant and equipment used for ....
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....he year under appeal as appellant has not transferred all significant risks of ownership to the buyer and the level of completion of the construction is less than 25% of the estimated cost of construction and development till 31.03.2014. Accordingly, the addition of Rs. 15,65,60,883/- made by the Assessing Officer is deleted. This ground of appeal is allowed." 8. We do not see any infirmity into the above findings of Ld.CIT(A) as the assessee has been applying consistently the same method since inception. Moreover, Ld.CIT(A) has recorded the fact that the assessee has been adopting the same method of accounting which was accepted by the Revenue. Further, it is also recorded by Ld.CIT(A) that the Assessing Officer committed error in computing the construction and development cost incurred by the assessee till 31.03.2014. As per Ld.CIT(A), the cost was only 18.40% of the total estimated construction and development cost. Therefore, no revenue could have been booked even as per the guidance note issued by ICAI. This finding of fact is not rebutted by the Revenue. Thus, Ground No.1 raised by the Revenue is devoid of any merit hence, dismissed. 9. Ground No.2 raised by the Revenue....
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....rokerage expenses. The brokerage expenses claimed in earlier year has been allowed to the appellant as detailed below:- AY. Amount (Rs.) Remarks 2013-14 4779263 Assessed u/s 143(1) 2012-13 723946 Assessed u/s 143(1) 2011-12 844895 Assessed u/s 143(1) There is no change in facts and circumstances of the case during the year as compared to facts and circumstances in the earlier years. Therefore, the assessing officer was duty bound to follow the decision of earlier years and should have allowed the brokerage expenses. It is also seen that as per para-19 of AS-7, the selling cost cannot be attributed to contract activity or cannot be allocated to a contract under construction. Even as per AS-2 "Valuation of Inventory" issued by ICAI, it is seen that selling and distribution cost cannot be considered as part of the cost of inventory and such expense has to be recognized in the period in which they are incurred. The cost which can be attributed /allocated over the inventory should comprise all the cost of purchase, cost of conversion and other cost incurred in bringing the inventory to their present location and condition. In the cas....
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....as dated 15- 8-1995, while agreement with 'M' was dated 1-10-1995, it could not be said that before that date, assessee had commenced business - Accordingly, Assessing Officer held that assessee had not commenced its business during relevant period and treated all expenses as having been incurred prior to commencement of business - On appeal, Commissioner (Appeals) as also Tribunal held that assessee had commenced its business on 15-8-1995 and, therefore, all expenses incurred on or after that date were allowable as revenue expenditures - Whether since assessee was ready to commence its business on 15-8-1995 when it acquired licence, there was no infirmity with regard to said findings of authorities below - Held, yes" The facts of the above cited judgments are identical with the facts of the appellant's case, therefore, the ratio of the above judgments is squarely applicable in the case of appellant. The appellant has commenced its business and expenses incurred on brokerage/ selling cannot form part of construction and development cost and same has to be allowed in the year in which they have been incurred. Accordingly, the brokerage expenses incurred by the a....