Krishna E-Campus Pvt. Ltd. Vs DCIT (ITAT Bangalore)
ITAT Bangalore held that from clause (5) of Guidance Note issued by ICAI that the cost of construction and also saleable project area needs to be taken into account while recognizing revenue under the Percentage Completion Method.
Facts- The only issue contended by the assessee in this appeal is regarding recognition of revenue under the Percentage Completion Method [PCM] as per Accounting Standards [AS] issued by the Institute of Chartered Accountants of India [ICAI].
Conclusion- It is clear from clause (5) of Guidance Note issued by ICAI that the cost of construction and also saleable project area needs to be taken into account while recognizing revenue under the PCM.
In the present case, we notice that the condition mentioned in clause (c) of para 5.3 of the ICAI Guidance Note is not satisfied since the saleable area for the year under consideration as a percentage tot the total saleable area (104685 / 526645 sq.ft.) is much less than 25%. Further, from the cost perspective, we notice that the AO has considered the revalued value of cost of land for the purpose of arriving at the total project, instead of actual cost of the land.
We find force in the argument of the ld. AR and are of the considered view that the cost of land and the estimated project cost have to be looked into, based on the facts and the documentary evidence. We, therefore, remit the issue back to the Assessing Officer with a direction that percentage of cost and saleable area have to be recomputed in accordance with para 5.3 of the ICAI Guidance Note. The AO is also directed to take into consideration the conditions prescribed in para 5.3 of the ICAI Guidance Note are cumulative and needs to be satisfied in toto and consider the revenue recognition accordingly, after giving opportunity of being heard to the assessee.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal by the assessee is against the order dated 9.4.2019 of the CIT(Appeals)-4, Bengaluru for the assessment year 2015-16.
2. The only issue contended by the assessee in this appeal is regarding recognition of revenue under the Percentage Completion Method [PCM] as per Accounting Standards [AS] issued by the Institute of Chartered Accountants of India [ICAI].
3. The assessee is a company engaged in developing property and constructing residential apartments and commercial complex. It filed its return of income for the AY 2015-16 on 25.12.2015 declaring a loss of Rs.94,92,127. The case was selected for scrutiny.
4. The Assessing Officer referred the case to the Transfer Pricing Officer [TPO] to determine the arm’s length price [ALP] in respect of the international transaction. No adjustment was determined by the TPO u/s. 92CA of the Income-tax Act, 1961 [the Act].
5. The AO called for various details with regard to the project ‘LAPAPLAZZO’. On a perusal of the submissions of the assessee, the AO noticed that the assessee hast not adopted PCM for recognition of revenue as per AS-9. Directions u/s. 144 on this issue was provided to the assessee and as per directions received from Addl.CIT, Range 4(1), assessment was concluded by the with the following observations:-
“6.1 Revenue recognition as per percentage completion method as per AS-9:-
The assessee has filed his submission vide his letter dtd: 10.12.2018 before the Addl. CIT Range-4(1), Bangalore. The assessee has submitted the calculation of revenue recognition following percentage completion method and in this calculation; the Company has shown that the percentage completion is only 20.03% which is different from the percentage of completion of the work given by the assessee at the time of the assessment proceeding before the AO which is 23.88%.
6.2 In the submission filed before the Addl. CIT Range-4(1), Bangalore dtd: 10.12.2018, the assessee has submitted a certificate from the engineer who has increase the estimated cost of the building as on 02.09.2017 to Rs. 213.39 Cr.. In the above submission dtd: 10.12.2018, the assessee has taken the estimated cost of the project at RS. 213.39 Cr. as given in the above certificate but this increase in the estimated cost of the project as on 02.09.2017.
6.3 The assessee was supposed to take the estimated cost of the project as on 31.03.2015, for the purpose , of the calculation of revenue following percentage completion of project. Hence, the calculation submitted by the assessee is rejected. Since the percentage of completion of work as on 31.03.2015 is 35.44% as calculated in the proposition dtd: 05.12.2018 reproduced on page 2 86 3 of this letter. . Hence the revenue is recognized as per calculation given on page 2 86 3 of this letter. The calculation of gross profit of Rs. 10,40,17,541/-, is tabulated as under:
