Case Law Details
Cavalcade Properties Pvt. Ltd. Vs DCIT (ITAT Mumbai)
Introduction: The case of Cavalcade Properties Pvt. Ltd. vs. DCIT (ITAT Mumbai) revolves around the contentious issue of revenue recognition concerning advances received against flat bookings. This article delves into the details of the case, the arguments presented, and the final verdict rendered by the Income Tax Appellate Tribunal (ITAT) Mumbai.
Detailed Analysis: The appeal filed by Cavalcade Properties Pvt. Ltd. contested the decision of the Commissioner of Income-tax (Appeals) regarding the treatment of advance amounts received for unexecuted and unregistered sale of flats. The crux of the matter lies in the method of revenue recognition, specifically the Percentage of Completion method (POCM) employed by the assessee.
While the assessee recognized revenue at the stage of 40% completion of the project, the Assessing Officer included advance receipts from flat bookings for revenue recognition. This discrepancy led to the addition of additional income by the Assessing Officer, a decision upheld by the Commissioner of Income-tax (Appeals).
However, upon further appeal, the ITAT scrutinized the matter and emphasized the importance of significant risk and reward transfer to the buyer for revenue recognition. Citing precedents and principles laid down by the Institute of Chartered Accountants of India (ICAI), the ITAT concluded that revenue should only be recognized when there is certainty of realization and transfer of significant risks and rewards to the buyer.
In light of this, the ITAT directed the case to be re-adjudicated by the Assessing Officer. The Assessing Officer was tasked with examining the agreements and conducting inquiries to ascertain whether substantial risks and rewards were indeed transferred to the buyers at the time of booking. The decision of revenue recognition was to be guided by the principles established in previous rulings.
Conclusion: The verdict in the case of Cavalcade Properties Pvt. Ltd. vs. DCIT highlights the significance of adhering to recognized principles in revenue recognition. The ITAT’s directive for re-adjudication underscores the importance of thorough examination and adherence to established guidelines. This case serves as a reminder for businesses to carefully assess revenue recognition methods and ensure compliance with regulatory standards.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against order dated 24.03.2023 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2015-16, raising following grounds:
Ground No.1:
On the facts and the circumstance of the case and in law, the learned CIT (A) has erred in confirming the action of the learned AO in respect of Percentage of Completion method on the advance amounts received by the Appellant amounting to Rs. 1,66,25,065 pertaining to unexecuted and unregistered sale of flats- units of buildings and thereby dete additional income of Rs. 38,77,965 to be included in th income for the year under consideration.
Ground No.2:
On the facts and the circumstance of the case and in la learned CIT (A) has erred in confirming the action learned AO in respect of initiating penalty proceedings Section 271 (1)(c) of the Act.
2. Briefly stated, facts of the case are that assessee filed its return of income on 30.11.2015 declaring total loss of Rs.27,71,66,306/-. The return of income filed by the ass selected for scrutiny assessment and statutory notices u/s 143(2) of the Income-tax Act, 1961 (in short the Act’) were issued and complied with. The assessee is engaged in the business of real estate development and related activities. The assesee constructing a residential project comprising of 11 building situated at Mohammedwadi’, Pune. During the year under consideration the assessee recognized proportionate income following percentage of completion method (POCM). The assessee is following the POCM since assessment year 2012-13. During the scrutiny proceedings, the Assessing Officer though accepted the POCM by the assessee, however, as far as revenue recognized from the projects is considered, the Assessing Officer considered the advance receipts from booking of the flats also for the purpose of recognizing revenue, whereas the assessee only considered the revenue recognized in cases where the registered sale agreements were entered into with customers/buyers. The Assessing Officer accordingly added additional revenue for un-registered flats amounting to Rs.38,77,965/-. On further appeal, the Ld. CIT(A) also upheld the addition made by the Assessing Officer. Aggrieved the assessee in appeal before the Tribunal raising grounds as reproduced above.
3. Before us, the Ld. counsel for the assessee has filed a Paper Book containing pages 1 to 193.
4. We have heard rival submission of the parties and perused the relevant material on record. The assessee is following POCM method for recognition of revenue from the projects of construction of residential flats. The assessee has recognized the revenue at the stage of 40% completion of the project. There is no dispute on this issue as what should be correct stage of construction for recognizing the revenue from the project. The assessee received advance at the time of booking of the flats and thereafter it enter into agreements with the purchaser of the flats/units which are then executed and registered. According to the assessee stage where all significant risk and reward of ownership gets transferred to buyers and therefore revenue is recognized only in respect of sales where sales agreement are executed and registered and not at the stage of receipt of advance from booking of flats. However, accordingly to the Assessing Officer, the assessee should have recognized revenue from sale of flats/units at the stage of booking agreement and receipt on advance. This dispute has been raised by the Assessing Officer in the case of the assessee from assessment year 2012-13 onwards. The Tribunal in the case of the assessee in ITA No. 4030/Mum/2017 for assessment year 2012 has discussed issue and held that revenue should be recognized following guidelines of the ICAI only when significant risk and rewards are passed on to the intended buyer and intended buyer right’s to transfer. The relevant finding of the Tribunal reproduced as under:
“34. After perusing the above judicial pronouncements, we are in agreement with the fact that there has to be reasonable certainty of realization of consideration or significant risk must pass to the intended buyer, since these basic terms are missing in the initial stage of provisional booking, we are inclined to agree with the assessee that initial advance cannot be treated as income of the assessee since unless and until there is risk and reward is passed on to the intended buyer and intended buyer has right to re-transfer the right and the assessee has certainty of receipts of sale consideration until then the receipts cannot be considered as Vincome of the assessee. Accordingly, grounds raised by the assessee are allowed.”
4.1 Thus, the only issue in dispute in the instant case the time of booking of the flats substantial risks and reward been transferred to the buyer or not. Before us, the assessee has filed a list of certain cancellation of the booking to support that those bookings was temporary in nature and therefore, cancelled.
However, from above agreements, we failed to understand as how those parties agreed for paying advance to the assessee without any certainty of purchase or benefit of escalation in the prices of the flat in case of cancellation. The assessee has not furnished any details of documents signed at the time of provisional booking. The Assessing Officer has also not made any comment in the assessment order in respect of as how the significant risk and reward were transferred to the buyer at the stage of booking. In the circumstances, we feel it appropriate to restore the matter back to the file of the Assessing Officer for examining parties from whom advance was received against booking. The Assessing Officer may carry out inquiries as deemed fit from the buyers from whom advance which were received for verification whether they had entered into any agreement which could establish substantial risk and reward to the buyer. The Assessing Officer accordingly shall decide the issue as to the quantum of revenue to be recognized from sale of flats in the year under consideration following the principle/ ratio of the decision of the Tribunal in the case of the assessee for assessment year 2012-13. The ground No. 1 of the appeal of the assessee is accordingly allowed for statistical purposes.
4.2 The ground No. 2 of the appeal of the assessee relates to penalty u/s 271(1)(c) of the Act initiated by the Assessing Officer which being premature at this stage same is dismissed as infructuous.
5. In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open Court on 10/01/2024.
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