Brief of the Case
ITAT Ahmedabad held in case of ITO vs. M/s Tirupati Enterprises held that the revenue has to be recognized only at the time when substantial risk and reward are transferred to the buyer by the seller. Since the construction was incomplete, the property was not ready for sale. The buyers did not pay full installment. It was only the advance booking amount that was paid by the buyers. The A.O. has without any basis taken the rate of 8% on the work in progress shown by the appellant. The appellant has rightly followed the method of accounting as prescribed in AS-9 of the ICAI.
Facts of the Case
The assessee was developing two construction projects; namely, Campus Corner-II and Paras Status during the year. The case of the assessee was picked up for scrutiny assessment. During assessment proceedings it was noted that in respect of Campus Corner-II, the assessee was showing Gross Profit year-to-year wise @ 20% on the receipts. However, in the case of Paras Status Project, the assessee did not show any income but considered all the work done during the year as work in progress. The AO did not accepted the method of accounting and held that the appellant should have followed Accounting Standard-7 and accordingly the assessment u/s.143(3) of the Income Tax Act,1961 was framed vide order dated 30/12/2009, thereby the Assessing Officer made addition of Rs.18,00,324/- being the income worked out by applying the percentage of completion method in respect of Paras Status Project. The assessee feeling aggrieved by the order of the AO, preferred an appeal before the ld.CIT(A), who after considering the submissions of the assessee, allowed the appeal. Aggrieved by the order of the ld.CIT(A) the Revenue filed the appeal before Hon’ble Tribunal.
Contention of the Revenue
The Ld. DR submitted that the substantial amount has been received from the prospective buyers. The project is completed and the assessee ought to have declared the profit on the basis of project completion method. The AO was of the view that the assessee is seller of goods and as such the assessee ought to have followed Accounting Standard (AS-7) and recognize the revenue when the seller has transferred the significant risk and reward in the property to the person for a consideration.
Contention of the assessee
The Ld. Counsel of the assessee submitted that the there is no illegality in the order of the ld.CIT(A). The view of Revenue that the assessee has received the entire money, handed over the possession of the project and the buyers have occupied the properties was not correct. The project was new in that year and the construction was incomplete. The assessee has received advance booking and did not transfer the possession of the units to the customers. It has been submitted that the assessee was following AS-9 issued by ICAI for revenue recognition. The revenue as per this method shall be recognized at the time when the seller transfers the property in goods to the buyer for a consideration or all significant risk and reward of ownership are transferred to the buyer and seller retains no effective control of goods.
Held by Tribunal
The Tribunal found that the AO made the addition on the basis that the assessee has received substantial sales consideration and despite the same, no income has been offered for taxation. The Hon’ble Tribunal agreed with the findings given by the ld. CIT(A) that the scheme was under construction and was not ready for possession. The buyer did not pay full installments, it was the only advance booking amount that was paid by the buyers. This finding on fact was not rebutted by placing any contrary material on record. The Revenue has not placed any material on record suggesting that the substantial amount has been paid to the assessee, project has been completed and after completion the possession was also handed over to the buyers. Moreover, it was not demonstrated as to how AS-9 of the ICAI was not applicable in the present case. Further it was also noted that the assessee has offered substantial profit in the next years on account of this scheme and therefore, there was no avoidance of tax at all. In view of these facts, the order of ld. CIT(A) was allowed to sustain. As a result the appeal of Revenue was rejected.