Case Law Details
Aadarh Developers Vs ACIT (ITAT Rajkot)
Admittedly, the assessee is a developer and not a works contractor. Therefore, the revenue has to be recognized by the assessee as per accounting standard 11 issued by the ICAI and not as per the accounting standard 7 which is applicable to the contractor.
The accounting standard 11 says that the revenue should be recognized once the risk and the rewards are transferred to the prospective buyer. In the case on hand, the risk and reward is transferred upon the execution of the sale deed which is a vital piece of evidence to draw an inference that the property has transferred. The Hon’ble Gujarat High Court in the case of Commissioner of Income-tax Vs Shivalik Buildwell (P.) Ltd. reported in 40 taxman.com 219 has held as under:
If as per the accounting standard available, the assessee was entitled to claim the entire income on completion of the project and if such accounting standard was accepted by the revenue in the earlier years, in the present year, the Assessing Officer could not have taken a different stand and that too, without hearing the assessee.
In addition to the above, we are convinced with the argument of the learned counsel for the assessee that if any addition is made in the year under consideration, then it would lead to the double addition. It is because the assessee before us has claimed that it has offered income upon realization of hundred percent of amount of the sales in the later years. However we find that no finding has been given by the learned CIT with respect to the income which has already been taxed in the earlier years. Certainly, in the absence of such direction it would lead to the double addition in the hands of the assessee. Be that as it may be, the assessee has been following its method of accounting for recognizing the income consistently which has been accepted by the revenue and therefore based on the principle of consistency, the revenue cannot disturb the method adopted by the assessee particularly in a situation where the income of assessee has already been offered to tax in the later years. As such, there is no loss to the Revenue. In view of the above and after considering the facts in totality, we set aside the finding of the learned CIT-A and direct the AO to delete he addition made by him.
FULL TEXT OF THE ORDER OF ITAT RAJKOT
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)-11, Ahmedabad [Ld. CIT(A) in short] dated 02/11/2016 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) relevant to the Assessment Year (A.Y.) 2013-14.
2. The only issue raised by the assessee is that the learned CIT(A) erred in confirming the addition made by the AO for Rs. 46,69,823.00 with respect to the under reporting of sales of 1 3,01,27,896.00.
3. The facts in brief are that the assessee in the present case is a partnership firm and engaged in the business of real estate development. The AO during the assessment proceedings observed certain facts as detailed under:
i. The assessee was recognizing the sales in its books of accounts upon the execution of the sale deed of the property.
ii. The assessee with respect to the properties against which it has received hundred percent consideration but did not execute the sale deed, was valuing the closing stock of such properties at the market value/sale value instead of the cost incurred on such units. In other words, the assessee was recognizing the income in respect of properties in the accounts though the assessee has not recognized the sales in the books of accounts.
iii. The assessee with respect to the units/properties against which it has received consideration less than hundred percent, it was showing the consideration as liability in the balance sheet and closing stock of such units was valued at the cost. In other words the assessee was not recognizing the income on such units.
4. The AO was not satisfied with the method adopted by the assessee for showing the sales and recognition of the income. According to the AO, the assessee has received a sum of 1 3,01,27,896.00 which was representing the sales realization more than 75% of the sale value of the properties. As per the AO the major amount was received by the assessee and therefore the assessee should have shown the corresponding income on such amount. Thus the AO worked out the gross profit ratio at the rate 15.50 and applied the same i.e. gross profit ratio on such sales value and worked out the element of gross profit amounting to Rs. 46,69,823.00 only. According to the AO, the assessee has not reported the sales amounting to 1 3,01,27,896.00 comprising of gross profit of Rs. 46,69,823.00 being 15.50% which was to be added to the total income of the assessee. Thus, the AO added the sum of Rs. 66,983.00 the total income of the assessee.
5. Aggrieved assessee preferred an appeal to the learned CIT-A who confirmed the order of the AO by observing as under:
5.2 The A.R of the appellant submitted that according to the Assessing Officer if the assessee received more than 75% advance against bookings of the unts then it has to be considered as sale. However, the principles adopted by the Assessing Officer regarding sales are based on incorrect application of accounting principles. A key component of the revenue principle, when it come to the sate of goods, is that revenue is earned when legal ownership the goods passes from seller to the buyer and legal ownership is transferred in case of real estate transaction when sale deed is executed and possession of the asset is handed over to the buyer. Therefore, the addition made was on incorrect principles of accounting and deserves to be deleted.
5.3 The assessee is a partnership firm engaged in business of rea1 estate development. In this case the assesses adopted has undue me accounting taw that the income required to be accounted the year earned accrued. In the line of construction business the assessee has to book profit from the project either on the basis of work in progress or on project completion method.
6. As discussed hereinabove, it was evident that the appellant neither followed work in progress method to estimate profits or project completion method to arrive at correct profit or toss from the project. It was also a fact on record that the project y/as not yet complete during the previous year relevant to the assessment year under consideration.
6.1 It is a settle position of law that any of the method regularly adopted by the assessee, if it has been accepted by the revenue, has to be allowed in the subsequent assessment years also. However, if there is change in the method regularly followed by the assessee, to reduce or defer his tax liability from the project then the same cannot be allowed.
6.2 The assessee considered sale value of the units for which either he received ful l consideration and or the advance received was more than 75% as only advance and did not work out estimated profit thereon and the valuation of the relevant units was made on the basis of cost. Thus, it was clear that the assessee adopted peculiar method of accounting which did not correctly reflect the taxable profit of the assessee. As per established practice in this line of business the appellant was required to work out profit either on the basis of work in progress method or on the basis of project completion method. These are only two recognized accounting systems in this line of business. Therefore, by doing so, the assessee has avoided his tax liability which was legally due in the year under consideration. In view of the above facts, in my considered opinion the assessee understated his income on the sale receipts of Rs.30127896/-. Hence the action of the Assessing Officer does not warrant any interference. Accordingly , both the grounds of appeal are dismissed.
6. Being aggrieved by the order of the learned CIT-A, the assessee is in appeal before us.
7. The learned AR before us filed a paper book running from pages 1 to 73, 1 to 33 and 1 to 23 and contended that the assessee has been following the impugned method of recognizing the revenue consistently and the same was also accepted by the revenue in the later and the earlier years.
7.1 The learned AR further submitted that if any addition is sustained in the year under consideration, the same shall lead to the double addition. It is for the reason that the assessee upon realizing the hundred percent amount has recognized the income which was offered to tax. Accordingly, the learned AR prayed to delete the addition made by the authorities below.
8. On the contrary, the learned DR vehemently supported the order of the authorities below.
9. We have heard the rival contentions of both the parties and perused the materials available on record. There is no dispute raised by the authorities below that the assessee has been following method of recognizing the revenue in the manner as discussed above. Admittedly, the assessee is a developer and not a works contractor. Therefore, the revenue has to be recognized by the assessee as per accounting standard 11 issued by the ICAI and not as per the accounting standard 7 which is applicable to the contractor.
9.1 The accounting standard 11 says that the revenue should be recognized once the risk and the rewards are transferred to the prospective buyer. In the case on hand, the risk and reward is transferred upon the execution of the sale deed which is a vital piece of evidence to draw an inference that the property has transferred. The Hon’ble Gujarat High Court in the case of Commissioner of Income-tax Vs Shivalik Buildwell (P.) Ltd. reported in 40 taxman.com 219 has held as under:
If as per the accounting standard available, the assessee was entitled to claim the entire income on completion of the project and if such accounting standard was accepted by the revenue in the earlier years, in the present year, the Assessing Officer could not have taken a different stand and that too, without hearing the assessee.
9.2 In addition to the above, we are convinced with the argument of the learned counsel for the assessee that if any addition is made in the year under consideration, then it would lead to the double addition. It is because the assessee before us has claimed that it has offered income upon realization of hundred percent of amount of the sales in the later years. However we find that no finding has been given by the learned CIT with respect to the income which has already been taxed in the earlier years. Certainly, in the absence of such direction it would lead to the double addition in the hands of the assessee. Be that as it may be, the assessee has been following its method of accounting for recognizing the income consistently which has been accepted by the revenue and therefore based on the principle of consistency, the revenue cannot disturb the method adopted by the assessee particularly in a situation where the income of assessee has already been offered to tax in the later years. As such, there is no loss to the Revenue. In view of the above and after considering the facts in totality, we set aside the finding of the learned CIT-A and direct the AO to delete he addition made by him. Hence the ground of appeal of the assessee is hereby allowed.
10. In the result the appeal filed by the assessee is allowed.
This Order pronounced in Open Court on 30/06/2022
