Case Law Details
Hi-tech Estates & Promoters Pvt Ltd. Vs PCIT (ITAT Cuttack)
Percentage Completion Method for Revenue Recognition not mandatory for Construction Companies till AY 2016-17
The issue under consideration is whether as per Section 43CB, profits and gains of a construction company mandatorily be determined on the basis of percentage completion method for revenue recognition?
ITAT states that, the assessee is a construction company engaged in the construction of flats/residential units on the land owned by it without any contract with the customers for construction of flats/residential units. It is ample clear that the assessee company is consistently following revenue recognition method by adopting completed project method, wherein, the revenue is recognised at the time of sale of flats/residential units by way of registered sale deed in favour of the customers and advance from customer and work in progress is recognised at cost in the balance sheet. In the present case, the assessee has recognised revenue on two broad heads viz; sale of flats and sale of plots/land and amount of advance is transferred to the sales account when the registered sale deed is executed in favour of the customers adding the amount of advance pertaining to flats/residential units/plots sold during the relevant financial year and further adding the amount of advance received during the year.
Further, ITAT reach to a logical conclusion that the ld. PCIT could not point out any defect in the revenue recognition method i.e. completed project method/percentage completion method adopted by the assessee and we are satisfied that the method consistently followed by the assessee and accepted by the department for recognition of revenue by following AS-2 alongwith AS-9 is a reasonable and right method for recognition of revenue on sale of flats/residential units/land.
As per section 43CB of the Act, the profits and gains of a construction company arising from construction contract or a contract for providing services shall be determined on the basis of percentage completion method and the same is mandatory for revenue recognition w.e.f. 1.4.2017 i.e. assessment year 2017-18 and this method of revenue recognition was not mandatory and compulsory to be followed for assessment year 2013-14.
Therefore, ld. PCIT cannot revise or revisit the assessment order(s) by pressing into service the provisions of section 43CB of the Act in the present case. Therefore, the findings arrived at by ld. PCIT in the impugned order at para 8 without any deliberation of explanation of the assessee explaining the method of accounting of revenue on account of sales and regarding non-applicability of AS-7 cannot be held as valid and sustainable without any further examination and exercise.
Therefore, Ld PCIT cannot direct the AO for denovo assessment without assigning any defects or deficiencies in the method of accounting of revenue recognition on account of sale of flats/residential units/land and regarding non-applicability of AS-7 as contended by ld counsel for the assessee during the proceedings u/s 263 of the Act. Accordingly, the revisionary order passed by the Ld. Pr. CIT is without jurisdiction and has to be quashed on legal issue as well as on merit.
FULL TEXT OF THE ITAT JUDGEMENT
This is an appeal filed by the assessee against the order of the Pr. CIT-1, Bhubaneswar under section 263 of the Act, 1961 (hereinafter in short ‘The Act’) for the assessment year 2013-14.
2. The Ground of appeal reads as under:
“ Because that the Pr. CIT-1, Bhubaneswar erred in law as well as in fact by setting aside the assessment for A.Y. 2013-14 on the premise that AS-7 (revised) issued by ICAI in 2002 is applicable to the appellant which is contrary to the facts that the appellant is a builder constructing the residential units on its own for commercial consideration and AS-7(Revised) is not applicable to the appellant based on the opinion issued by ICAI.
3. The appeal is time barred by 158 days. The assessee has filed condonation petition dated 2.11.2018 supported by an affidavit and prescriptions by the treating doctor, stating the reasons for filing the appeal delay. In the petition, it is stated that due to ill health of Sri Tirupati Chaudhury, the Director looking after the finance and taxation of the company, the appeal could not be filed within due time. It is also requested to condone the delay in filing the appeal for 158 days.
4. Ld counsel for the assessee reiterated the submissions stated in the petition and prayed for condoning the delay. Ld CIT DR opposed the condonation petition.
5. After considering the condonation petition and considering the rival submissions, we are satisfied that the assessee was prevented by sufficient cause for filing the appeal before the Tribunal late. Therefore, we condone the delay of 158 days in filing the appeal and admit the appeal for hearing.
APPLICATION FOR ADMISSION OF ADDITIONAL GROUND:
6. Ld A.R. by way of application dated 14.2.2020, sought to raise the following additional ground of appeal:
“ “Because that the Pr. CIT-1, Bhubaneswar erred in law as well as in fact by setting aside the assessment ignoring the method accounting regularly employed by the appellant in recognizing the revenue from sale of residential flats which was submitted and considered during the assessment proceedings u/s.143(3).”
7. Placing into service the request of the assessee for admission of additional ground, ld A.R. of the assessee submitted that in this appeal, the assessee is challenging the revision of assessment order u/s.263 of the Act by Ld. Pr. CIT. Ld A.R. pleaded that the ld Pr. CIT being not satisfied with the method of accounting followed by the assessee has directed the Assessing Officer to reframe denovo assessment order on the said issue. Ld A.R. submitted that the additional ground employed by the appellant for recognizing the revenue for sale of residential flat is quite correct and justified and same is being consistently followed by the assessee and accepted by the department. Therefore, the additional ground may kindly be admitted for adjudication as the same can be considered and decided on the basis of material already available on record without any further record or documents.
8. Replying to above, ld CIT(DR) opposed to the admission of additional ground. However, in all fairness, ld CIT DR submitted that additional ground is nothing but elaboration of sole ground of the assessee. Therefore, the department has no serious objection if the same is admitted for consideration and adjudication.
9. On careful considered of rival submissions, we are of the view that since the assessee is challenging revision of assessment order u/s.263 of the Act by Pr. CIT, Bhubaneswar and the sole controversy revolves around the method of accounting employed or adopted by the assessee for recognizing the revenue from sale of residential flats. Therefore, in the interest of justice and by respectfully following the ratio laid down by Hon’ble Supreme Court in the case of CIT vs NTPC, 229 ITR 383 (SC), the additional ground of the assessee is admitted for consideration and adjudication.
10. We have heard the arguments of both the sides, inter alia, impugned revisional order of Pr. CIT, Bhubaneswar and paper book of the assessee spread over 219 pages.
11. Ld A.R. submitted that from para 3 of the notice u/s.263 of the Act and from para 3 of impugned order u/s.263 of the Act, it is clearly discernible that the Ld. Pr. CITY only alleged that the case was selected for limited scrutiny under CASS with reason to examine “Real Estate Business with high closing stock” and to verify whether the assessee had adopted percentage completion method alongwith other two reasons for financials year 2012-13. But for A.Y. 2013-14, the case was selected for comprehensive scrutiny and not for limited scrutiny. Drawing our attention to copies of assessment order for A.Y. 2013-14 (APB page 27-35) and assessment order for assessment year 2015-16 (APB para 36 to 39) , the ld A.R. further submitted that for assessment year 2015-16 the case was selected for limited scrutiny on four issues/points as noted in para 3 of impugned order. Thus, it is amply clear that at the time of initiating revisional proceedings, issuing notice u/s.263 of the Act and while passing order u/s.263 of the Act, ld Pr. CIT has not considered relevant assessment order for A.Y. 2013-14 dated 29.3.2016 which was selected for complete scrutiny but he considered the irrelevant assessment order for assessment year 2015-16 dated 3.11.2017, which was selected for limited scrutiny on four points. Thus, it is a clear case of non-application of mind by the ld Pr. CIT and he initiated revisional proceedings, issued notice u/s.263 of the Act and passed order u/s.263 of the Act without application of mind and by considering the irrelevant assessment order for A.Y. 2015-16 and without considering the relevant assessment order & record of assessment year 2013-14. Therefore, he submitted that entire revisional proceedings u/s.263 of the Act including issuance of notice u/s.263 of the Act and impugned order u/s.263 of the Act deserves to be held as unsustainable and quashed only on this count. He strenuously contended that the AO during comprehensive scrutiny proceedings u/s.143(3) of the Act for assessment year 2013-14, passed assessment order after due enquiry and exercise by application of mind on all the core issues and also made total addition of Rs.2,11,82,595/- on six issues/points.
12. Ld A.R. of the assessee submitted that during original assessment proceedings, the Assessing Officer raised issue of method of accounting adopted by the assessee for revenue recognition on account of sale of residential flats, which was replied by the assessee vide written submission dated 23.3.2016 (APB 40-41). Ld A.R. submitted that the Assessing Officer has made sufficient and adequate inquiry on the issue during original scrutiny assessment proceedings u/s.143(3) of the Act and it was submitted by the assessee that the assessee company has developed and constructed residential projects on the land owned by it and selling the same to the customers. Ld A.R. further submitted that there is no contract between the customers and the company to construct the residential unit on behalf of the customers. The company constructed the residential units on it’s own land and entered into agreement of sale with the customers to sell the residential unit after its completion. Ld A.R. further submitted that so long as the flats are not sold the same are treated as stock in trade and, accordingly, the closing work-in-progress has been worked out at cost at the end of the financial year.
13. Ld A.R. further submitted that the assessee company is following mercantile system of accounting and follows completion method of accounting in case of residential projects developed, constructed and sold to the customers as the flats are treated as goods. Ld A.R. further submitted that the revenue from the sale of flats is recognised in the accounts after the title in the property and possession thereof is transferred to the buyer through registered conveyance deeds and the revenue has been shown on completion method. Ld A.R. submitted that the gross revenue as per service tax is the amount received by the assessee company in instalments from customers during the year. However, the sales as per statement of profit and loss account is the value of flats transferred and sold i.e. the flats registered in the name of the customers during the year. The sale value as per statement of profit and loss account also includes amount received during the earlier years treated as advance brought forward from customers at the beginning of the year and at the instance of sale of flats and registration of sale deed therefore, the same is reduced from the advance amount from customers. Ld A.R. submitted that the value of sales on account of sale of flats and on account of sale of land has been shown clearly in the P&L account and the incidence of service tax is the amount received during the year and, therefore, same shall not tally with that of the revenue as per statement of profit and loss account.
14. Ld A.R. submitted that Pr. CIT picked up the case for the assessment year 2013-14 alleging that the assessee has not followed mandatory accounting system of Accounting Standard (AS-7) but the same was not compulsory and mandatory for present assessment year 2013-14. Ld A.R. submitted that AS-7 is compulsory and mandatory to be followed for construction companies w.r.e.f. 1.4.2017 i.e. from assessment year 2017-18. Therefore, it cannot be alleged against the assessee that the assessee is not following proper applicable method of accounting. Further, drawing our attention towards impugned revisional order u/s.263 of the Act of Pr. CIT para -7, ld A.R. submitted that even replying to the show cause notice u/s.263 of the Act dated 6.3.2018, the assessee through its ld A.R. filed written submission dated 23.3.2018 explaining the accounting of revenue on account of sales and reasons of non-applicability of AS-7, which was also explained before the AO during original assessment proceedings. Therefore, Ld. Pr. CIT was not correct and justified in holding the assessment order as erroneous and prejudicial to the interest of the revenue.
14. Regarding applicability of AS-7, ld A.R. submitted that AS-7 is applicable when there exists a contract especially a long-term contract i.e, 5 years between the company and the customers and the company on behalf of the customers. In the present case, there is no contract between the customers and the company to construct the residential units on behalf of the customers. Ld A.R. further referred to page 49 of APB and submitted that significant accounting policy which was also explained to the AO and Ld. PCIT shows that the assessee company is recognising revenue by following accrual system of accounting as required under section 209(3) of the Companies Act, 1956. Ld A.R. submitted that instalments received from members/customers shown in ‘advance from customers’ until the last instalment is received and registration of sale deed of land/flat is done in favour of the customers/members. Ld A.R. submitted that similarly all recurring expenses are accounted on accrual basis and, therefore, the closing stock of land is valued at cost including the related expenses for purchase, developments and promotion thereto and the closing stock of work in progress of residential projects is valued at cost without any addition or subtraction.
15. Ld A.R. submitted that the assessment order passed after due and adequate enquiry, hence, the same cannot be tagged as erroneous and prejudicial to the interest of revenue. The ld R. submitted that the AO, during original scrutiny assessment proceedings, issued show cause notice u/s.142(1) of the Act vide dated 23.11.2015 and it was compiled by the assessee through its Authorised Representative and the assessee alongwith audit report, books of account and other relevant financial statements also submitted written submissions vide dated 23.3.2016 explaining the accounting method and policy, which was consistently followed by the assessee and accepted by the department without any dispute or doubt. The ld A.R. also submitted that the assessee vide said letter dated 23.3.2016 also explained reason for difference in the amounts shown in the Service Tax Return and as per statement of profit, thus, there was an adequate, sufficient and proper inquiry by the AO during scrutiny assessment proceedings on the various issues including issue of method of accounting adopted by the assessee for recognition of revenue on sale of flats/plots and made total addition of Rs.2,11,82,595/- on six issues. Therefore, ld A.R. submitted that the due to this reason, assessment order cannot be alleged as erroneous and prejudicial to the interest of revenue. Ld A.R. further submitted that the applicability of revised AS-7 to enterprises undertaking construction on their own account as a venture of commercial nature and as per the guidelines issued by ICAI, revised AS-7 would not be applicable to the company for accounting for new housing projects which are undertaken by the company during accounting period commencing on or after 1.4.2013, and the company can value its inventories in accordance with AS-2. The ld A.R. also contended that as per said guideline of ICAI, the definition of inventory as “an asset in the process of production for the purpose of sale” and thus, the activity of developing housing projects on its own account as a commercial venture by the company can be construed as a production activity. Ld A.R. strenuously contended that as per said guideline of ICAI the revised AS-7 would not be applicable to the company for accounting for new housing projects which are undertaken by the company during the accounting periods commencing on or after 1.4.2003. Therefore, the assessment order cannot be alleged as erroneous and prejudicial to the interest of the revenue.
16. Ld A.R. further submitted that from para 6 of the impugned revisional order, it is discernible that Pr. CIT only picked up first half part of sub-para (d) of para 2 of “report on other legal and regulatory requirements”(APB-43) whereas the assessee has clearly mentioned in the said para 2(d) that the auditor has clearly mentioned that “ in our opinion, the balance sheet and the statements of profit and loss comply with the Accounting Standards” referred to in sub-section (3C) of the Section 211 of the Company Act, 1956.”. The ld AR also contended that for assessment year 2013-14, following AS-7 was not compulsory and mandatory for the business module of the assessee and the method of accounting of project completion method was consistently followed by the assessee and accepted by the department without any dispute. Therefore, the assessment order cannot be held as erroneous and prejudicial to the interest of the revenue and, hence, Pr. CIT was not correct in setting aside the assessment order and the directing the AO to reframe the assessment order denovo.
17. Lastly, ld A.R. also contended that Pr. CIT has grossly erred in law and on facts in setting aside the assessment order on the premise that AS-7 (revised) issued by ICAI in 2002 is applicable to the appellant which is clearly contrary to the facts and circumstances of business modus operandi of the assessee as the appellant is a builder constructing residential units on its own land on commercial consideration and AS-7 (revised) is not applicable to the assessee based on the opinion and guideline issued by ICAI for assessment year 2013-14. Ld A.R. further submitted that Pr. CIT has erred in setting aside the assessment order ignoring the method of accounting regularly and consistently followed by the assessee in recognising the revenue from sale of residential flats., which was submitted and considered during scrutiny assessment proceedings u/s.143(3) of the Act for assessment year 2013-14 and subsequent assessment year 2015-16.
18. Ld A.R. has placed reliance on the following judgments/orders of Hon’ble High Courts and Tribunal:
(i) Manjusha Estates (P) ltd vs CIT, 393 ITR 644 (Guj)
(ii) CIT vs. Principal Officer, Hill View Infrastructure Pvt Ltd.,384 ITR 451 (P&H)
(iii) Paras Buildtech India (P) Ltd vs CIT, 382 ITR 630 (Del)
(iv) Ashoka Hi-tech Builders Pvt Ltd vs DCIT, (ITA Nos.121/Ind/2016 & 686/Ind/2016) A.Y. 12-13 & 13-14 dated 3.8.2018
(v) Bhoomi Construction Projects vs ACIT, 7 NYP TTJ 1472 (Mum)
(vi) Haware Constructions Pvt Ltd vs ITO, (ITA No.5601/Mum/2009 & ors) order dated 8.2011
(vii) Unique Enterprises vs ITO, (ITA No.5109/Mum/2008) order dated 8.2010
19. Ld A.R. summed up his arguments by submitting that as per the order of ITAT Mumbai ‘B’ in the case of Bhoomi constructions Pvt Ltd (supra) , the revenue cannot impose different method upon the assessee unless there is a finding of fact that such a method is not reflecting the true profits of the assessee. Ld A.R. has placed reliance on the order of ITAT Indore Bench in the case of Ashoka Hi-tech Builders Pvt Ltd(supra) and submitted that in this case, ITAT has considered all relevant judgments on the issue and clearly held in para 42 that the amendment brought in statute with retrospective effect w.e.f. 1.4.2017 by way of insertion of Section 43CB for the purpose of computation of income from construction and service contract is applicable for assessment year 2017-18 onwards. Therefore, the revisional order passed by Pr. CIT may kindly be quashed.
20. Replying to above, ld CIT DR submitted that during original assessment proceedings, the case was under comprehensive scrutiny and the issue of method of accounting for revenue recognition has not been properly verified by the Assessing Officer. Drawing our attention towards original assessment order, ld CIT DR submitted that it is not in dispute that the assessee discloses its accounting policy before the AO during inquiry by way of letter dated 23.6.2016 but the AO did not apply his mind to this letter despite the fact that the AO was having tax audit report before him during said proceedings. Ld CIT DR submitted that the assessee has clearly violated the accounting standard applicable for revenue recognition for its business. Therefore, Ld PCIT was right in alleging the impugned assessment order as erroneous and prejudicial to the interest of the revenue. Ld CIT DR also contended that if the assessee is following consistently same method of revenue recognition during earlier and subsequent assessment year then also principle of res judicata does not apply to tax proceedings. In such kind of situation, it is open for the revenue to frame assessment order as per applicable method of accounting for the business of the assessee. Ld CIT DR lastly submitted that the assessee was duty bound to follow AS-7 for revenue recognition. Therefore, Pr. CIT was right in pressing into service the revisional provision of section 263 of the Act and directing the AO to reframe assessment order denovo.
21. Placing rejoinder to the submission of ld CIT DR, ld A.R. drew our attention towards a sample agreement for sale of flat/apartment placed at APB 65 to 106 and submitted that the assessee is constructing flats/residential units on the land owned by it and there is no contract between the assessee and customers to build flats or residential units on behalf of the customers. Ld A.R. submitted that the assessee is constructing flats/residential units on the land owned by it, by incurring cost from its own resources and simultaneously the assessee entered into contract with the customers for sale of flats/residential units and on completion of construction and on receipt of all entire sale consideration, the assessee transfers the possession and right over the sold units/flats in favour of the customers and at that point of time, revenue is recognised by showing the entire sale consideration in the books of account of the assessee. Ld A.R. explained that the assessee shows work in progress at cost and completed units are shown as stock in hand, therefore, there is no point that the assessee be compelled to follow percentage completion method in stead of project completion method for recognition of revenue in its books of account.
22. Ld A.R. again drew our attention towards the decision of Indore Bench of the Tribunal in the case of Ashoka Hi-tech Builders Pvt Ltd(supra) and submitted that the Co-ordinate bench of the Tribunal in its order has elaborately considered all relevant orders and judgments of Hon’ble Supreme Court, High Courts and Tribunal and the final proposition clearly culled out therefrom is that the assessee cannot be compelled to adopt percentage completion method in the facts and circumstances of the present case and the recognition /identification of revenue income and under the Income tax Act can be attained by several method of accounting and same result could be attained by any one of the accounting methods and completed contract method is one of such method which could not be held as non-applicable to the assessee’s case only on the basis of whims and surmises. Ld A.R. also drew our attention towards the decision of Hon’ble Supreme Court in the case of CIT vs Bilahari Investment (P) Ltd, (2008) 299 ITR 1 (SC) and submitted that the percentage completion method tries to attain periodic recognition of income in order to reflect current performance and the amount of revenue recognised under this method is determined by reference to the stage of completion of the contract and this method is only applicable and suitable in the case of the assessee where undertaking contract work which spread over several years and revenue is recognised on the basis of percentage of completed part of project. Ld A.R. submitted that Their Lordships speaking to Hon’ble Supreme Court in the said judgment clearly held that under completed contract method, the revenue is not recognised until the contract is complete and costs are accumulated during the course of contract. The said methods determine results only when the contract is completed and this method leads to objective assessment of the results of the contract. Therefore, following the completion method by the assessee for assessment year 2013-14 cannot be held as wrong or incorrect method of revenue recognition.
23. On careful consideration of the rival submissions, we are of the considered view that undisputedly the assessee is a construction company, which is constructing flats/residential units on the land owned by it. It is also not in dispute that the assessee company is following completion method for recognising revenue, wherein, the revenue recognition is made on transfer of flats/residential units to the respective customers by way of registered sale deed and completed flats/residential units have been shown as stock in trade at cost and work in progress is also shown in the balance sheet at cost.
24. First of all, we proceed to consider and adjudicate the contention of ld R. on behalf of the assessee that at the time of initiation of revisional proceedings, issuing notice u/s.263 of the Act and while passing revisional order u/s.263 of the Act, the ld PCIT has not considered and applied his mind to the relevant assessment record for assessment year 2013-14 and at the time of initiation of said proceedings and passing order u/s.263 of the Act, ld PCIT had taken into consideration the irrelevant assessment order of assessment year 2015-16 and record thereof. On careful and vigilant perusal of the copy of the notice u/s.263 of the Act dated 6/15.3.2018 and impugned order passed u/s.263 of the Act, it is clear that the Pr. CIT wanted to revise assessment order of A.Y. 2013-14 but from para 3 of said notice & para 3 of the impugned order, it is clear that the Ld PCIT has considered the assessment order in which the case was selected for limited scrutiny on four issues including the issue of mismatch of turnover reported in Audit report & ITR and Real Estate Business with high closing stock, etc. From copies of the assessment order for A.Y,. 2013-14 (APB 27-35) and for A.Y. 2015-16 (APB 36 to 39), it is clear that the AO picked up the case of A.Y. 2013-14 for comprehensive complete scrutiny whereas for A.Y. 2015- 16, the case was selected for limited scrutiny on four issues including issue of mismatch of sales turnover reported on the audit report & ITR. From para 3 of notice & para 3 of impugned order u/s.263 of the Act, it is amply clear that the Ld. PCIT mentioned that the case was selected for limited scrutiny with reason to examine “Real State Business with high closing stock” (to verify whether the assessee has adopted percentage completion method) and he proceeded to revise assessment order for A.Y. 2013-14.
25. For proper adjudication of said contention of assessee, we find it proper to revisit provision of section 263 of the Act, which reads as follows:
“ 263. Revision of orders prejudicial to revenue
(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the 2 Assessing] Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he, may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.”
26. On careful and vigilant reading of section 263 of the Act, in our humble understanding, in this section, the legislature, in its wisdom, has given a minicode/procedure to be followed by the revisionary authority i.e. ld Pr.CIT for revision of assessment order, wherein, first of all, he would call and examine the record of any proceedings under the Act, and if he consider that any order passed therein by the AO is erroneous and so far as prejudicial to the interest of revenue, then he may, after allowing due opportunity of being heard to the assessee and after making or causing to be made such enquiry as he deems necessary pass such order thereon as the circumstances of the case justify including an order of enhancing or modifying the assessment or cancelling the assessment and directing the AO for fresh assessment. Meaning thereby, at the very first stage, the ld PCIT is required to call and examine the assessment record, including assessment order, of relevant assessment year which the revisionary authority, wants to revise. But in the present case, para 3 of notice & para 3 of impugned order u/s.263 of the Act clearly shows that the ld PCIT called & examine the assessment record and assessment order of A.Y. 2015-16 and not relevant assessment year 2013-14, which is a very fatal act on the part of the revisionary authority. In view of above, we are compelled to hold that the ld. Pr.CIT initiated proceedings u/s.263 of the Act, issued notice u/s.263 of the Act and pass impugned order u/s.263 of the Act by calling and examining irrelevant record and assessment order of A.Y. 2015- 16 and by not calling and examining record of A.Y. 2013-14 and thus, the impugned order cannot be held valid and sustainable only on this count. Thus, the contention of ld A.R. is allowed on this issue.
27. From the copy of the notice u/s.263 of the Act dated 6/15.3.2018, it is clearly discernible that Pr. CIT noticed that the revenue was not recognised under percentage completion method as per AS-7 and the issue was not examined by the Assessing Officer erroneously in the scrutiny assessment despite the fact that one of the reasons for selection of case through CASS for limited scrutiny was to verify whether assessee has adopted percentage completion method or not. From careful reading of the impugned order of ld Pr. CIT u/s.263 of the Act part 6 reveals that ld Pr. CIT picked up the auditor’s report first part of para 2(d) and proceeded to hold that the assessee company has also not made “disclosure” as required by paragraphs 38 to 43 of AS-7. In this regard, the moot question for our adjudication as to whether it was mandatory for the assessee to follow AS-7 for recognition of revenue in assessment year 2013-14 as per modus operandi of business adopted and followed by the assessee.
28. From the copy of Compendium of Opinions issued by Indian Chartered Accountants of India (ICAI), it is clear that the Institute opined that revised AS-7 would not be applicable for new housing projects which are undertaken by the company during the accounting periods commencing on or after 1.4.2003. Institute also opined that the activity of developing housing project on its own account as a commercial venture by the company is of the nature of production activity and, therefore, should be considered as such. The inventories should be valued by the company in accordance with AS-2, which is relevant for valuation of inventories including construction work and progress and not recognition of revenue. The Institute has also made it clear that in such a situation the AS-9 would be relevant and appropriate method for recognition of revenue.
29. At the same time, we cannot ignore that the legislature, by Finance Act, 2018, has inserted Section 43CB to the Act w.e.f. 1.4.2017, which provides the profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage completion method (PCM) in accordance with the income computation and disclosure standards notified under sub-section (2) of Section 145 of the Act. Thus, this provision is applicable from assessment year 2017-18 onwards and the ld CIT DR, in all fairness, agreed that the provisions of section 43CB is applicable from assessment year 2017-18. On being asked by the Bench, the ld. CIT DR could not controvert the fact that same is not mandatorily applicable to assessment year 2013-14, which is under consideration.
30. From auditor’s report clause 2(d) Report on other legal and regulatory requirements available at page 43 of APB, it is ample clear that the auditor opined that “ in our opinion, the balance sheet and the statements of profit and loss comply with the Accounting Standards” referred to in sub-section (3C) of the Section 211 of the Company Act, ”.
31. From para 6 of the impugned revisionary order of Pr. CIT, we observe that the revisionary authority only picked up first half part of said clause 2(d) of auditor’s report and thereafter held that the company has not made disclosure as required by paragraphs 38 to 43 of AS-7. This is not a reasonable and justified approach of revisionary authority that first half part of clause 2(d) of auditor’s report is picked up but second half part is ignored to take an objective decision but real meaning can be gathered only by considering entire clause 2(d) in toto.
32. In the present case, the assessee never claimed that it is recognising revenue by following percentage completion method of accounting standard but from the statement submitted before the AO during the assessment proceedings and reply filed by the assessee to show cause notice u/s.263 of the Act vide letter dated 23.3.2018, which has also been reproduced by Pr. CIT in para 7 of the impugned order that the assessee clearly explained both the issues viz; (i) “accounting of revenue on account of sales” and (ii) Regarding applicability of AS-7. But from last operating para 8 of the impugned revisional order of ld Pr. CIT, it is clear that the revisionary authority did not make any observation on the contention of the assessee regarding non-applicability of AS-7 or did not point out any defects in the recognition of revenue on account of sales, neither brought out facts and legal situation on record showing that AS-7 and percentage completion method (PCM) was mandatory and applicable for recognition of revenue for assessment year 2013-14 in the assessee’s case. From para 8 of impugned order, we clearly observe that the ld Pr. CIT held that the assessee company is not following percentage completion method (PCM) of accounting for recognition of revenue as per relevant AS-7 and complete and proper verification to correctly recognise the revenue was not done at the time of assessment and not at all the requisite evidences were also brought on record leading to erroneous assessment which was prejudicial to the interest of revenue. With these observations, Ld Pr. CIT set aside the assessment order and directed the Assessing Officer to pass denovo assessment order on the issue.
33. From the copy of scrutiny assessment order passed u/s.143(3) of the Act dated 29.3.2016 for A.Y. 2013-14, it is clear that the Assessing Officer issued notice u/s.142(1) of the Act alongwith questionnaire on 23.11.2015 and in response to the same, ld A.R. of the assessee appeared and furnished reply vide dated 23.3.2016 alongwith related documents and ledger copy and detailed information as called for and same was verified by the AO.
34. From the copy of the written reply dated 23.3.2016 submitted by the assessee before the AO, it is clear that the assessee explained the method of accounting of revenue recognition on account of sales by explaining that the company has developed residential flats on the land owned by it and selling the same to the customers. It was also explained by the assessee that there is no contract between the assessee and the customers for constructing the residential units on behalf of the customers and the company constructed residential flats on its own land and sold it to the customers after completion of the building. It was also explained that so long as the flats are not sold the same are treated as stock in trade and, accordingly, the closing stock and work in progress have been worked out at the end of the year at cost at the end of the year. It was also explained that the company follows mercantile system of accounting and follows completion method of accounting in case of residential projects developed, constructed and sold to the customers as the flats are treated as goods. The revenue from the sale of flats is recognised in the accounts after the title in the property is transferred to the buyer through conveyance of registered sale deeds.
35. The assessee also explained that during the assessment proceedings that the gross revenue as per service tax was 44,51,17,424/- for the impugned assessment year which is the amount received by the assessee in instalments during the year. However, sales as per statement of profit and loss account is the value of flats sold i.e. the flats registered in the name of the customers during the year. The sale value as per statement of profit and loss account includes amount received during the earlier years treated as advance from customers at the beginning of the year. Thus, the value on account of sale was recognised at Rs. 40,61,35,655/- and on account of sale of land was Rs.1,68,79,000/- during the year. The assessee also explained that as the incidence of service tax is on the amount received during the year, same shall not tally with that of the revenue as per statement of profit and loss account. These explanations and the modus operandi adopted by the assessee for recognition of revenue was accepted by the Assessing officer after due verification & examination during scrutiny assessment proceedings. Therefore, it is not a case of Pr. CIT that the Assessing Officer has not made any inquiry on this issue but the main allegation of the Pr. CIT is that proper verification to correct recognisation of the revenue was not done at the time of assessment and the requisite evidences were also not brought on record. But the Pr. CIT has not made any verification and examination of the method adopted by the assessee for recognisation of the revenue and neither any deliberation has been made by pr. CIT regarding applicability or non-applicability of AS-7 to the business modules of the assessee in the impugned revisionary order passed u/s.263 of the Act.
36. At the cost of repetition, we may point out that ICAI has clearly opined that revised AS-7 is not applicable for new housing projects which are undertaken by the company during the accounting periods commencing on or after 1.4.2003. The inventories should be valued by the company in accordance with AS-2, which is relevant for valuation of inventories including construction work and progress and not recognition of revenue. It is also explained that AS-9 would be relevant for recognition of revenue. The legislative intent, as noted by us in earlier paragraph of this order, clearly reveals that the percentage completion method is mandatory for construction company from assessment year 2017-18 and not for assessment year 2013-14 and this point has not been considered and adjudicated by Pr. CIT in this revisionary impugned order u/s.263 of the Act.
37. In the case of Manjusha Estates Pvt Ltd., (supra), Hon’ble Gujarat High Court held that the Tribunal was not justified in rejecting the projection completion method which was followed consistently by the assessee and instead applying work-in-progress method and taxing 80 per cent thereon as net profit.
38. In the case of Hill View Infrastructure (P) Ltd., (supra), Hon’ble P&H High Court held that the assessee developer consistently following project completion method, the CIT(A) and the Tribunal rightly deleted the addition made by the AO by applying percentage completion method and in absence of any prohibition or restriction under the Act for doing so, it cannot be held that the approach of the ld CIT(A) and the Tribunal was erroneous or illegal in any manner so as to call for interference by the Hon’ble High Court.
39. Further, in the case of Paras Buildtech India (P) Ltd., (supra), Hon’ble Delhi High Court held that the Tribunal having accepted the findings of ld CIT(A) that the assessee was a developer and not contractor, was not justified in holding that advance amount received by the assessee should be treated as income in its hands in the year in which the advance amounts were received and in applying AS-7 i.e. percentage completion method by the assessee.
40. ITAT Mumbai ‘B’ Bench in the case of Bhoomi Construction Projects (supra) held as under:
“The sole reason for making the addition by the AO is that, at the time of search the assessee had offered to disclose the income on the basis of percentage completion method which has been retracted alter on. However, there is no finding that the assessee has been following percentage completion method regularly since beginning or in any other project. There is no such evidence or documents which have been found during the course of search indicating that the assessee had been following percentage completion method regularly. If the assessee has been following one of the recognised methods as prescribed by AS-9, then it cannot be held that the revenue can impose a different method up0on the assessee unless there is a finding of fact that such a method is not reflecting the true profits of the assessee. Now, it has also been brought on record by the ld counsel that in the subsequent year i.e. in the year of completion of the project in assessment year 2012-13, the revenue itself has accepted the project completion method for recognition of revenue and, accordingly, has assessed the income of the project on the same method.”
42. Similar view has been taken by ITAT Mumbai ‘H’ Bench in the case of M/s. Haware Constructions Pvt Ltd. (supra).
43. Further more, in the case of Unique Enterprises (supra), ITAT Mumbai ‘F’ Bench in paras 13 to 25 held as follows:
“13. The assessee in this case is a builders and real estate developer. The undisputed fact is that the assessee follows project completion method of accounting since its inception in the year 1996. It has been offering income by this method of accounting and the department has been accepting the same over the years. The other undisputed fact is that the assessee has declared that the project is completed in the assessment year 2005-06 and the assessee has offered M/s Unique Enterprises the income on project completion method in that year. Thus, only the year of taxation is under dispute. The issue is whether the method of accounting followed by the assessee has been rightly rejected by the A.O. The A.O’s contention, which is affirmed by the CIT(A) is that AS-7 issued by the Institute of Chartered Accountants of India is applicable to the builders and real estate developers. This finding in our opinion is erroneous. AS-7 prior to its revision in the year 2002 dealt with the Accounting for Construction Contracts, in the financial statements of enterprises. We extract a part of this statement for ready reference:
“This statement deals with accounting for construction contracts in the financial statements of enterprises undertaking such contracts thereafter referred to as “contractors”). The statement also applies to enterprises undertaking construction activities of the type dealt with in this statement not as contractors but on their own account as a venture of a commercial nature where the enterprise has entered into agreements for sale.”[Emphasis own]
14. A perusal of the above makes it clear that the statement applied to builder and real estate developers. In AS-7, as revised in the year 2002, the scope of the statement is given as follows:
“Scope (1) This statement should be applied in accounting for construction contracts in the financial statements of contractors”.
A Construction contract is defined as follows:
“A construction contract is a contract specifically negotiated for the construction of an asset or a combination of asset that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.”
From reading of the above makes it clear that revised AS-7 issued in the year 2002, does not apply to builders and real estate consultants. The Institute of Chartered Accountants of India has in reply to a query given in the Compendium of Opinions – Vol.XXIII – 95 Query No. 15 as stated as follows:
“B. Query
5. In the light of the above, the querist has sought the opinion of the Expert Advisory Committee on the following issues:
(a) Whether the revised AS-7 would be applicable t the company for accounting for new housing projects, which may be undertaken by the company on or after 01.04.2003 on the same business model as mentioned in the facts of the case.
(b) In case revised As-7 is not applicable to the company, whether the company can value its inventories in accordance with Accounting Standard (AAS)2, “Valuation of Inventories’, issued by the Institute of Chartered Accountants of India, considering the definition of inventory as ‘an asset in the process of production for the purpose of sale’, i.e. whether the activity of developing housing projects on its own account as a commercial venture by the company can be construed as a production activity.
(c) If the activities of the company cannot be considered as a production activity and consequently AS -2 is also not applicable, which Accounting Standard should be followed for recognition of revenue and valuation of its construction work-in-progress?
C. Points considered by the Committee
6. The Committee notes that Accounting Standard (AS)-7, ‘Accounting for Construction Contracts’, issued by the Institute of Chartered Accountants of India in December 1983, states in paragraph 1 that “The statement also applies to enterprises undertaking construction activities of the type dealt with in this statement not as contractors but on their own account as a venture of a commercial nature where the enterprise has entered into agreements for sale”. Therefore, the Standard was applicable to the activities carried on by the company as stated in paragraphs 1 and 2 above. The Committee also notes that the revised Accounting Standard (AS) 7, ‘Construction Contracts’, issued by the Institute of Chartered Accounts of India in 2002, does not contain the aforesaid sentence contained in the pre-revised AS-7. On the other hand, paragraph 1 of revised AS-7, clearly states that, “This Statement should be applied in accounting for construction contracts in the financial statements of contractors”. Therefore, the Committee is of the view that the revised AS 7 is not applicable to such enterprises.” [Emphasis own] Thus, the revised AS-7 cannot be applied to enterprises which is in the business of real estate developers.
15. The Bangalore Bench of the Tribunal in the case of Prestige Estate Projects (P) Ltd.(supra) has held as follows:
“Accounts – Accounting system – Project completion method consistently followed – Assessee developer had been regularly employing project completion method which is an accepted method of accounting – Accounting Standard -7 has not been specified by the Central Government under s.145(2) – Hence, AO could not reject the accounts under s.145(3) on the ground that the assessee had not followed the prescribed method of accounting – Moreover, assessee was under bona fide belief that it was adopting a method of accounting which was applicable to it as per the report of the Expert Committee of the ICAI – Therefore, revised AS-7 cannot be applied in the case of the assessee – Even otherwise, in case revised AS-7 is to be applied, the opening inventories are to be valued as per revised AS-7- That apart, on the principle of consistency, Revenue should have accepted the method of accounting adopted by the assessee as the same was being followed for many years – Hence AO is directed to accept the project completion method of accounting.
16. Moreover, the Institute of Chartered Accountants of India has issued Guidance Note on Recognition of Revenue by Real Estate Developers. The recommendations are at para 6, which is extracted for ready reference :
“Revenue in case of real estate sales should be recognized when all the following conditions are satisfied:
(i) The seller has transferred t the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with ownership;
(ii) No significant uncertainty exists regarding the amount of the consideration that will be derived from the real estate sales; and
(iii) It is not unreasonable to expect ultimate “
From the above discussion, it is clear that the first appellate authority was not in error in upholding the view taken by the AO, that the revised AS-7 is applicable to builders and real estate developers.
17. On the facts of this case, we agree with the arguments of Shri Yogesh Thar, learned counsel for the assessee, that the decision in the case of Champion Construction Co. (supra), had laid down that when the assessee follows project completion method, it would be appropriate to offer income to tax in the year in which 80% of the construction was completed. At para 18, page 507-508, the Tribunal held as follows:
“We have examined the facts of the case from this point of view. We find that out of the total accommodation of 58,970 sq.ft. constructed, the assessee was able to sell only 25,530 sq.ft. during the previous year relevant for the assessment year 1977-78. Neither the construction of the multi-storeyed building was complete nor even the half portion of the building sold. The net sale proceeds received were much less than the total expenditure/cost incurred by the assessee upto date. In the circumstances so far as the assessment year 1977-78 is concerned we accept the assessee’s submission that it would be in order if no profits or losses are estimated from the venture for the assessment year 1977-78. the assessment for this year is, therefore, cancelled even on this score.”
18. In this year the assessee has admittedly completed only 53.95% of the construction and hence, it cannot be said that the assessee has substantially completed the project, so as to recognize income under the project completion method of accounting.
19. At para 19, the Hon’ble Tribunal in the case of Champion Construction Co. (supra) held as follows:
“However, the position as regards the assessment year 1978-79 is materially different. The construction of the building is completed in that year. Total area earmarked for sale is 61,396/- sq.ft. out of which upto the end of that year the assessee had sold 49,965 sq. ft. i.e. about 80 per cent of the area. The net receipts have far exceeded the total cost or expenditure to the assessee. Assuming there is any possibility of the assessee’s incurring some liability in future in connection with the completion of the project or otherwise, the unsold portion comprising of 12,331/- sq.ft. and the difference between the net receipts and the total expenditure and the amount actually treated as the assessee’s income are more than sufficient to take care of any such contingency.”
Thus, the methodology followed by the assessee in recognizing the income from the project under project completion method in the next year is in accordance with the propositions laid down by the Tribunal in the case of Champion Construction Co. (supra).
20. In any event, the method followed by the assessee cannot by any stretch of imagination be called as an unreasonable method. Any change in the method is revenue neutral. The revenue cannot change the method of accounting, as is sought to be done in the facts and circumstances of the case.
21. Coming to the case laws, the case of CIT v. Bill Hari Investment Ltd. (299 ITR 1, the Hon’ble Supreme Court has held as follows:
“15. Recognition/identification of income under the 1961 Act, is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. Completed contract method is one such method. Similarly, percentage of completion method is another such method.
16. Under completed contract method, the revenue is not recognized until the contract is complete. Under the said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to P&L a/c. The said method determines results only when contract is completed. This method leads to objective assessment of the results of the contract.
17. On the other hand, percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under this method is determined by reference to the stage of completion of the contract. The stage of completion can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract.
18. the above indicates the difference between completed contract method and percentage of completion method.
19. In the judgment of the Bombay High Court in Taparia Tools Ltd. (supra) it has been held that in every case of substitution of one method by another method, the burden is on the Department to prove that the method in vogue is not correct and it distorts the profits of a particular year. Under the mercantile system of accounting based on the concept of accrual, the method of accounting followed by the assessee is relevant. In the present case, there is no finding recorded by the AO that the completed contract method distorts the profits of a particular year. Moreover, as held in various judgments, the Chit Scheme is one integrated scheme spread over a period of time, sometimes exceeding 12 months. We have examined computation of tax effect in these cases and we find that the entire exercise is revenue Neutral, particularly when the scheme is spread as one integrated scheme spread over a period of time.
20. As stated above, we are concerned with asst. years 1991-1992 to 1997- 1998. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessee, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present case, we find from the various statements produced before us, that the entire exercise, arising out of change of method from completed contract method to deferred revenue expenditure, is revenue neutral. Therefore, we do not wish to interfere with the impugned judgment of the High Court.
21. Before concluding, we may point out that under 211(2) of the Companies Act, Accounting Standards (“AS”) enacted by the Institute of Chartered Accountants have now been adopted [see: judgment of this Court in J.K. Industries case (supra)]. Shri Tripathi, learned counsel for the Department, has placed reliance on AS 22 as the basis of his argument that the completed contract method should be substituted by deferred revenue expenditure (spreading the said expenditure on proportionate basis over a period of time). He also relied upon the concept of timing difference introduced by As 22. It may be stated that all these developments are of recent origin. It is open to the Department to consider these new accounting standards and concepts in future cases of chit transactions. We express no opinion in that regard. Suffice it to state that, these new concepts and accounting standards have not been invoked by the Department in the present batch of civil appeals.” [Emphasis own]
22. This judgment applies to the facts of the case in all force. The entire exercise is revenue neutral. The revenue has accepted the method over the years.
23. In the case of Chainrup Sampatram v. CIT (24 ITR 481), the Hon’ble Full Bench of the Supreme Court has held that while valuing closing stock, anticipated losses are taken into account and that the anticipated profit in the shape of appreciation in the value of stock is not brought into account. This case law, in our considered opinion, is not of much help to assessee.
24. The Ho’ble Bombay High Court in the case of CIT vs. Tata Iron & Steel Co. Ltd. (106 ITR 363) held that when the method of accounting followed by the assessee company cannot be said to be an unreasonable method, and that in such a case, even if a better method could be visualized, the method consistently followed can be accepted.
25. In view of the above discussion, we have to necessarily uphold the contention of the assessee and allow ground No. 1 of the assessee. We have allowed this ground of the assessee on the propositions discussed above, we do not give any finding on whether revenue has to be recognized in this year based on the Guidance Note issued by the Institute of Chartered Accountants of India on Recognition of Revenue by Real Estate Developers, by interpreting the Agreement of Sale, etc., as this would be an academic exercise. Accordingly, ground No. I is allowed.”
The Co-ordinate Bench of this Tribunal in this order held that when the method of accounting followed by the assessee company cannot be said to be an unreasonable method and that in such a case, even if a better method could be visualised, the method consistently followed by the assessee can be accepted.
43. ITAT Indore Bench in the case of Ashoka Gi-tech Builders Pvt Ltd (supra) after considering all the judgments on the issue held that before insertion of section 43CB of the Act, there was no legal obligation on the part of the assessee to follow percentage completion method only. Before insertion of this section person engaged in construction and service contracts were free to follow either the project completion/completed project method or percentage completion method in accordance with the provisions of section 145 of the Act. In this order, the ITAT has held thus:
“41. From perusal of all the judgments it has been consistently held rather a settled law that the action of revenue authorities cannot be held justified if they substitute another method of accounting on the assessee which in the instant case was imposing of percentage completion method on the assessee even when it has been consistently maintaining the regular books of accounts on mercantile basis u/s 145 of the Act adopting project completion method to account for the revenue and the revenue authorities have failed to bring forth any inconsistency in the books of accounts. The Assessing Officer in the instant case has merely applied the method of percentage completion adopted by the Developer JSM DPL and calculated the income of the assessee completely ignoring the fact that the assessee was merely the owner of land and he was entitled to 32% of saleable area only on completion of construction and the deadline of which was 60 months from the date of agreement i.e. from 1.4.2009. The Ld.A.O also ignored the fact that right to sale its share of constructed area with the assessee was only from April, 2014 onwards and the assessee has offered the revenue for taxation from F.Y 2014-15 onwards as and when the sale deed has been registered. As held by various courts as discussed above that the method of adopting project completion method is not ultra virus and the assessee is free to adopt either the percentage completion method or project completion method with the only rider that it should be consistently adopted and in case of any deviation the effect of profit or loss should be offered to tax as the case may be. Revenue has not disputed this fact that assessee has offered the impugned advances to tax in the subsequent years i.e. from financial year 2014-15 based on sale deed registered which proves that there has been no loss to the revenue. Mere postponement of tax as a result of method employed by assessee has not been viewed adversely by courts so long as the method is regularly and consistently employed as held by Hon’ble Apex Court in the case of Excel Industries Ltd (2013) 358 ITR 295.
42. Before parting of with adjudication of this issue it would be relevant to take note of the amendment brought in statute with retrospective effect w.e.f. 1.4.2017 by way of insertion of Section 43CB for the purpose of computation of income from construction and service contract. The relevant provision of Section 43CB of the Act reads as follows;
“43CB. Computation of income from construction and service contracts.–
(1) The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with the income computation and disclosure standards notified under sub- section (2) of section 145:
Provided that profits and gains arising from a contract for providing services,–
(i) with duration of not more than ninety days shall be determined on the basis of project completion method;
(ii) involving indeterminate number of acts over a specific period of time shall be determined on the basis of straight line method. (2) For the purposes of percentage of completion method, project completion method or straight line method referred to in sub-section (1)–
(i) the contract revenue shall include retention money;
(ii) the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital “.
43. From the perusal of above section it is crystal clear that before the insertion of this section there was no legal obligation on the part of the assessee to follow percentage completion method only. Before insertion of this section person engaged in construction and service contracts were free to follow either the project completion/ Completed project method or percentage completion method in accordance with the provisions of Section 145 of the Act. In the instant appeal assessee even though not directly involved in the construction activity and it is merely gave its land for development and it was agreed between the assessee company and the developer that 32% of the saleable area shall be given to the assessee. The assessee is constituently followed completed project contract/percentage completion method as recognized its revenue at the time of execution of getting the sale deed registered and before that it has to be consistently showing the advance from sale of flats as the liability in the balance sheet.
44. We therefore in the given circumstances of the case and in the light of judgment referred in preceding paragraphs are of the considered view that the Ld. A.O was not justified in applying the percentage completion method on the assessee merely on the basis that it was followed by the developer JSM DPL and arbitrarily making addition to the income ignored the fact that project completion method/ completed contract method of accounting has been consistently adopted by the assessee and even have been accepted by the revenue authority for the A.Y. 2010-11 and A.Y. 2011-12. We therefore set aside the findings of CIT(A) and delete the addition of Rs.16,12,34,754/- for Assessment Year 2012-13.
45. As regards Appeal No.ITA No.686/Ind/2016 pertaining to A.Y 2013-14 as the issue are being the same we apply our decision of Assessment Year 2012-13 in assessee’s own case referred above on the appeal for the year 2013-14 and accordingly set aside the findings of both the lower authorities and delete the addition of Rs.12,25,55,171/- and allowed all the ground No. 1 & 2 s raised by the assessee in its appeal for the A.Y. 2013-14.
44. In the present case, as we have noted above, the assessee is a construction company engaged in the construction of flats/residential units on the land owned by it without any contract with the customers for construction of flats/residential units. It is ample clear that the assessee company is consistently following revenue recognition method by adopting completed project method, wherein, the revenue is recognised at the time of sale of flats/residential units by way of registered sale deed in favour of the customers and advance from customer and work in progress is recognised at cost in the balance sheet. In the present case, the assessee has recognised revenue on two broad heads viz; sale of flats and sale of plots/land and amount of advance is transferred to the sales account when the registered sale deed is executed in favour of the customers adding the amount of advance pertaining to flats/residential units/plots sold during the relevant financial year and further adding the amount of advance received during the year.
45. In view of foregoing discussion, we reach to a logical conclusion that the ld. PCIT could not point out any defect in the revenue recognition method i.e. completed project method/percentage completion method adopted by the assessee and we are satisfied that the method consistently followed by the assessee and accepted by the department for recognition of revenue by following AS-2 alongwith AS-9 is a reasonable and right method for recognition of revenue on sale of flats/residential units/land.
46. As per section 43CB of the Act, the profits and gains of a construction company arising from construction contract or a contract for providing services shall be determined on the basis of percentage completion method and the same is mandatory for revenue recognition w.e.f. 1.4.2017 i.e. assessment year 2017-18 and this method of revenue recognition was not mandatory and compulsory to be followed for assessment year 2013-14. Therefore, ld. PCIT cannot revise or revisit the assessment order(s) by pressing into service the provisions of section 43CB of the Act in the present case. Therefore, the findings arrived at by ld. PCIT in the impugned order at para 8 without any deliberation of explanation of the assessee explaining the method of accounting of revenue on account of sales and regarding non-applicability of AS-7 cannot be held as valid and sustainable without any further examination and exercise. In our humble understanding, Ld PCIT cannot direct the AO for denovo assessment without assigning any defects or deficiencies in the method of accounting of revenue recognition on account of sale of flats/residential units/land and regarding non-applicability of AS-7 as contended by ld counsel for the assessee during the proceedings u/s 263 of the Act.
47. In view of the aforesaid facts, we are of the considered view that the revisionary order passed by the Ld. Pr. CIT is without jurisdiction and has to be quashed on legal issue as well as on merit. Hence, we quash the order u/s. 263 of the Act as well as notice u/s.263 of the Act and all proceedings and orders, if any, in pursuant thereto.
48. In the result, appeal of the assessee is allowed.
