2017 (4) TMI 911 - AT - Income Tax

Accrual of income - Taxation of net advance amount received in respect of flat No.701 there is no reason to tax the very same income double. - Decided in favour of assessee.

Summary

Issues:
1. Treatment of income from flat nos. 701 and 702 up to completion of 4th slab.
2. Application of accounting standard by the appellant.
3. Consideration of percentage completion method.

Analysis:

Issue 1: Treatment of income from flat nos. 701 and 702 up to completion of 4th slab
The appellant, a Private Limited Company engaged in builders and developers business, appealed against the order treating 60% of the agreement value of flat nos. 701 and 702 as income. The AO considered these agreements as income up to the completion of the 4th slab, leading to tax imposition. The CIT(A) upheld this action, prompting the appellant's further appeal. The appellant argued that conditions for revenue recognition, as per the Guidance Note on Recognition of Revenue by Real Estate Developer, were not met. The appellant highlighted that the agreements lacked enforceability due to non-approval by the government authority, leading to uncertainties and making it unreasonable to expect ultimate collection. The appellant offered the income in the subsequent year when permissions were obtained, emphasizing the non-satisfaction of conditions for revenue recognition.

Issue 2: Application of accounting standard by the appellant
The appellant contended that it followed the accounting standard issued by ICAI, specifically AS-9, for revenue recognition. The appellant justified postponing revenue recognition for flat nos. 701 and 702 based on the non-satisfaction of conditions outlined in AS-9. The cancellation of the agreement for flat no. 701 and the pending suit for flat no. 702 further supported the appellant's stance on delaying revenue recognition. The appellant's adherence to accounting standards and the subsequent treatment of income in the following year when permissions were obtained were crucial aspects of the argument.

Issue 3: Consideration of percentage completion method
The Tribunal examined the percentage completion method applied by the appellant for revenue recognition. The Tribunal noted the uncertainties and lack of enforceability regarding the agreements for flat nos. 701 and 702 due to non-approval by the government authority. The Tribunal acknowledged the appellant's decision to postpone revenue recognition based on the conditions set forth in AS-9. The cancellation of one agreement and the pending suit for the other agreement further supported the appellant's approach. Ultimately, the Tribunal found no merit in the lower authorities' decision to tax the advance amount received for flat nos. 701 and 702, as the appellant had already offered the income in the subsequent year when permissions were obtained, leading to the allowance of the appeal.

In conclusion, the Tribunal allowed the appellant's appeal, emphasizing the importance of adhering to accounting standards and the justification for postponing revenue recognition based on the non-satisfaction of conditions outlined in the relevant guidance notes and accounting standards.