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2020 (5) TMI 593 - AT - Income TaxRevenue recognition - Percentage of completion method - Revenue recognized significantly based on principle of AS-9 (Accounting Standard as per ICAI) - HELD THAT:- Assessee has two main stream of revenues, one from ‘NOP’ Project and from other project. Assessee is basically construction contractor and also indulged in developing and sale of project named ‘NOP’. On overall basis, assessee is following percentage completion method. Whether the method of percentage of completion method can be applied for construction contract as well as real estate development project with reference Guidance Note GN(A) 23 (R2012). Assessee has commenced this project in AY 2006-07 and completed the whole project. It developed the total saleable area of 56727 Sq. ft. and upto AY 2012-13, it sold 46006 Sq. ft, this assessment year, it sold 1032 Sq. ft. only and it carried unsold stock of 9689 Sq.ft. This indicates that assessee has divergent business module. As per guidance note, percentage completion method can be applied only when revenue, costs and profit from transactions and activities of real estate which have same economic substance as construction contracts. Though, it is clear that only when the economic substance in real estate development and construction contract has to be same. Project ‘NOP’ does not have same economic substance as construction contract. The difference in revenue generating pattern. ‘NOP’ project already completed but certain portion of development remain unsold. It shows that revenue model is not same i.e. in construction contract, the whole revenue is already determined and only construction has to be completed. Revenue can be recognized significantly based on principle of AS-9 (Accounting Standard as per ICAI). Where the sale of goods for recognizing revenue, cost and profits from transactions which are in substance similar to delivery of goods. Principle of AS-9 alone can be applied as far as revenue recognition is concern. We notice that percentage of margin recognized by assessee upto 31.03.12 at 13.94% and the revised estimate indicate that it is at 25.97% of the whole project. Short recognition of profit of past sales. As per prudent method of accounting, the revised estimate cost to be recognized immediately and as far as income is concerned, the construction is already completed and still 9689 Sq. ft pending for sale. The economic situation might change when the actual sales of stock in trade i.e. pending area of sale. We are in agreement with the proposed absorption of the profit during this year based on the revised estimation of profit of ₹ 5,391.88 per Sq. ft. Accordingly, we direct the AO to estimate the profit of the assessee to the extent of sales achieved by the assessee during this year i.e. 1032 Sq. ft. and to estimate the profit of ₹ 55,64,424/-. Assessee carries stock-in-trade for the next assessment year at 9,689 Sq. ft and we are not sure whether the cost of sales will remain same and there may be cost of holding the stock which might reduce the profit of the assessee, therefore it is prudent to absorb the profit based on the revenue not based on estimation which should have been earned by the assessee by the end of this year. Accordingly, enhancement proposed by the CIT(A) are reduced to ₹ 55,64,424/-. The method proposed by CIT(A) is not applicable to the present case as explained above. Accordingly, the grounds raised by the assessee are allowed.
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