2025 (6) TMI 698 - AT - Income Tax

Addition on the ground of non disclosure of revenue from project Altius by the assessee as per ICDS-III issued by ICAI and by applying AS-7 - CIT(A) deleted addition - HELD THAT - We note that the case of the assessee has been assessed under scrutiny in the preceding assessment year i.e. 2017-18 and the accounting method of re-cognizing the revenue on project completion method has been accepted by the Revenue as is apparent from the assessment order for A.Y. 2017-18 a copy of which is placed in the paper book. Therefore unless there is a change in the facts no deviation is allowed in the current financial year from the practice followed by the assessee as has been held in the case of Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT wherein as held that Rule of consistency has to be maintained unless there is a change in facts and circumstances of the case. Even the ld. AO has wrongly computed the addition under the Percentage Completion Method by even taking the whole sale value of the project including the one attributable to the 15 co-owners of the project. We note that the assessee and the co-owners shares were 48.44% and 51.56% respectively and thus out of the total sale value as per agreement between the land owners Rs.111, 83, 19, 211/- the share of the assessee would work out to be at Rs.54, 17, 13, 826/- and thus the ld. AO has taken excess value of to the extent of Rs. 57, 66, 05, 385/- while computing the addition as per the Percentage Completion Method at Rs.12, 18, 46, 800/- in the hands of the assessee. We even note that ultimately the project was completed in A.Y. 2021-22 and finally outcome of the project was loss of Rs.18, 71, 78, 668/- which was declared in the return filed for A.Y. 2021- 22. CIT (A) has given a clear-cut finding that ICDS-III and AS-7 were applicable in the instant case for recognition of the revenue and even it is accepted for a moment that AS-9 ICDS-III and Percentage Completion Method of accounting to be applicable even during the in A.Y. 2017- 18 even then there was loss from the project as stated hereinabove. CIT (A) noted that once the practice is followed in one accounting year/assessment year that has to be followed in all the subsequent assessment years also as a matter of consistency as there was no change in the facts and circumstances of the case. The ld. CIT (A) even noticed that the calculation made by the ld. AO about profits on Percentage Completion Method suffered from a patent error as has been noted above. Therefore we do not find any infirmity in the order of the ld. CIT (A). Addition under the head interest expenses paid to land co-owners - CIT(A) deleted addition - HELD THAT - We find that the ld. AO has himself appreciated the facts of the case by taking into account the advances given to 15 land co-owners of Rs.7, 80, 19, 021/- against the total amount payable of Rs.576605385/- and the balance outstanding was Rs.49, 85, 86, 364/-. Therefore there is no question charging any interest from advances to the land co-owners. The ld. CIT (A) has correctly appreciated this issue and given a very clear-cut finding. We also note that the second advance given by the assessee was in respect of another project at BT Road Kolkata which was yet to be started and same was the position with regard to that advance as the same was also given to land owners. Therefore considering these facts on record and finding of ld. CIT (A) we find no infirmity in the appellate order. Appeal of the Revenue is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the addition of Rs.12,18,46,800/- made by the Assessing Officer (AO) on account of non-disclosure of revenue from the real estate project ALTIUS by not applying the Percentage Completion Method (PCM) as per ICDS-III and AS-7 was justified.

- Whether the assessee was required to recognize revenue from the ALTIUS project under ICDS-III and AS-7 or could continue to follow the Project Completion Method under AS-9 as adopted in earlier years.

- Whether the AO's computation of revenue recognition under PCM was correct, particularly in light of the co-ownership structure and the sharing of sale proceeds.

- Whether the disallowance of Rs.1,66,95,828/- on account of interest expenses paid to land co-owners was justified, considering advances given interest-free to co-owners while the assessee had interest-bearing borrowings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of ICDS-III and AS-7 versus AS-9 and Project Completion Method for Revenue Recognition

Relevant legal framework and precedents: ICDS-III (Income Computation and Disclosure Standards) notified by CBDT prescribes accounting treatment for construction contracts, mandating revenue recognition on the Percentage Completion Method (PCM) for contracts commenced on or after 1 April 2015. AS-7 (Accounting Standard 7) similarly governs construction contracts. AS-9 (Accounting Standard 9) deals with revenue recognition generally. The principle of consistency in accounting methods is well-established, supported by the Apex Court decision in Radhasoami Satsang Vs. CIT (1992) 193 ITR 320 (SC).

Court's interpretation and reasoning: The Court noted that the assessee commenced construction of the ALTIUS project in FY 2012-13, prior to the applicability date of ICDS-III (1 April 2015). The AO invoked ICDS-III and AS-7 to require revenue recognition under PCM, but the CIT(A) and the Tribunal found that the assessee was entitled to continue following AS-9 and Project Completion Method as per past practice and earlier assessment years, particularly AY 2017-18 where the same method was accepted.

The Tribunal emphasized the rule of consistency, holding that absent any change in facts or circumstances, an accounting method regularly followed and accepted in prior years cannot be changed arbitrarily. The Tribunal also found that the AO's application of PCM was flawed due to incorrect computation of revenue, as the AO treated the entire sale value as belonging to the assessee, ignoring the co-ownership share of 48.44% to the assessee and 51.56% to other co-owners.

Key evidence and findings: The assessee's construction commencement was supported by the notice of commencement dated 26.02.2013 and building permit dated 29.08.2012. The development agreement dated 11.05.2011 clarified the sharing of sale proceeds. The AO's computation took the entire sale value of Rs.111.83 crores as the assessee's revenue, whereas the correct share was Rs.54.17 crores. The Tribunal also noted that the project ultimately resulted in a loss of Rs.18.71 crores as per the return for AY 2021-22.

Application of law to facts: Since the project commenced before 1 April 2015, ICDS-III was not applicable. The assessee was entitled to continue with AS-9 and Project Completion Method. The AO's addition was based on an incorrect assumption of revenue share and misapplication of ICDS-III and AS-7. The principle of consistency required adherence to the accounting method accepted in prior years.

Treatment of competing arguments: The Revenue argued for application of ICDS-III and AS-7 and restoration of the AO's order. The assessee argued non-applicability of ICDS-III, acceptance of AS-9 and Project Completion Method in earlier years, and errors in AO's computation. The Tribunal sided with the assessee on all counts.

Conclusions: The addition of Rs.12,18,46,800/- was deleted. The assessee was allowed to follow AS-9 and Project Completion Method for revenue recognition for the ALTIUS project for AY 2018-19.

Issue 2: Computation of Revenue Share and Impact on Addition under Percentage Completion Method

Relevant legal framework and precedents: Revenue recognition must reflect the assessee's actual share in the project. The development agreement and co-ownership percentages govern the allocation of sale proceeds.

Court's interpretation and reasoning: The AO erred by attributing 100% of the sale proceeds to the assessee, ignoring the 51.56% share of other co-owners. The Tribunal found that the assessee's share was Rs.54.17 crores and advances paid to co-owners were properly accounted for. Even if PCM was applied, the correct revenue recognition would result in a loss, not income.

Key evidence and findings: Development agreement dated 11.05.2011 specifying share of sale proceeds; advances paid to co-owners amounting to Rs.7.80 crores; AO's use of entire sale value in computation.

Application of law to facts: Revenue recognition must be proportionate to the assessee's share. AO's failure to segregate shares led to inflated addition. Proper application of PCM with correct share results in no addition but a loss.

Treatment of competing arguments: Revenue acknowledged factual error but sought restoration of AO's order. Assessee demonstrated correct share and consequent loss under PCM.

Conclusions: AO's computation was flawed; addition based on inflated revenue share was unjustified.

Issue 3: Disallowance of Interest Expenses on Advances to Land Co-owners

Relevant legal framework and precedents: Interest disallowance may arise if interest-bearing funds are used to provide interest-free advances to related parties without commercial justification. However, advances in line with contractual obligations and business necessity may not warrant disallowance.

Court's interpretation and reasoning: The AO disallowed Rs.1,66,95,828/- on the ground that the assessee had interest-bearing borrowings but made interest-free advances to land co-owners. The CIT(A) and Tribunal found that advances given (Rs.13.82 crores) were significantly lower than the total sale proceeds payable to co-owners (Rs.57.66 crores) as per the development agreement. The advances were made in terms of the business necessity and contractual obligations. The AO did not identify any related party transactions or other grounds for disallowance.

Key evidence and findings: Development agreement dated 11.05.2011; advances paid to co-owners; AO's admission of advances and outstanding amounts; lack of evidence of related party transactions or misuse of funds.

Application of law to facts: Since advances were contractual and business-driven, and the AO failed to establish any misuse or related party concerns, disallowance of interest expenses was unwarranted.

Treatment of competing arguments: Revenue relied on AO's order; assessee demonstrated contractual basis and business necessity for advances.

Conclusions: Disallowance of Rs.1,66,95,828/- interest expenses was deleted.

3. SIGNIFICANT HOLDINGS

"The appellant has established that it is regularly following 'Project Completion method' of accounting and AS-9 for recognition of revenue w.r.t ALTIUS project and has further established on a without prejudice basis that even under ICDS-III sought to be applied by the AO, the appellant is allowed to continue the regularly followed method of accounting for recognition of revenue, since its construction had started before the stipulated date as laid out in ICDS and CBDT notifications."

"The claim of the appellant that it is a developer and regularly following AS-9 and 'Project Completion Method' of accounting which has been accepted by the Department in the immediately preceding year and therefore the same should also be followed in the relevant FY w.r.t 'ALTIUS' project is found correct."

"The addition of Rs 12,18,46,800/- made by the AO as revenue recognized from the project 'ALTIUS' is not found correct, and is directed to be deleted."

"The advances of Rs. 13,82,73,184/ given to the land co-owners are duly explained since these parties are entitled to much higher quantum as receivables on account of their share of sale proceeds."

"The stand of the AO in disallowing the interest expenses of Rs. 1,66,95,828/- is not found correct, and therefore this addition /disallowance of Rs. 1,66,95,828/- made by the AO is directed to be deleted."

Core principles established include the applicability of ICDS-III and AS-7 only to construction contracts commenced on or after 1 April 2015, the primacy of the rule of consistency in accounting methods, and the necessity to correctly allocate revenue and expenses in co-ownership projects based on contractual shares.

Final determinations: The Tribunal upheld the deletion of the addition of Rs.12,18,46,800/- for revenue recognition, upheld the deletion of disallowance of interest expenses of Rs.1,66,95,828/-, and dismissed the Revenue's appeal.