TMI Blog2013 (11) TMI 721X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. The assessee has clearly demonstrated that it has regularly employed the project completion method of accounting - Accounting Standard-7 issued by the Institute of Chartered Accountants of India recognizes the position that in the case of construction contracts the assessee can follow either the project completion method or percentage completion method. It is the option of the assessee to follow either the completed contract method or the percentage completed method. The completed contract method in the present case in appeal followed by the appellant, therefore, could not be faulted with by the revenue authorities and on that basis it is neither correct nor justified to say that the accounts did not present correct and complete picture of its profits. The accounts rejected by the Assessing Officer on the basis adopted by him are thus not found tenable - 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. The Completion Contract method is one of such methods. Under the Completed contract method, the revenue is not recognized un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was carried at business premises of the assessee on 17/9/2008. The assessee has filed Nil return of income both for assessment years 2008-09 and 2009-10 by adopting project completion method. The Assessing Officer issued a show cause notice u/s 142(1) of the Act on 1/12/2010 informing him that since it has not followed accounting slandered AS7 and AS-9, which it was required to follow as per the provisions of section 145(2) and 145(3), assessment in the case was proposed to be made as per the provisions of section 144 as has been laid out in section 145(3) of the Act and assessee income for assessment year 2008-09 at Rs. 90,43,688. The assessee furnished detailed reply vide letter dated 13/12/2010 as is also reproduced as under:- 1. The assessee has been strictly following the provisions of section 145(1) 145(2) of the Act and accounting standards notified in Official Gazette by the Central Government vide its notification No. SO.69(E) dated 25.01.1996. 2. Since the project was not completed during the year, there was no occasion for the assessee company to recognize either the project expenses or the project revenue and accordingly the method of accounting followed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f account maintained by it. He was of the view that significant risk in the real estate is the price risk and in the agreement, such price is fixed and agreed by the allottees. Accordingly, any subsequent variation in the market price of the flat will affect the buyer/allottee. In case, market price of flat goes up, it is a reward to the buyer and if it goes down it is the risk of the buyer in respect of a flat that has already been booked by him. In this view of the matter, all the risks and rewards have been transferred to the allottee at the time of booking/entering into agreement with him. The guidance note issued by the Institute of Chartered Accountants also emphasized that under such circumstance, the risk and reward of ownership is treated to have been transferred. In this background and having regard to the judgment by Hon'ble Apex Court in the case of CIT v. British Paints India Limited 188 ITR 44 (SC) and also in the case of Sutlej Cotton Mills v. CIT [1999] 116 ITR 1 (SC), he upheld rejection and estimation made by the Assessing Officer. The ground raised in appeal stood dismissed. 5. Ld. Counsel for the assessee contends that the controversy regarding option to follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operations, the contractor prepares what is called a contract account which is debited with various costs and which is credited with revenue associated with a particular contract. However, the rules of recognition of cost and revenue depend on the method of accounting. Two methods are prescribed in Accounting Standard No. 7. They are "completed contract method" and "percentage of completion method". Thus, as both the methods of accounting are recognized methods of accounting, the assessee is at liberty to choose any of the above and if any one of the method of accounting is consistently followed by the assessee, the assessing officer cannot change the method of accounting to the "percentage of completion method"." "12.16 The Hon'ble Delhi High Court while dealing with the similar situation in the case of CIT v. Manish Buildwell Pvt. Ltd. in ITA No. 928/2011 dated 15/11/2011 held that after the above judgment of Supreme Court in CIT v. Bilahari Investment Pvt. Ltd., 299 ITR 1, it cannot be said that the project completion method followed by the assessee would result in deferment of the payment of taxes which are to be assessed annually under the income tax Act. Accounting Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etion of performance as provided in para 11 of AS-9 "Revenue Recognition"- "11. In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled: (i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and (ii) No signification uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods." 2. Guidance Note 2006 on Revenue recognition by Real Estate Developers was initially issued by the Institute of Chartered Accountants of India in the year 2006 wherein para 3 provided the Guidance regarding transfer of significant risks and rewards of ownership. 3. This guidance was lacking and, therefore, Revised Guidance Note 2012 was issued within a short span of 6 years. The Revised Guidance Note provided further conditions for ascertaining transfer of risks and rewards. These condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expect that the parties of such contracts will comply with the payment terms as defined in the contracts. To illustrate- If there are 10 Agreements of sale and 10% of gross amount is realized in case of 8 agreements, revenue can be recognized with respect to these 8 agreements." 5. It may be noted that the above conditions are minimum threshold limits to be eligible to recognize revenue. The entity can decide its own higher threshold limits, as part of its accounting policy. The Hon'ble Mumbai Tribunal in the case of Champion Construction Co. 5 ITD (BOM) 495 has held a threshold limit of 80% to be reasonable for recognizing revenue under 'Percentage of Completion Method' (PCM). 6. It may not be misunderstood that above para 5.3 makes it mandatory to recognize revenue once minimum threshold limits of 25% completion, etc. are crossed. It is rather the other way round and no revenue below the threshold limits can be recognized. 7. RGN 2012 is not a piece of legislation brought on any statute book which may invite debate about its prospective or retrospective application. RGN 1012 is codification of existing best accounting practices in this regard. 8. Even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follow Completed Contract Method if outcome of the contract cannot be estimated reliably. This is so provided in para 31 reproduced below:- "31. When the outcome of a construction contract cannot be estimated reliably: (a) Revenue should be recognized only to the extent of contract costs incurred of which recovery is probably; and (b) Contract costs should be recognized as an expense is the period in which they are incurred. An expected loss on the construction contract should be recognized as an expense immediately in accordance with paragraph 35." 12. Forcing compliance of AS-7 by the Department, will make the assessee eligible for claim of deducting of expected loss as provided in para 35. "35. When it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognized as an expense immediately." 7. The appellant has also clarified before the authorities below that there is no bar on allotees of flats to cancel the bookings. The cancellation of bookings had factually been done subsequently. The so called binding agreement does not provide for forfeiture of money and therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by appellant were rested on the period prior to issuance of guidance notes by the Institute of Chartered Accountants. The method adopted by the Assessing Officer was found justified. It, therefore, needs to be upheld by rejecting the grounds raised in appeal by the assessee. 9. We have heard parties with reference to material on record and case laws brought to our notice. The Assessing Officer in this case rejected the accounts on the sole ground that the assessee has not followed Accounting Standard-7 and AS-9 for recognition of revenue which required him to deduce income on the basis of Percentage Completion Method by working out the profits at the end of each financial year as the projects are spread over in the series of financial years. The assessee admittedly is engaged in the business of construction as a builder/real estate developer. He has also maintained complete books of account, which are duly audited by duly qualified Chartered Accountants. The assessee has also maintained its account on mercantile basis by regularly applying Project Completion Method. The assessee in assessment for assessment year 2009-10 has also consistently followed the same method as was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Completion Contract method is one of such methods. Under the Completed contract method, the revenue is not recognized until the contract is completed. 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 the profit and loss account. The said method determines results only when the contract is completed. The method leads to objective assessment of the results of the contract. On the other hand the 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 and 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". The Apex Court again in the case of CIT v. Hyundai Heavy Industries Co. Ltd., [2007] 291 ITR 482(SC) took the similar view and held at page 495 as under:- "Lastly, there is a concept in accounts which called the concept of contract accounts. Under that concept, two methods exist for ascertain ..... X X X X Extracts X X X X X X X X Extracts X X X X
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