TMI Blog2019 (10) TMI 977X X X X Extracts X X X X X X X X Extracts X X X X ..... 009 is 73% and the assessee-company has recognized the revenue by applying 73% to the value of agreements executed till 31.03.2009. It was further stated before the AO that the revenue in respect of balance advances could not be recognized as passing of risks and rewards by virtue of ownership is an essential condition for revenue recognition as per AS-9, which has not been fulfilled in the instant case, as no agreement is executed and no possession have been given to the buyer. The case laws relied on by the Ld. counsel and Ld. DR have been narrated at length hereinbefore. One principle which emerges from the above case laws is the role of agreement executed. Immovable property is not conveyed by delivery of possession, but by a duly registered deed. Further, it is the date of execution of registered document, not the date of delivery of possession or the date of registration of document which is relevant. Once the executed documents are registered, the transfer will take place on the date of execution of documents and not on the date of registration of documents as held in Alapati Venkataramiah v. CIT [ 1965 (3) TMI 21 - SUPREME COURT ] As per the ingredients of AS-7 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant company, was an accepted method and in consonance with the accounting standards as well as the guidance note of the Institute of Chartered Accountants of India regarding real estate transactions. 3. The Ld.CIT(A) completely misapplied himself and erred in confirming the stand taken by the assessing officer in invoking the provisions of sec. 2(47) which apply to capital asset and not to stock-in-trade. 4. The Ld.CIT(A) erred in appreciating that for two assessment years 2005-06, and 2008-09, in assessment orders framed under section 143(3) the method of accounting adopted by the appellant had been accepted and a deviation there from militated against the principle of consistency. 5. Without prejudice to the above and in the alternative the Ld.CIT(A) failed to appreciate that, since the appellant was a company where tax rates were virtually constant there is no revenue loss to the department even if the income was taxed in a year different from that in which it was submitted to tax by the appellant, as the entire income was submitted to tax albeit in different assessment years. 3. Briefly stated, the facts are that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stically enhanced. Thus the AO held that entering into an agreement and its registration is not necessary for recognition of revenue on advances or on the completed part of the project. Observing that the above condition has been dispensed with in cases falling under AS-9, the AO worked out the profit on the project at ₹ 3,59,87,333/- as under : A. Total Revenue to be recognized from entire project ₹ 62,47,20,998/- B. Income to be recognized as on 31.03.2009 (73%) ₹ 45,60,46,329/- C. Cost of the project as on 31.03.2009 ₹ 36,23,59,833/- D. Income to be recognized up to 31.03.2008 (45%) ₹ 28,11,24,449/- E. Cost of the project as on 31.03.2008 (45%) ₹ 22,23,72,500/- F. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S) on real estate business at the relevant point of time. In view of the same, it is argued that the appellant recognized the revenue as per the Guidance Note of the ICAI regarding accounting for real estate transactions and for recognition of revenue, the Guidance Note draws upon the principles enunciated in AS-9 on revenue recognition and AS-7 on construction contracts. The Ld. counsel explains that the appellant, accordingly, recognizes revenue on execution and registration of agreement for sale with the buyer, and however, the value of agreement is further subjected to the percentage completion as certified by the architect. It is argued by him that the certificate by the architect based on the basis of survey of work perform or completion of physical proportion of the contract work is an accepted method of determination of stage of completion as per para 29 of AS-7 and therefore, if the work is 80% complete as on the last day of the financial year, the total revenue recognized till the end of the year is 80% of the total value of all agreements executed till date. Thus the difference between the total revenue, so determined and the revenue recognized up to end o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per which income has to be accounted in the year in which project is complete and flats are sold. The assessee in earlier two years followed the same method which has been accepted by the Department. However, in the current year, the Department has tried to assess the income on the basis of percentage completion method as per which the income has to be assessed on the basis of percentage of work completed during the year. The case of the Department is that the profit is inbuilt into the quantum of work done by the assessee and, therefore, the profit has to be computed annually on the basis of work done in a particular area. The Tribunal held that the project completion method adopted by the assessee builder and real estate developer was held to be justified, instead of percentage completion method as contested by the Department. In the instant appeal there is no dispute about the percentage completion method adopted by the assessee, whereas in the above case, the assessee was following project completion method. Therefore, the present case is distinguishable from the above decision. In the case of Malibu Estates Pvt. Ltd. (supra), the assessee is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance booking from the prospective buyers of the project. The AO noticed from the audit report that the assessee recognized revenue from the sale of the office/shops only on the registration of title deeds and till that event, the receipts were shown as liability. The AO opined that merely because the title deeds were not registered in a particular year, would not mean that no profit arose or accrued to the assessee. The AO held that income should be recognized on the transfer of right/interest in the property to the prospective buyers. As the terms and conditions of the agreements to sell provided for the transfer of risks and rewards in the ownership of the property to the buyers, without prejudice in the right of the assessee to receive sale consideration, the AO held that income was to be recognized by applying percentage completion method. The Tribunal held that where assessee, a developer, having constructed commercial units, transferred same at initial stage of construction along with significant risks and rewards of ownership to buyers, assessee s income had to be taxed on year to year basis by applying percentage completion method . In the case of Alcon Dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consistently following mercantile system of accounting in respect of all its projects, assessee was not justified in adopting cash system of accounting in respect of only one project . 7.2 It is relevant here to discuss application of principles of AS-9 in respect of sale of goods to a real estate project, which is produced below: 4.1 The application of principles of AS 9 in respect of sale of goods requires recognition of revenues on completion of the transaction/activity when the revenue recognition process in respect of a real estate project is completed as explained in paragraph 4.2 below. 4.2 The completion of the revenue recognition process is usually identified when the following conditions are satisfied: (a) The seller has transferred to 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; (b) The seller has effectively handed over possession of the real estate unit to the buyer forming part of the transaction; (c) No significant uncertainty exists regarding the amoun ..... 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