TMI Blog2019 (11) TMI 698X X X X Extracts X X X X X X X X Extracts X X X X ..... enue recognition, has a balance sheet effect. In this view, expense recognition is simultaneous with a decrease in an asset or an increase in a liability. In such a scenario, reversal of profits declared in the earlier years on account of estimated loss expected of ₹ 6,81,13, 166/- in WIP for the impugned assessment year by the assessee upsets the applecart of mercantile system of accounting, the matching principles. Therefore, no reliance can be placed on the above workings of total estimated loss as on 31.03.2014 of project S.S. House arrived at by the assessee, which are nothing but bald statements. As the order passed by the Ld. CIT(A) is not based on proper appreciation of facts and law, we set it aside. Resultantly, the order passed by the AO is restored. - ITA No. 2649/MUM/2018 (Assessment Year: 2014-15) - - - Dated:- 28-10-2019 - SHRI SAKTIJIT DEY (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) Revenue by: Mr. Chaudhary Arun Kumar Singh, DR Assessee by: Mr. Vijay Mehta Mr. Govind Javeri, AR ORDER PER N.K. PRADHAN, AM This is an appeal filed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier years was reversed. In response to it, the assessee filed a reply stating that (i) till the assessment year 2012-13, it had offered profits from its project S.S. House , on percentage completion method basis, by declaring around 10-12% profits on its WIP on year to year basis and the same was done by debiting the WIP account and crediting the P L account in the respective years; this way till AY 2012-13, it had offered a total of ₹ 6,81,13,165/- as profits on accrual basis ; (ii) however, after the introduction of Revised Guidance Note on Real Estate Transactions prescribed by the Institute of Chartered Accountant of India (ICAI)[ in short Guidance Note ] in AY 2013-14, it had again offered profits based on percentage completion method basis, this time by showing sales of ₹ 65,12,000/- and claiming proportionate cost of ₹ 45,07,663/-, thereby declaring net profit of ₹ 20,04,337/-, (iii) however, when the assessee-firm was working out the revenue recognition for AY 2014-15, based on the costs incurred and agreements entered till date, future estimated costs and future sales expected, there was a total expected loss of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r such earlier date. This Guidance Note supercedes the Guidance Note on Recognition of Revenue by Real Estate Developers, issued by the Institute of Chartered Accountants of India in 2006, when this Guidance Note is applied as above. Further, the AO referred to the clause 5.9 of the Guidance Note which is produced below: The changes to estimate referred in paragraph 5.8 above also include changes arising out of cancellation of contracts and cases where the property or part thereof is subsequently earmarked for own use or for rental purposes. In such cases any revenues attributable to such contracts previously recognized should be reversed and the costs in relation thereto shall be carried forward and accounted in accordance with AS 10, Accounting for Fixed Assets. The AO observed that in assessee s case neither the contracts were cancelled nor the property was earmarked for its own use or for rental purpose. This is evident from the fact that the assessee had not reflected any rental income in the P L account. Further, as per the balance sheet, the assessee has not shown any flat/shop from ongoing project i.e. S.S. House in fixed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Observing as above, the Ld. CIT(A) held at para 5.7 of his order the following : 5.7 After considering the totality of facts, rival submissions and on the basis of discussion mentioned above, I find force in the argument of the appellant. The Institute of Chartered Accountants of India has prescribed from time to time of various Accounting Standards and Guidance Notes in order to guide various enterprises while computing their profits from year to year. The percentage of completion method prescribed by the Institute of Chartered Accountants of India. The appellant has been consistently following the percentage completion method. As per guidance note of Institute of Chartered Accountants of India, when the total project costs will exceed total eligible project revenues, the expected loss should be recognized as an expense immediately. The appellant firm had declared profits ₹ 6,81,13,165/- on percentage of completion method basis, year after year. When the appellant was finalizing the accounts and revenue working for A.Y. 2014-15, by following the percentage of completion method, there was a total loss emerging of more than ₹ 3.95 cr. from the afores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. DR argues that the order passed by the AO be restored. Contentions of the Assessee 6. Per contra, the Ld. counsels for the assessee submit that during the year under appeal, the assessee-firm was undertaking the construction of its commercial project known as S.S. House , which was complete to the extent of approx 90%. The assessee has regularly and consistently followed the method of percentage completion, all over the years, to recognize revenue from the said project and the said method was also applied during the year under appeal. Prior to the year under appeal, the assessee had offered total profits aggregating to ₹ 6,81,13,165/- till AY 2012-13. During the year under appeal, when the assessee was working out the revenue recognition, the results as emerged showed a net estimated loss of more than ₹ 3.95 crores till AY 2014-15. Further there was an actual loss of ₹ 2,62,68,079/- in AY 2015-16. The working out of loss or profit for AY 2014-15 was based on the principles of estimation. Further, the Ld. counsels explain that the assessee had incurred a total loss from the aforesaid project due to the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms Ltd. (2018) 404 ITR 409 (SC), ACIT v. M/s ITD Cementation India Ltd. (ITA No. 3669/Mum/2011 for AY 2004-05 by ITAT, Mumbai), Dredging international N.V. v. ADIT (2011) 48 sot 430 (Mumbai), Aarts Module v. ITO (ITA No. 9302/BOM/92 for A.Y. 1984-85). Reasons for the Decision 7. We have heard the rival submissions, perused the relevant materials on record and decisions cited. The reasons for our decisions are given below. We discuss now the case-laws relied on by the Ld. counsels. In the case of Virtual Soft Systems Ltd. (supra) for the AY 1998-99, the assessee had entered the amount, inter alia, under the head Lease equalization account at ₹ 4,35,89,486/-. Under the P L account for the said year, the assessee had reduced the aforesaid amount representing the lease equalization account from the lease rental of ₹ 11,84,21,434/-. The AO disallowed the said claim on the ground that the same was neither a liability nor an allowance nor an expenditure. The AO observed that the same was just a matching entry for the purpose of tallying the accounts with regard to the assets leased out. Aggrieved by the said order the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fact that AS- 7 has not been notified by the Central Government ; however, this does not mean that the assessee is precluded from following AS-7, (ii) a perusal of the provisions of section 145 shows that the accounting standards which have been notified by the Central Government have to be mandatorily followed by the assessee ; but this does not mean that the assessee cannot follow the other accounting standards issued by ICAI, (iii) ICAI being the highest accounting body of the country, created by an Act of Parliament, accounting standards issued by it cannot be brushed aside lightly; on the contrary, if an assessee is following accounting standards issued by ICAI, it would give more credibility and authenticity to its accounts. In Dredging international N.V.(supra), it is held that provisions for foreseeable losses made in accordance with guidelines of AS-7 and duly debited in audited accounts of company is an allowable expenditure. In Aarts Module (supra), it is held that it is permissible for the assessee to work out the profit or loss in respect of a project on the basis of the WIP worked out at the net realizable value. We f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As per it accrual refers to the assumption that revenues and costs are accrued, that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate. 7.3 The assessee is following consistently percentage of completion method. AS-7 (Revised) allows only percentage of completion method for construction contracts. The basic ingredients of the above method are (i) the recognition of revenue and expenses by reference to the stage of completion of a contract is called the percentage of completion method , (ii) the contract revenue is matched with the contract costs incurred in reaching the stage of completion, (iii) this results in the reporting of revenue, expenses and profit that can be attributed to the proportion of work completed, (iv) this method provides useful information on the extent of contract activity and performance during a period, (v) contract revenue is recognized as revenue in the statement of profit and loss in the accounting periods in which the work is performed, (vi) contract costs are usually recognized as an expense in the statement of profit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) commencement of project work; or (b) the stage of completion of project activity. 5.8 The percentage of completion method is applied on a cumulative basis in each reporting period to the current estimates of project revenues and project costs. Therefore, the effect of a change in the estimate of project costs, or the effect of a change in the estimate of the outcome of a project, is accounted for as a change in accounting estimate. The changed estimates are used in determination of the amount of revenue and expenses recognized in the statement of profit and loss in the period in which the change is made and in subsequent periods. 5.9 The changes to estimates referred to in paragraph 5.8 above also include changes arising out of cancellation of contracts and cases where the property or part thereof is subsequently earmarked for own use or for rental purposes, in such cases any revenues attributable to such contracts previously recognized should be reversed and the costs in relation thereto shall be carried forward and accounted in accordance with AS 10, Accounting for Fixed Assets. 7.4.1 In the instant case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king of total estimated profits as on 31.03.2014 of the project S.S. House given by the Ld. counsel, which is produced below : S.S. ENTERPRISES PROJECT. S.S. HOUSE WORKING OF ESTIMATED PROFITS AS ON 31 ST MARCH 2014 Total agreements for sale entered till 31/03/20 = 600,448,264.00 Further sale agreements epected in F.Y. 2014 = 300,000,000.00 Total estimated sales = 900,448,264.00 Total cost incurred till 31/03/2014 = 978,886,048.00 Further estimated costs = 3,00,00,000.00 1,008,886,048.00 Say = 1,008,880,000.00 Estimat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 x 100 = 67% 97,00,000 Proportion of total contract value recognized as turnover as per AS 7 (Revised) on Construction Contracts = 67% of ₹ 85,00,000 = ₹ 56,95,000/- Cost recognized = ₹ 64,99,000 Lost till date = ₹ 8,04,000 Provision for additional loss till date = ₹ 3,96,000 Total estimated loss = ₹ 12,00,000 7.7 An examination of the working of total estimated loss on the project S.S. House as worked out by the assessee clearly indicates that it suffers from basic deficiencies viz. (i) total cost incurred till 31/03/2014 ₹ 91,07,85,390/ or ₹ 978,886,048/- is not a reliable one, as the assessee is sticking to two figures, without supporting computation, and (ii) total estimated loss of ₹ 3,95,51,736/- or ₹ 108,431,736/- is not a reliable ..... X X X X Extracts X X X X X X X X Extracts X X X X
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