TMI Blog2020 (7) TMI 524X X X X Extracts X X X X X X X X Extracts X X X X ..... registered sale deed is executed in favour of the customers adding the amount of advance pertaining to flats/residential units/plots sold during the relevant financial year and further adding the amount of advance received during the year. PCIT could not point out any defect in the revenue recognition method i.e. completed project method/percentage completion method adopted by the assessee and we are satisfied that the method consistently followed by the assessee and accepted by the department for recognition of revenue by following AS-2 alongwith AS-9 is a reasonable and right method for recognition of revenue on sale of flats/residential units/land. As per section 43CB the profits and gains of a construction company arising from construction contract or a contract for providing services shall be determined on the basis of percentage completion method and the same is mandatory for revenue recognition w.e.f. 1.4.2017 i.e. assessment year 2017-18 and this method of revenue recognition was not mandatory and compulsory to be followed for assessment year 2013-14. PCIT cannot revise or revisit the assessment order(s) by pressing into service the provisions of section 43CB of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the condonation petition and considering the rival submissions, we are satisfied that the assessee was prevented by sufficient cause for filing the appeal before the Tribunal late. Therefore, we condone the delay of 158 days in filing the appeal and admit the appeal for hearing. APPLICATION FOR ADMISSION OF ADDITIONAL GROUND: 6. Ld A.R. by way of application dated 14.2.2020, sought to raise the following additional ground of appeal: Because that the Pr. CIT-1, Bhubaneswar erred in law as well as in fact by setting aside the assessment ignoring the method accounting regularly employed by the appellant in recognizing the revenue from sale of residential flats which was submitted and considered during the assessment proceedings u/s.143(3). 7. Placing into service the request of the assessee for admission of additional ground, ld A.R. of the assessee submitted that in this appeal, the assessee is challenging the revision of assessment order u/s.263 of the Act by Ld. Pr. CIT. Ld A.R. pleaded that the ld Pr. CIT being not satisfied with the method of accounting followed by the assessee has directed the Assessing Officer to reframe denovo assessment order on the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f impugned order. Thus, it is amply clear that at the time of initiating revisional proceedings, issuing notice u/s.263 of the Act and while passing order u/s.263 of the Act, ld Pr. CIT has not considered relevant assessment order for A.Y. 2013-14 dated 29.3.2016 which was selected for complete scrutiny but he considered the irrelevant assessment order for assessment year 2015-16 dated 3.11.2017, which was selected for limited scrutiny on four points. Thus, it is a clear case of non-application of mind by the ld Pr. CIT and he initiated revisional proceedings, issued notice u/s.263 of the Act and passed order u/s.263 of the Act without application of mind and by considering the irrelevant assessment order for A.Y. 2015-16 and without considering the relevant assessment order record of assessment year 2013-14. Therefore, he submitted that entire revisional proceedings u/s.263 of the Act including issuance of notice u/s.263 of the Act and impugned order u/s.263 of the Act deserves to be held as unsustainable and quashed only on this count. He strenuously contended that the AO during comprehensive scrutiny proceedings u/s.143(3) of the Act for assessment year 2013-14, passed assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ginning of the year and at the instance of sale of flats and registration of sale deed therefore, the same is reduced from the advance amount from customers. Ld A.R. submitted that the value of sales on account of sale of flats and on account of sale of land has been shown clearly in the P L account and the incidence of service tax is the amount received during the year and, therefore, same shall not tally with that of the revenue as per statement of profit and loss account. 14. Ld A.R. submitted that Pr. CIT picked up the case for the assessment year 2013-14 alleging that the assessee has not followed mandatory accounting system of Accounting Standard (AS-7) but the same was not compulsory and mandatory for present assessment year 2013-14. Ld A.R. submitted that AS-7 is compulsory and mandatory to be followed for construction companies w.r.e.f. 1.4.2017 i.e. from assessment year 2017-18. Therefore, it cannot be alleged against the assessee that the assessee is not following proper applicable method of accounting. Further, drawing our attention towards impugned revisional order u/s.263 of the Act of Pr. CIT para -7, ld A.R. submitted that even replying to the show cause notice u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The ld A.R. also submitted that the assessee vide said letter dated 23.3.2016 also explained reason for difference in the amounts shown in the Service Tax Return and as per statement of profit, thus, there was an adequate, sufficient and proper inquiry by the AO during scrutiny assessment proceedings on the various issues including issue of method of accounting adopted by the assessee for recognition of revenue on sale of flats/plots and made total addition of ₹ 2,11,82,595/- on six issues. Therefore, ld A.R. submitted that the due to this reason, assessment order cannot be alleged as erroneous and prejudicial to the interest of revenue. Ld A.R. further submitted that the applicability of revised AS-7 to enterprises undertaking construction on their own account as a venture of commercial nature and as per the guidelines issued by ICAI, revised AS-7 would not be applicable to the company for accounting for new housing projects which are undertaken by the company during accounting period commencing on or after 1.4.2013, and the company can value its inventories in accordance with AS-2. The ld A.R. also contended that as per said guideline of ICAI, the definition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee in recognising the revenue from sale of residential flats., which was submitted and considered during scrutiny assessment proceedings u/s.143(3) of the Act for assessment year 2013-14 and subsequent assessment year 2015-16. 18. Ld A.R. has placed reliance on the following judgments/orders of Hon ble High Courts and Tribunal: (i) Manjusha Estates (P) ltd vs CIT, 393 ITR 644 (Guj) (ii) CIT vs. Principal Officer, Hill View Infrastructure Pvt Ltd.,384 ITR 451 (P H) (iii) Paras Buildtech India (P) Ltd vs CIT, 382 ITR 630 (Del) (iv) Ashoka Hi-tech Builders Pvt Ltd vs DCIT, (ITA Nos.121/Ind/2016 686/Ind/2016) A.Y. 12-13 13-14 dated 3.8.2018 (v) Bhoomi Construction Projects vs ACIT, 7 NYP TTJ 1472 (Mum) (vi) Haware Constructions Pvt Ltd vs ITO, (ITA No.5601/Mum/2009 ors) order dated 5.8.2011 (vii) Unique Enterprises vs ITO, (ITA No.5109/Mum/2008) order dated 20.8.2010 19. Ld A.R. summed up his arguments by submitting that as per the order of ITAT Mumbai B in the case of Bhoomi constructions Pvt Ltd (supra) , the revenue cannot impose different method upon the assessee unless there is a finding of fact that such a method is not reflecting the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and customers to build flats or residential units on behalf of the customers. Ld A.R. submitted that the assessee is constructing flats/residential units on the land owned by it, by incurring cost from its own resources and simultaneously the assessee entered into contract with the customers for sale of flats/residential units and on completion of construction and on receipt of all entire sale consideration, the assessee transfers the possession and right over the sold units/flats in favour of the customers and at that point of time, revenue is recognised by showing the entire sale consideration in the books of account of the assessee. Ld A.R. explained that the assessee shows work in progress at cost and completed units are shown as stock in hand, therefore, there is no point that the assessee be compelled to follow percentage completion method in stead of project completion method for recognition of revenue in its books of account. 22. Ld A.R. again drew our attention towards the decision of Indore Bench of the Tribunal in the case of Ashoka Hi-tech Builders Pvt Ltd(supra) and submitted that the Co-ordinate bench of the Tribunal in its order has elaborately considered all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also shown in the balance sheet at cost. 24. First of all, we proceed to consider and adjudicate the contention of ld A.R. on behalf of the assessee that at the time of initiation of revisional proceedings, issuing notice u/s.263 of the Act and while passing revisional order u/s.263 of the Act, the ld PCIT has not considered and applied his mind to the relevant assessment record for assessment year 2013-14 and at the time of initiation of said proceedings and passing order u/s.263 of the Act, ld PCIT had taken into consideration the irrelevant assessment order of assessment year 2015-16 and record thereof. On careful and vigilant perusal of the copy of the notice u/s.263 of the Act dated 6/15.3.2018 and impugned order passed u/s.263 of the Act, it is clear that the Pr. CIT wanted to revise assessment order of A.Y. 2013-14 but from para 3 of said notice para 3 of the impugned order, it is clear that the Ld PCIT has considered the assessment order in which the case was selected for limited scrutiny on four issues including the issue of mismatch of turnover reported in Audit report ITR and Real Estate Business with high closing stock, etc. From copies of the assessment ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment record, including assessment order, of relevant assessment year which the revisionary authority, wants to revise. But in the present case, para 3 of notice para 3 of impugned order u/s.263 of the Act clearly shows that the ld PCIT called examine the assessment record and assessment order of A.Y. 2015-16 and not relevant assessment year 2013-14, which is a very fatal act on the part of the revisionary authority. In view of above, we are compelled to hold that the ld. Pr.CIT initiated proceedings u/s.263 of the Act, issued notice u/s.263 of the Act and pass impugned order u/s.263 of the Act by calling and examining irrelevant record and assessment order of A.Y. 2015-16 and by not calling and examining record of A.Y. 2013-14 and thus, the impugned order cannot be held valid and sustainable only on this count. Thus, the contention of ld A.R. is allowed on this issue. 27. From the copy of the notice u/s.263 of the Act dated 6/15.3.2018, it is clearly discernible that Pr. CIT noticed that the revenue was not recognised under percentage completion method as per AS-7 and the issue was not examined by the Assessing Officer erroneously in the scrutiny assessment des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt clause 2(d) Report on other legal and regulatory requirements available at page 43 of APB, it is ample clear that the auditor opined that in our opinion, the balance sheet and the statements of profit and loss comply with the Accounting Standards referred to in sub-section (3C) of the Section 211 of the Company Act, 1956. . 31 . From para 6 of the impugned revisionary order of Pr. CIT, we observe that the revisionary authority only picked up first half part of said clause 2(d) of auditor s report and thereafter held that the company has not made disclosure as required by paragraphs 38 to 43 of AS-7. This is not a reasonable and justified approach of revisionary authority that first half part of clause 2(d) of auditor s report is picked up but second half part is ignored to take an objective decision but real meaning can be gathered only by considering entire clause 2(d) in toto. 32. In the present case, the assessee never claimed that it is recognising revenue by following percentage completion method of accounting standard but from the statement submitted before the AO during the assessment proceedings and reply filed by the assessee to show cause notice u/s.263 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on its own land and sold it to the customers after completion of the building. It was also explained that so long as the flats are not sold the same are treated as stock in trade and, accordingly, the closing stock and work in progress have been worked out at the end of the year at cost at the end of the year. It was also explained that the company follows mercantile system of accounting and follows completion method of accounting in case of residential projects developed, constructed and sold to the customers as the flats are treated as goods. The revenue from the sale of flats is recognised in the accounts after the title in the property is transferred to the buyer through conveyance of registered sale deeds. 35. The assessee also explained that during the assessment proceedings that the gross revenue as per service tax was ₹ 44,51,17,424/- for the impugned assessment year which is the amount received by the assessee in instalments during the year. However, sales as per statement of profit and loss account is the value of flats sold i.e. the flats registered in the name of the customers during the year. The sale value as per statement of profit and loss account includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and instead applying work-in-progress method and taxing 80 per cent thereon as net profit. 38. In the case of Hill View Infrastructure (P) Ltd., (supra), Hon ble P H High Court held that the assessee developer consistently following project completion method, the CIT(A) and the Tribunal rightly deleted the addition made by the AO by applying percentage completion method and in absence of any prohibition or restriction under the Act for doing so, it cannot be held that the approach of the ld CIT(A) and the Tribunal was erroneous or illegal in any manner so as to call for interference by the Hon ble High Court. 39. Further, in the case of Paras Buildtech India (P) Ltd., (supra), Hon ble Delhi High Court held that the Tribunal having accepted the findings of ld CIT(A) that the assessee was a developer and not contractor, was not justified in holding that advance amount received by the assessee should be treated as income in its hands in the year in which the advance amounts were received and in applying AS-7 i.e. percentage completion method by the assessee. 40. ITAT Mumbai B Bench in the case of Bhoomi Construction Projects (supra) held as under: The sole reason fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial statements of enterprises. We extract a part of this statement for ready reference: This statement deals with accounting for construction contracts in the financial statements of enterprises undertaking such contracts thereafter referred to as contractors ). The statement also applies to enterprises undertaking construction activities of the type dealt with in this statement not as contractors but on their own account as a venture of a commercial nature where the enterprise has entered into agreements for sale. [Emphasis own] 14. A perusal of the above makes it clear that the statement applied to builder and real estate developers. In AS-7, as revised in the year2002, the scope of the statement is given as follows: Scope (1) This statement should be applied in accounting for construction contracts in the financial statements of contractors . A Construction contract is defined as follows: A construction contract is a contract specifically negotiated for the construction of an asset or a combination of asset that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. From rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atement should be applied in accounting for construction contracts in the financial statements of contractors . Therefore, the Committee is of the view that the revised AS 7 is not applicable to such enterprises. [Emphasis own] Thus, the revised AS-7 cannot be applied to enterprises which is in the business of real estate developers. 15. The Bangalore Bench of the Tribunal in the case of Prestige Estate Projects (P) Ltd.(supra) has held as follows: Accounts - Accounting system - Project completion method consistently followed - Assessee developer had been regularly employing project completion method which is an accepted method of accounting - Accounting Standard -7 has not been specified by the Central Government under s.145(2) - Hence, AO could not reject the accounts under s.145(3) on the ground that the assessee had not followed the prescribed method of accounting - Moreover, assessee was under bona fide belief that it was adopting a method of accounting which was applicable to it as per the report of the Expert Committee of the ICAI - Therefore, revised AS-7 cannot be applied in the case of the assessee - Even otherwise, in case revised AS-7 is to be applied, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or this year is, therefore, cancelled even on this score. 18. In this year the assessee has admittedly completed only 53.95% of the construction and hence, it cannot be said that the assessee has substantially completed the project, so as to recognize income under the project completion method of accounting. 19. At para 19, the Hon'ble Tribunal in the case of Champion Construction Co. (supra) held as follows: However, the position as regards the assessment year 1978-79 is materially different. The construction of the building is completed in that year. Total area earmarked for sale is 61,396/- sq.ft. out of which upto the end of that year the assessee had sold 49,965 sq. ft. i.e. about 80 per cent of the area. The net receipts have far exceeded the total cost or expenditure to the assessee. Assuming there is any possibility of the assessee's incurring some liability in future in connection with the completion of the project or otherwise, the unsold portion comprising of 12,331/- sq.ft. and the difference between the net receipts and the total expenditure and the amount actually treated as the assessee's income are more than sufficient to take care of any such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed by the assessee is relevant. In the present case, there is no finding recorded by the AO that the completed contract method distorts the profits of a particular year. Moreover, as held in various judgments, the Chit Scheme is one integrated scheme spread over a period of time, sometimes exceeding 12 months. We have examined computation of tax effect in these cases and we find that the entire exercise is revenue Neutral, particularly when the scheme is spread as one integrated scheme spread over a period of time. 20. As stated above, we are concerned with asst. years 1991-1992 to 1997-1998. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessee, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present case, we f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y finding on whether revenue has to be recognized in this year based on the Guidance Note issued by the Institute of Chartered Accountants of India on Recognition of Revenue by Real Estate Developers, by interpreting the Agreement of Sale, etc., as this would be an academic exercise. Accordingly, ground No. I is allowed. The Co-ordinate Bench of this Tribunal in this order held that when the method of accounting followed by the assessee company cannot be said to be an unreasonable method and that in such a case, even if a better method could be visualised, the method consistently followed by the assessee can be accepted. 43. ITAT Indore Bench in the case of Ashoka Gi-tech Builders Pvt Ltd (supra) after considering all the judgments on the issue held that before insertion of section 43CB of the Act, there was no legal obligation on the part of the assessee to follow percentage completion method only. Before insertion of this section person engaged in construction and service contracts were free to follow either the project completion/completed project method or percentage completion method in accordance with the provisions of section 145 of the Act. In this order, the ITAT ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstruction and service contract. The relevant provision of Section 43CB of the Act reads as follows; 43CB. Computation of income from construction and service contracts.-- (1) The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with the income computation and disclosure standards notified under sub- section (2) of section 145: Provided that profits and gains arising from a contract for providing services,-- (i) with duration of not more than ninety days shall be determined on the basis of project completion method; (ii) involving indeterminate number of acts over a specific period of time shall be determined on the basis of straight line method. (2) For the purposes of percentage of completion method, project completion method or straight line method referred to in sub-section (1)-- (i) the contract revenue shall include retention money; (ii) the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains. . 43. From the perusal of above section it is crystal clear that before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee company is consistently following revenue recognition method by adopting completed project method, wherein, the revenue is recognised at the time of sale of flats/residential units by way of registered sale deed in favour of the customers and advance from customer and work in progress is recognised at cost in the balance sheet. In the present case, the assessee has recognised revenue on two broad heads viz; sale of flats and sale of plots/land and amount of advance is transferred to the sales account when the registered sale deed is executed in favour of the customers adding the amount of advance pertaining to flats/residential units/plots sold during the relevant financial year and further adding the amount of advance received during the year. 45. In view of foregoing discussion, we reach to a logical conclusion that the ld. PCIT could not point out any defect in the revenue recognition method i.e. completed project method/percentage completion method adopted by the assessee and we are satisfied that the method consistently followed by the assessee and accepted by the department for recognition of revenue by following AS-2 alongwith AS-9 is a reasonable and right method ..... X X X X Extracts X X X X X X X X Extracts X X X X
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