Income Tax Appellate Tribunal - Delhi
Mrg Developers Pvt. Ltd., Delhi vs Ito, New Delhi on 13 November, 2017
In the Income-Tax Appellate Tribunal,
Delhi Bench 'E', New Delhi
Before : Shri Bhavnesh Saini, Judicial Member And
Shri L.P. Sahu, Accountant Member
ITA No. 6505 & 6506/Del.2014
Assessment Years: 2005-06 & 2006-07
MRG Developers Pvt. Ltd., vs. Income-tax Officer,
Sagar Complex, Plot No. 5, First Ward 5(4), New Delhi
Floor, LSC, New Rajdhani Enclave,
Main Vikas Marg, Delhi.
PAN - AADCM 4743Q
(Appellant) (Respondent)
Appellant by Sh. Neeraj Jain, C.A. &
Sh. P.K. Mishra, C.A.
Respondent by Ms. Rakhi Vimal, Sr. DR
Date of Hearing 28.09.2017
Date of Pronouncement 13.11.2017
ORDER
Per L.P. Sahu, A.M.:
These two appeals arise at the instance of assessee out of separate orders of ld. CIT(A)-X, Delhi dated 15.09.2014 for the assessment years 2005- 06 and 2006-07. Since the common question of law and facts are involved in both the appeals raising common grounds, therefore, both the appeals are being decided by this consolidated order for the sake of convenience and brevity. We take up the appeal for the assessment year 2005-06 first, wherein the assessee has raised following effective grounds :
ITA Nos. 6505 & 6506/Del./2014 2
"1. That the order of learned Commissioner of Income Tax (Appeals) is bad in law and on facts and in the circumstances of the case.
2. That the learned Commissioner of Income Tax (Appeals) has erred in sustaining the notional addition of Rs.26,07,172/- (i.e. Rs.17,94,767/- in Pitampura Project and Rs.8,12,405/- in Agra Project) made by the learned Assessing Officer applying 'percentage completion method' for revenue recognition and rejecting the 'project completion method' adopted by the assessee which is a recognized method of revenue recognition."
2. From the above grounds of appeal, it reveals that the only question which requires adjudication at this stage is whether the ld. Authorities below were justified in applying the percentage completion method instead of project completion method adopted by the assessee for revenue recognition. The appellant is engaged in the business of construction and real estate development. The assessee filed its return of income on 30.10.2005 declaring the loss of Rs.3,09,215/-. In the assessment order, the AO observed that during the year, two projects were under construction, one at Pitampura, Delhi known as Pacific North and second at Agra known as pacific Taj. In response to the query by the AO, the assessee stated that the assessee received a sum of Rs. 04,06,24,640/- against booking of 34095.65 sq. ft. area in Pitampura Project and a sum of Rs.2,70,02,097/- against booking of 33489 sq. ft. area in Agra Project upto 31.03.2005. Keeping all the facts and circumstances of the case in view, the AO was of the opinion that proportionate completion method for revenue recognition is applicable in the ITA Nos. 6505 & 6506/Del./2014 3 instant case for arriving at the correct profits of the assessee company in respect of the projects undertaken by it as per AS-9. It was also observed that during this year, 62.47% of Pitampura Project and 29.44% of Agra Project stood completed and the determination of profit would be based on the proportionate revenue and not on the alternate results, which are to be considered in the year of completion and not in the intervening period when the project is under completion. The AO, therefore, did not accept the claim of loss made by assessee and estimated Rs.50 lacs of total profit in Pitampura Project and Rs.1.50 crores in Agra Project. After applying the proportionate completion method and taking into consideration the revenue receipts from the prospective buyers, determined the profit of Rs.17,94,767/- and Rs.8,12,405/- from both the Pitampura and Agra Projects respectively. The learned CIT(A) in appeal of the assessee sustained the action of the assessee, observing as under :
"(ii) Ground No.4 of appeal is against the addition of Rs.26,07,172/-made by the A.O. on account of working of profit by applying revenue recognition method instead of project completion method adopted by the appellant company. It was observed by the A.O. that during the year two projects were under construction, one at Pitam Pura, Delhi known as Pacific North and second at Agra known as Pacific Taj. The total cost of work-in-progress including the cost of land of Pacific North (PP) was at Rs.10,16,25,160/- and of Pacific Taj (Agra) was at Rs.4,06,24,6407-. On enquiry as to why Accounting Standard:9 issued by the Institute of Chartered Accountants of India was not adopted by the appellant company, it was argued by the appellant that the company was following project completion method and have been showing profits in respect of a ITA Nos. 6505 & 6506/Del./2014 4 particular project of its completion only. Regarding application of AS:9, it was argued that the same was not applicable in appellant's case as it is applicable to service contracts while the appellant company is a builder and is constructing own buildings for commercial purposes. The A.O., however, rejected the appellant's contention and adopted the proportionate completion method as per AS:9 and computed the profits separately for both the projects amounting to Rs.17,94,767/- and Rs.8,12,4057- respectively. Thus, the addition of Rs.26,07,172/- was made in appellant's income. During the appellate proceedings, the appellant has vehemently argued that AS:9 was not applicable in this case as the same is followed in the activities of enterprise from sale of goods, rendering all services and used by others of enterprise resources yielding interest, royalties and dividends. Since the appellant is a builder, constructing its own properties on its own lands and selling it to prospective buyers, Accounting Standard:9 was not applicable. Alternatively, it was argued that to recognize revenue, the property should be transferred to the buyer.
Further it was also argued that Notification No. 9949 dt. 25-01-1996 issued by the CBDT does not figure AS:7 and AS:9 in it as the same are not mandatory under the I.T. Act.
On considering the facts of the case as well as arguments of the appellant it is observed that the appellant has been continuously taking advances from its prospective buyers of the property and utilizing the same for construction in projects. As per agreement with the prospective buyer, the specifications of the property are determined and as such the appellant company is providing service to its prospective buyer. Had it been a case of project completion method, the appellant should have constructed the properties from its own funds and such properties should have been sold as out of shelf item and then only revenue should have been recognized at the completion. Such is not the case of the appellant. The appellant is taking advances from the customers against the sale booking of the units and, therefore, it should definitely book profit under the revenue recognition method as per AS:9. Therefore, the action taken by the A.O. is fully justified and there is no ground to interfere in the findings of the A.O. The addition of Rs.26,07,172/- made by the AO is justified and the same is, therefore, sustained. Ground No. 4 is dismissed."
ITA Nos. 6505 & 6506/Del./2014 5Aggrieved by the impugned order, the assessee is in appeal before the Tribunal.
3. The ld. AR of the assessee submitted that the appellant has recognized the revenue by adopting project completion method; that the projects were completed in the assessment year 2007-08 and the appellant has returned the loss of Rs.1,05,90,257/- by adopting project completion method which stood accepted by the AO in assessment order u/s. 143(3) of the Act for A.Y. 2007- 08; that the AO was aware that there was a loss in the projects, but he estimated the income without any basis by applying percentage completion method; that the method of revenue recognition as per AS-9 is not applicable to the present case, as no activity has been undertaken by the assessee during the year as prescribed in AS-9, inasmuch as i) sale of goods, ii) rendering of services and iii) Use by others of enterprises resources yielding interest, royalties and dividend; that the appellant is the owner of the project lands on which the shops/flats were constructed and hence, it is rendering the services to its own self and not to the prospective buyer; that the appellant has only taken advance and made allotment of the shop/flats to the constructed without passing any rights to the buyer other than his right to claim a refund; that the risks and ownership in the property stood transferred on delivery ITA Nos. 6505 & 6506/Del./2014 6 and registration of property in the name of buyer; that there is no claim of department regarding interest or royalty; that therefore, AS-9 is not applicable; and that AS-9, if at all, could be applied in the years of completion of project whereas the department has already accepted the returned loss for the A.Y. 2007-08 when both the projects were completed. Reliance is placed mainly on the decision of Hon'ble Delhi High Court in CIT vs. Manish Build Well (P) Ltd. (2011) 245 CTR 397.
4. On the other hand, the ld. DR relied on the orders of the authorities below and submitted that the appellant has taken advances from the customers against the booking of the units and, therefore, the assessee has booked the profit when he received the amount of booking for sale, particularly when the assessee has been adopting the mercantile system of accounting and when there was no uncertainty regarding the consideration received during the year as per agreement with the prospective buyers and therefore, such receipts should be treated as trading receipts for accrual of income of the assessee. The ld. DR reiterated the contents of the assessment order and the impugned order.
ITA Nos. 6505 & 6506/Del./2014 7
5. We have heard the submissions of both the sides and have perused the entire material available on record. The contention of the assessee has been that the loss returned by the assessee in the year of completion of project, i.e., 2007-08 stood accepted by the Department when similar method of revenue recognition, viz., Project Completion method' was adopted and that, what led the authorities below to take a different method is not discernible from their orders and hence, rule of consistency should be applied during the year under consideration. In this regard we observe that firstly, the assessment order for A.Y. 2007-08 placed before us does not depict as to which method for revenue recognition was adopted by the assessee in that year and secondly, even if it is taken for granted that the assessee would have adopted project completion method, it cannot be denied that the assessment year 2007-08 was the year of completion of project, whereas the situation in the year under consideration is not such. From the records placed before us, it is found that the assessee has been adopting mercantile system of accounting and in such system accounting, the income is determinable on accrual basis. There is no record before us to ascertain the method of revenue recognition adopted by assessee in the years preceding to the year under consideration to apply the rule of consistency. The ld. Authorities below have also not referred any previous instances either in the cases of assessee or any other similar cases where the ITA Nos. 6505 & 6506/Del./2014 8 percentage completion method has been applied by them. In the decision relied by the assessee in CIT vs. Manish Buildwell (P) Ltd. (supra), it is clear that any of the above two methods can be applied as contemplated by AS-7 and that the department cannot change the method of recognition during the year under consideration on selective basis. However, in the instant case, the assessee has filed audited balance sheets for F.Y. 2004-05 and 2005-06. On perusal of these balance sheets, we find that the statutory auditor has pointed out in Schedule-L of the Financial Statements under the head "Significant Accounting Policy" at Sub-head "B"- "Revenue Recognition" as under :
a) For recognition of Revenue/Income, generally accrual basis of accounting is followed except in respect of those items of income where exact quantum cannot reasonably be ascertained.
b). All income and expenditure having a material bearing on the financial statements are recognized on accrual basis except the Property-
tax, Electricity and Ground rent etc. have been recorded on payment basis."
6. It is clear from the above that the revenue recognition is done by the assessee on accrual basis barring some items of income, the quantum of which is not ascertainable. In the instant case, the assessee has adopted the mercantile system of accounting and has adopted the project completion method for revenue recognition. From the sample copy of one of the prospective buyers submitted before us at page 22 of the paper book, it is ITA Nos. 6505 & 6506/Del./2014 9 clear that the total value of the flat/shop was quite an ascertained value and nothing sort of it is depicted there from as to which part of the receipt was not ascertainable. The assessee was also in receipt of the amounts as stipulated in the said agreement. The assessee has also incurred expenditure towards construction works and the auditor's report categorically speaks of revenue recognition on accrual basis. However, the loss claimed by the assessee is based on application of Project completion method. In such peculiar facts, it has to be decided whether the profit earned on a particular receipt would be taxable or not during the year under consideration or not. The learned authorities below also appear to have not examined all these aspects of the case. They have also not properly examined whether there was any item of income, the quantum of which was not ascertainable during the disputed year. Moreover, there is nothing on record before us to examine that the assessee has been consistently following the project completion method for revenue recognition in respect of all the projects undertaken by assessee during the years preceding to the year under consideration, as also to the subsequent projects undertaken by him. This aspect also needs examination at the stage of AO before finally deciding the issue. In case the assessee is found to have adopted consistent method of revenue recognition in preceding and subsequent projects, then the Assessing Officer will not be justified to work ITA Nos. 6505 & 6506/Del./2014 10 out the profit by applying percentage of completion method during the impugned year on selective basis. Therefore, the matter deserves to be restored back to the file of Assessing Officer to decide the issue afresh after making proper examination/enquiries from the records/accounts books of the assessee in the light of observations made above after giving reasonable opportunity of being heard to the assessee. The assessee shall be at liberty to adduce all the evidences in support, which he thinks fit to produce before the AO. Accordingly, the appeal of the assessee for A.Y. 2005-06 deserves to be allowed for statistical purposes.
7. Since the facts, circumstances and arguments of both the parties are identical in appeal for A.Y. 2006-07, the aforesaid decision shall equally apply to the appeal of the assessee for this year too. Accordingly, this appeal of the assessee also deserves to be allowed for statistical purposes.
8. In the result, both the appeals are allowed for statistical purposes.
Order pronounced in the open court on 13.11.2017.
Sd/- Sd/-
(Bhavnesh Saini) (L.P. Sahu)
Judicial member Accountant Member
Dated: 13.11.2017
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