ITO Vs Toucan Real Estates Pvt. Ltd. (ITAT Delhi)
Total estimated construction cost the percentage of the completion works out to 24.89% which is less than the 25%, being the limit prescribed for recognition of Revenue.
Facts-
Assessee electronically filed its ROI declaring total income at Rs.4,06,880/-. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) of the Act vide order dated 29.12.2016 determining the total income at Rs.13,63,41,560/-. Aggrieved by the order of AO, assessee carried the matter before CIT(A) who vide order dated 30.01.2019 in Appeal No.9/10774/2017-18 granted substantial relief to the assessee. Aggrieved by the order of CIT(A), Revenue is now in appeal on the ground of deleting addition amounting to Rs.13,59,34,679/- to the income of the assessee company as percentage completion of the project has reached 28.63% which is more than 25% and therefore, the revenue needs to be recognized.
Assessee contended that the same is only 24.89% of the project was completed and therefore no revenue recognition was called for.
Conclusion-
We are therefore of the view that the increase in total saleable area with the escalation in cost of material and change in specification by customers had led to the estimated cost at Rs.138 crores. We further find that before CIT(A) assessee had furnished Architect certificate wherein the initial estimated cost of project and with the increase in saleable area and other factors the revised cost has been certified. Based on the total estimated construction cost the percentage of the completion works out to 24.89% which is less than the 25%, being the limit prescribed for recognition of Revenue.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal filed by the Revenue is directed against the order dated 30.01.2019 of the Commissioner of Income Tax (Appeals)-9, New Delhi relating to Assessment Year 2014-15.
2. The relevant facts as culled from the material on records are as under :
3. Assessee is a company stated to be engaged in the business of real estate development of a project “Hotel cum Commercial Complex” at Village Ulahaswas Sector 60, Gurgaon Haryana. Assessee electronically filed its return of income for A.Y. 2014-15 on 18.09.2014 declaring total income at Rs.4,06,880/-. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) of the Act vide order dated 29.12.2016 determining the total income at Rs.13,63,41,560/-. Aggrieved by the order of AO, assessee carried the matter before CIT(A) who vide order dated 30.01.2019 in Appeal No.9/10774/2017-18 granted substantial relief to the assessee. Aggrieved by the order of CIT(A), Revenue is now in appeal and has raised the following grounds:
1. “On the facts and circumstances of the case the Ld CIT(A) erred in deleting the addition amounting to Rs.13,59,34,679/- to the income of the assessee company as percentage completion of the project has reached 28.63% which is more than 25% and therefore, the revenue needs to be recognized.
2. The appellant craves, leave or reserving the right to amend modify alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”
4. During the course of assessment proceedings, on the examination of financial statements and details relating to the project, AO noticed that assessee had incurred Rs.34,35,20,283/-as on 31.03.2014 towards Cost of Construction and Development expense relating to the project and the same was disclosed under the head “Inventories”. He also noticed that assessee had not recognized any Revenue for the year under consideration and the entire amount of Rs.80,67,67,000/- received from customers towards the said project was disclosed under the head “Other Current Liabilities”. The assessee was asked to furnish the details relating to the advances received, cost of project, saleable area, area sold etc. to which assessee made the submissions. AO on the basis of the details furnished by the assessee came to the conclusion that assessee fall into the category of construction contractor and therefore AS-7 read with Guidance Note on Real Estate Developers issued by Institute of Chartered Accountant of India was applicable to the assessee. He was of the view that the conditions required to apply percentage completion method to recognize revenue was fulfilled by the assessee during the year under consideration, as according to him, assessee had taken all the critical necessary approvals for the commencement of project, 100% area i.e. 264580 sq. ft. was secured by the contracts or agreements with buyers, more than 10% contract consideration was received by the assessee. The contentions of the assessee that since only 24.89% of the project was completed and therefore no Revenue recognition was called for, was not found acceptable to AO as according to him, assessee had calculated the aforesaid percentage completion based on cost incurred till 31.03.2014 at Rs.34.35 crores and total cost of Project (excluding Land Cost) as Rs.138 crores as against 124 crores claimed by assessee in A.Y. 2013-14. AO also noted that on the website of the assessee, it had uploaded a report for December, 2015 and according to that report the cost of construction of the said project disclosed to various Government agencies was Rs.120 crores. AO was therefore of the view that based on the total construction cost of project at Rs.120 crores and the cost incurred by the assessee at Rs.34.35 crores. The percentage of completion worked out to 28.63%. He was therefore of the view that since the percentage completion was more than 25%, the percentage completion method should have been applied for Revenue recognition. He thereafter on the basis of the working which is tabulated at page 11 & 12 of his order, worked out the Revenue that should have been recognized by the assessee for A.Y. 2014-15 at Rs.37,08,96,396/- and the corresponding expenditure for recognition at Rs.,23,49,61,717/- and thus according to the AO the net profit was to the tune of Rs.13,59,34,679/-, which should have been recognized by assessee. He thus made addition of Rs.13,59,34,679/-.
5. Aggrieved by the order of AO, assessee carried the matter before CIT(A). CIT(A) held that the addition made by AO was not justified. He accordingly directed the deletion of the addition made by AO. Aggrieved by the order of CIT(A), Revenue is now before us.
6. Before us, Learned DR took us to the findings of AO and further submitted that assessee had disclosed the cost of construction to various Government agencies at Rs.120 crores and therefore the assessee was not justified in considering the total cost of project at Rs.138 crore for the purpose of working out the project completion. He submitted that if the percentage completion of the project is worked out on the basis of Rs.120 crores, the project completion works out to more than 25% and therefore the AO was fully justified in estimating the net profits. He further submitted that the documents submitted to the Government agencies has to be considered to be an authentic figure and the cost of project based on the Architect Certificate of Rs.138 crores was without any basis. He thus supported the order of lower authorities.
7. Learned AR on the other hand reiterated the submissions made before AO and CIT(A) and further submitted that the estimated cost of construction in A.Y. 2013-14 was Rs.124 crores and the same was increased to Rs.138 crores in A.Y. 2014-15. The reason for the increase in the cost of construction was that the assessee had initially conceived the project with total saleable area of 251634 sq ft. but however as per the booking against which letter of intent/agreement were executed was for 264580 sq.ft. and thus extra space of 12496 sq. ft. was booked which led increase in estimated cost of project from Rs.124 crores in A.Y. 2013-14 to Rs. 138 crores in A.Y. 2014-15. He submitted that the increase in cost of project is also supported by the certificate of the Architect. He further submitted that other reason for increase in estimated cost was on account of escalation in cost of material and change in specification by customers. He submitted that since reasonable level of development of the project was 24.89%, which is below the threshold limit specified in the Guidelines notes, no Revenue was recognized as it was below the limit of 25% specified in guidance Note. He further submitted that the cost of Rs.120 crores as reported in the compliance report was as per the provision of Water/Air Act and according to which the amount incurred on Government fees and project overheads was not required to be included in the cost of project. He therefore submitted that due to increase in area and due to other factors, the architect estimated the total cost of construction of the project as on 31.03.2014 at Rs.138 excluding the cost of land which was as per the prevailing practice in the construction industry. He thereafter submitted that CIT(A) after considering the relevant material has decided the issue in favour of the assessee. He thus supported the order of CIT(A).
8. We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the estimating the cost of construction and thereby the percentage of completion and estimation of profits. It is the undisputed fact that assessee had reported the project cost at Rs.120 crores in the compliance report and also in the website of the assessee. Before us, assessee has however submitted that in the project that was initially conceived, the total saleable area was 251634 sq. ft. but however as per the booking and the agreement that were executed for the saleable area was 264580 sq.ft. and thus extra space of 12496 sq. ft. was booked. The aforesaid factual position is not disputed by Revenue. When there is increase in saleable area, the cost of construction will definitely increase. We are therefore of the view that the increase in total saleable area with the escalation in cost of material and change in specification by customers had led to the estimated cost at Rs.138 crores. We further find that before CIT(A) assessee had furnished Architect certificate wherein the initial estimated cost of project and with the increase in saleable area and other factors the revised cost has been certified. Based on the total estimated construction cost the percentage of the completion works out to 24.89% which is less than the 25%, being the limit prescribed for recognition of Revenue. We thus find that CIT(A) after considering the details, has given a finding that the architect certificate as on 31.03.2014 has given head wise, item wise project cost and there is no material placed by AO to show that the certificate issued by the architect was bogus. He has further given a finding that the certificate estimating cost of project of the architect as on 31.03.2013 was duly accepted by AO. We further find that CIT(A) while deciding the issue has given a finding that the estimated project cost of Rs.120 crores was calculated as per the provision of Water and Air Act and according to which the amount incurred in Government fee and project over head was not required to be included to the cost of project. Based on the reasoning given by CIT(A) in the order, he has concluded that the cost of completion of the project worked out to 24.89% which is less than 25%. Before us, no fallacy in the findings of CIT(A) has been pointed out by Revenue. In such a situation, we find no reason to interfere in the order of CIT(A). Thus the ground of Revenue is dismissed.
9. In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on 23.05.2022
