Recognition of revenue by developer only on registration of sale deeds wasn't a valid method under sec. 145

February 6, 2015[2015] 54 taxmann.com 54 (Panaji - Trib.)

IT : Recognition of the revenue from sale of plots by assessee only when the registration of the sale deed has been done by the assessee in favour of the buyer is not a recognized method of recognizing the revenue under AS-7. This method is neither project completion method nor percentage of completion method. The method adopted by the Assessee, therefore, cannot be regarded to comply with the ingredients as laid down u/s 145 of the Income Tax Act. Sec. 145 of the Income Tax Act makes it mandatory on the part of the Assessee to follow either cash or mercantile system of accounting regularly. Recognizing the revenue when the sale deed has been registered by the Assessee in favour of the buyer cannot be regarded to be either cash or mercantile system of accounting

Facts

• Assessee had completed the development work of the plot as on 31.3.2009 and in respect of the plots he has received around 70-80% of the sale proceeds but still the Assessee had not shown the sale proceeds in the profit and loss account.

• Since the development had already been completed, therefore, the AO re-computed the profit relating to these projects completed crediting the sale proceeds to the profit and loss account.

• The Assessee contended that he was showing sales when the registration of the sale deed was carried out. The assessee contended that he was following project completion method according to AS-7

• The Assessee went in appeal before the CIT(A).

• CIT(A) took the view as if the AO has changed the method from project completion method to percentage completion method and deleted additions and allowed assessee's appeal

• Hence, the instant appeal by Department against CIT (A)'s order

Held

• The Assessee contended before CIT(A) and CIT(A) has also agreed that the Assessee was following the project completion method but Assessee has not recognized the revenue on the basis of the project completion method.

• It is an undisputed fact that the development work on the plots has been completed. Registration of the sale deed represents only the transfer of the title in favour of the buyer from the Assessee.

• The Assessee was not following percentage of completion method. Under the percentage of completion method revenue is recognized in the profit and loss account in the accounting period to the extent the work is completed. In case the revenue has to be recognized on the basis of receipt of payment from the plot-holders, that will also not be regarded to be percentage of completion method.

• It is not a case where the AO has rejected the accounts of the Assessee on the ground that it had not followed AS-7 for recognition of revenue on the basis of percentage of completion method.

• The method as has been followed by the Assessee, in our opinion, is neither project completion method nor percentage of completion method.

• Percentage of completion method is not linked with the consideration received by the Assessee from the intended buyer.

• Assessee has recognized the revenue only when the registration of the sale deed has been done by the Assessee in favour of the buyer. Under AS-7 this is not a recognized method of recognizing the revenue. This method is neither project completion method nor percentage of completion method.

• The method adopted by the Assessee, therefore, cannot be regarded to comply with the ingredients as laid down u/s 145 of the Income Tax Act.

• Sec. 145 of the Income Tax Act makes it mandatory on the part of the Assessee to follow either cash or mercantile system of accounting regularly.

• Recognizing the revenue when the sale deed has been registered by the Assessee in favour of the buyer cannot be regarded to be either cash or mercantile system of accounting.

• CIT(A)'s order set aside and order of the AO restored. Department's appeal allowed in the result