DY.COMM OF INCOME TAX CENTRAL CIRCLE-1 , THANE V. UNIQUE SHANTI NEMINATH DEVELOPERS LLP, MUMBAI

ITA 1733/MUM/2022

AI Insights

The case revolves around the dispute concerning the recognition of revenue by M/s. Unique Shanti Neminath Developers LLP under the percentage completion method for the assessment year 2016-17. The Dy. Commissioner of Income Tax challenged the CIT(A)'s decision, which had favored the assessee by deleting a substantial addition made by the Assessing Officer. The main contention was whether the revenue from real estate projects should be recognized based on the percentage of completion or upon the execution of sale agreements. The Tribunal examined the facts, including the completion status of the projects and the accounting policies consistently followed by the assessee in previous years.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 301214 (ITAT-MUMBAI)
• Duration Of Justice: 11 year(s) 11 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 11-10-2022
• Assessment Year: misc
• Appeal Filed On: 03-12-2010
• Other Referred Cases: M/s. Shankala Realtors Pvt. Ltd. vs. ITO
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: REVENUE RECOGNITION. IT; REVENUE RECOGNITION BECAUSE ENFORCEABLE CONTRACT QUA ALL
• Assessee Lawyers: HITESH SHAH
• Keywords: Rule of consistency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “F”, MUMBAI BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER ITA No.1733/M/2022 Assessment Year: 2016-17 Dy. Commissioner of Income Tax, Central Circle-1, 6 th Floor, Room No.10, Road No.16-Z, Ashar I.T. Park, Wagle Industrial Estate, Thane (W)- 400604 Vs. M/s. Unique Shanti Neminath Developers LLP, A-103M Raj Shree Building, Eksar Road, Borivali (W), Mumbai – 400 092 PAN: AAEFU2567L (Appellant) (Respondent) Present for: Assessee by : Shri Hitesh Shah, A.R. Revenue by : Ms. Vranda U Matkarni, D.R. Date of Hearing : 12 . 10 . 2022 Date of Pronouncement : 24 . 11 . 2022 O R D E R Per : Kuldip Singh, Judicial Member: The appellant, M/s. Unique Shanti Neminath Developers LLP (hereinafter referred to as ‘the assessee’) by filing the present appeal, sought to set aside the impugned order dated 18.04.2022 passed by Commissioner of Income Tax (Appeals), Pune [hereinafter referred to as the CIT(A)] qua the assessment year 2016-17 on the grounds inter-alia that :- “1. On the facts & in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.8,64,83,675/- on account of under reported profit from real estate business as per percentage completion method by not appreciating ITA No.1733/M/2022 M/s. Unique Shanti Neminath Developers LLP 2 and recognizing revenue in accordance with Para 5.3 of revised Guidance Note on Accounting for Real Estate Transactions issued by 1CA1 in 2012. 2. On the facts & in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that assessee entered into agreement/contract with the buyers of flats through Booking Application/Acceptance Letter which fulfills all the elements of a legally enforceable valid agreement/contract. 3. On the facts & in the circumstances of the case and in law, the Ld. C1T(A) erred in appreciating the fact that merely because agreement to sell was not entered with the buyers in a particular year revenue cannot be recognized in percentage completion method. 4. The appellant craves leave to add, alter, modify, delete and amend any of the grounds, as per the circumstances of the case.” 2. Briefly stated facts necessary for adjudication of the issues at hand are: the assessee is Limited Liability Partnership (LLP) engaged in the business of builders & developers filed its return of income on 12.10.2016 declaring total income of Rs.2,85,97,770/- which was subjected to scrutiny and consequently assessment order under section 143(3) of the Act was passed by the Assessing Officer (AO) by making addition of Rs.8,64,83,675/- on account of under reporting of profit from the business of real estate development. 3. Assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has deleted the addition by allowing the appeal. Feeling aggrieved with the impugned order assessee has come up before the Tribunal by way of filing present appeal. 4. We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto. ITA No.1733/M/2022 M/s. Unique Shanti Neminath Developers LLP 3 5. Undisputedly year under consideration is the second year of declaring profit. It is also not in dispute that the AO made the addition merely on the ground that the assessee has underreported the profit during the year under consideration. It is also not in dispute that the assessee has been consistently following the Percentage Completion Method (PCM) for revenue recognition. It is also not in dispute that 62% of the project of the assessee was completed during the year under consideration and the assessee has recognized the revenue to the extent of 62% of the total sale consideration of the flat for which the sale agreements were registered. 6. In the backdrop of the aforesaid undisputed facts the AO after identifying the facts for which 10% or more amount of sale value was realized by the assessee which comes to 16 flats out of 142 flats. The AO also found that out of 142 flats only in 16 flats less than 10% of the sale price which comes to Rs.7,53,50,000/- was received. The AO proceeded to take the sale value of eligible contracts for which the Revenue was to be recognized at Rs.60,52,89,400/- (Rs.68,06,39,400/- – Rs.7,53,50,000/-) and thereby made the addition of Rs.8,64,83,675/- on account of unreported profit. 7. We have perused the impugned order passed by the Ld. CIT(A) who has deleted the addition by relying upon the order passed by the co-ordinate Bench of the Tribunal in case of M/s. Shankala Realtors Pvt. Ltd. vs. ITO in ITA No.3827/M/2017 order dated 28.08.2019 wherein it has been held that when percentage completion method is applied, the date of agreement to sell is the point which determines the point of recognition of ITA No.1733/M/2022 M/s. Unique Shanti Neminath Developers LLP 4 revenue because passing of risks and rewards by virtue of the ownership is an essential condition for revenue recognition. The Tribunal has also held that it is the date of execution of the agreement which is important and not the date of registration of the agreement as contended by the assessee and directed the AO to bring to tax the revenue out of remaining executed agreements if any during the year under consideration by applying the percentage completion method. 8. The Ld. D.R. for the Revenue challenging the impugned order passed by the Ld. CIT(A) relied upon the order passed by the AO and contended inter-alia that the Ld. CIT(A) has not appreciated the fact that the assessee entered into agreement with the buyers of flats through booking application/acceptance letters which fulfills all the elements of legally enforceable valid agreement/contract; that it is not correct proposition that merely because agreement to sell was not entered with the buyers in a particular year revenue cannot be recognized in percentage completion method. 9. However, on the other hand, the Ld. A.R. for the assessee relied upon the order passed by the Ld. CIT(A) by contending that in the percentage completion method when project is complete to the extent of 62% the assessee has recognized the revenue to the extent of 62% of the sale consideration for the flat for which sale agreements were registered. The Ld. CIT(A) thrashed the facts threadbare in view of the fact that the AO himself accepted the accounting policy adopted by the assessee in 2016-17 and 2018-19 by following the rule of consistency. When we apply the method of revenue recognition adopted by the AO, it would result into ITA No.1733/M/2022 M/s. Unique Shanti Neminath Developers LLP 5 preponement of revenue from subsequent years to the year under consideration and would subsequently lead to double taxation. Moreover, it is proved on record that the assessee has already offered the corresponding revenue in subsequent years i.e. A.Y. 2017-18, 2018-19 & 2019-20. Moreover, the AO was not empowered to recognize and tax the income of unsold and cancelled flats. 10. The AO has recognized the revenue for all flats for which more than 10% of the sale consideration was realized by the assessee even without bringing on record any evidence if in all those cases some legal enforceable contract was arrived at between the assessee and the buyers. This issue was decided by the co- ordinate Bench of the Tribunal in case of M/s. Shankala Realtors Pvt. Ltd. (supra) wherein it is held that revenue is required to be recognized at the time of execution of the agreement. 11. The Ld. CIT(A) by taking into account all the aforesaid facts and contentions raised by the assessee deleted the addition by returning following findings: ITA No.1733/M/2022 M/s. Unique Shanti Neminath Developers LLP 6 ITA No.1733/M/2022 M/s. Unique Shanti Neminath Developers LLP 7 ITA No.1733/M/2022 M/s. Unique Shanti Neminath Developers LLP 8 ITA No.1733/M/2022 M/s. Unique Shanti Neminath Developers LLP 9 ITA No.1733/M/2022 M/s. Unique Shanti Neminath Developers LLP 10 ITA No.1733/M/2022 M/s. Unique Shanti Neminath Developers LLP 11 ITA No.1733/M/2022 M/s. Unique Shanti Neminath Developers LLP 12 ITA No.1733/M/2022 M/s. Unique Shanti Neminath Developers LLP 13 ITA No.1733/M/2022 M/s. Unique Shanti Neminath Developers LLP 14 12. Aforesaid findings returned by the Ld. CIT(A) need no interference on the grounds inter-alia that the entire revenue has been recognized by the assessee as per accepted percentage completion method; that the flats for which no doubt assessee has received more than 10% of the sale consideration but cannot be taken for revenue recognition because enforceable contract qua all those flats have come on record and merely of 10% or more of the sale consideration, the revenue cannot be recognized for taxing the income; that moreover the Ld. CIT(A) has returned factual findings that there is no flat for which revenue is required to be recognized over and above the revenue recognized in the books of account and; that moreover the assessee has already offered the corresponding ITA No.1733/M/2022 M/s. Unique Shanti Neminath Developers LLP 15 revenue in the subsequent years for A.Y. 2017-18, 2018-19 & 2019-20. 13. Consequently, appeal filed by the assessee is hereby dismissed. Order pronounced in the open court on 24.11.2022. Sd/- Sd/- (GAGAN GOYAL) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 24.11.2022. * Kishore, Sr. P.S. Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// By Order Dy/Asstt. Registrar, ITAT, Mumbai.