Method of Revenue Recognition and application of Accounting Standard properly verified by AO in Assessment Order: ITAT quashes Revision Order

The Ahmedabad bench Income Tax Appellate Tribunal ( ITAT ) while quashing the revision order held that the method of revenue recognition and application of accounting standard are properly verified by the assessing officer in the assessment order.

The Assessee, Soham Buildcon is a partnership firm engaged in the business of real estate construction. After filing the return of income the Ao passed the assessment order under section 143(3) of the Income Tax Act.

Subsequently the PCIT on perusal of assessment records found that project being bungalow was completed for more than 83% and till end the of the year under consideration, the total cost of Rs. 22,40,38,488/- was incurred which is 36% of total expected revenue of Rs. 61,85,58,873/- whereas the assessee has shown the sale at Rs. 4,05,86,464/- only which is only 6% of expected revenue.

The PCIT observed that the assessee being in the business of construction of residential and commercial complex was required to recognize revenue on percentage completion method as provided under accounting standard 7 issued by the ICAI. However, the assessee has not explained the method of accounting employed for revenue recognition and neither did the AO raise any question in this regard.

The PCIT further found that no inquiry whatsoever was made by the AO regarding the method of valuation of closing stock of Rs. 19,75,26,263/- which was neither anywhere stated by the assessee. Accordingly the PCIT passed a revision order.

Aggrieved by the order the assessee  filed an appeal before the tribunal.

During the adjudication Parin Shah, the counsel for assessee argued that  assessee has been following the project complete method and the income from the project has already been offered to tax over the years. Furthermore, the project has already been completed. Thus, there is no error which is causing prejudice to the Revenue.

Sudhendu Das,  Department representatives supported the decision of PCIT.

The tribunal observed that the assessee has offered income from the project over the period and paid due taxes. The only difference here may arise as per the method adopted by assessee, the income which should have been offered in the year by employing percentage completion method ( PCIT method ) was deferred in subsequent years but in such a scenario the assessee should have offered less income in subsequent years. Also the twin conditions to exercise the power under section 263 of the Act have not been satisfied.

Further the bench determined that In assessee's case, the assessee being a Builder and Developer of property has offered the income from project of redevelopment under the head of and gains from business or profession following Project Completion Method and therefore the addition made by the assessing officer is not sustainable.

Therefore After analyzing the submission of both parties the bench comprising  Madhumita Roy ( Judicial Member ) and Waseem Ahmed, ( Accountant Member )  observed that the method of revenue recognition and application of accounting standards are properly verified by the assessing officer in the assessment order.

Therefore the bench quashed the revision order.

To Read the full text of the Order CLICK HERE

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