INCOME TAX ACT, 1961

Section 143(3) Section 145(1)

Assessment - Addition to income - Revenue recognition on percentage completion method - Reduction in cost

Assessee was the group company of M/s. Gaur Group and was engaged in the business of real estate development. During the year under consideration the assessee as developing housing project in Sector 79, Noida, U.P. The return for the year was filed on 28-9-2014 declaring net taxable income of Rs. 12,59,710. The return was selected for scrutiny assessment under CASS. During the course of the scrutiny assessment proceedings, the assessee was asked to explain why no revenue related to the project have been recognized. In its reply the assessee explained that the work was not completed to the extent of 30% and following the accounting policy no revenue was recognized during the year under consideration. AO found that as on 31-3-2016 the total cost of project had been shown at Rs. 349.56 crores which was less than the total cost of project shown as on 31-3-2014 which was Rs. 362.60 crores. The AO was of the firm belief that the total cost of project cannot get reduced in the subsequent year and was of the opinion that the total cost of project at Rs. 349.56 crores was completed as on 31-3-2014 and according to this the percentage of completion comes to 30.74% and, therefore, the assessee should have recognized the revenue as on 31-3-2014 itself. Assessee contended that as per requirement of income computation and disclosure standard assessee-company have selling and marketing expenses (including brokerage) and from cost estimating sale to this estimated cost had come to Rs. 345.55 crores from Rs. 374.61 crores. Discarding all the submissions and documentary evidence filed by the assessee during the course of assessment proceedings, the AO rubbished the figure of Rs. 362.60 crores and adopted Rs. 349.56 crores. Re-working the total cost of project the AO made the addition of Rs. 17,32,78,878. Assessee carried the matter in appeal before the CIT(A), but without any success. Held: Assessee had recognized the revenue in assessment year 2015-16 onwards when the completion exceeded 30%. The reasons for the reduction in the estimated cost of project from Rs. 362 crores as on 31-3-2014 to Rs. 349.53 crores as on 31-3-2016 had been well explained at para 37 of the AS 7 and the reason for reduction in the estimated cost so far as the case in hand was concerned was due to selling cost which was earlier taken at Rs. 25 crores which was reduced Rs. 12.35 crores. It was pertinent to note that the assessment order for assessment year 2014-15 was filed on 29-9-2015. This means that AO was well aware of the revenue recognition in assessment year 2015-16 and, therefore, grossly erred in making additions in assessment year 2014-15 for income which had been duly recognized in subsequent assessment year. In the light of the subsequent assessments of the assessee the assessment orders of which were placed on record and considering the observations of the Supreme Court, AO.CIT(A) were not justified in substituting the cost as on 31-3-2014 with the cost on 31-3-2016. Addition made by the AO was, therefore, not justified on the facts of the case. Accordingly, the AO was directed to delete the entire addition.

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