Once a method of recognizing revenue accepted by revenue in earlier and later years, same cannot be disturbed for the intervening year- ITAT
In a recent judgment, ITAT has quashed a revisionary order holding that Once a method of recognizing revenue accepted by revenue in earlier and later years, same cannot be disturbed for the intervening year.
ABCAUS Case Law Citation:
ABCAUS 3843 (2024) (01) ITAT
In the instant case, the assessee had challenged the order passed by the PCIT under Section 263 of the Income Tax Act, 1961 (the Act) by holding the assessment framed under Section 143(3) of the Act as erroneous in so far prejudicial to the interest of Revenue.
The appellant assessee was a private limited company engaged in the business of real estate development. The assessee for the year under consideration filed its return of income declaring loss.
Subsequently, the PCIT on examination of the assessment records found certain defects in the assessment framed under Section 143(3) of the Act and therefore, he proposed to hold the assessment as erroneous causing prejudice to the interest of Revenue.
A s per the Ld. PCIT, the assessee claimed to have been following the method of revenue recognition as per the accounting standard-7 Construction contracts issued by ICAI consistently. However, the Principal CIT found that the assessee is recognizing the revenue based on sale deed registered in the relevant year.
As per the PCIT, the assessee had not furnished the revenue statement demonstrating that the revenue was recognized based on percentage completion method. In the absence of the documents, the PCIT was of the view that the properties in respect of which the registration is pending, no revenue has been recognized by the assessee irrespective of the fact that proceeds have been received against those properties.
The PCIT further found that the assessee had shown sale of property on which full TDS under Section 194IA was deducted. However, the entire sale amount has not been offered to tax but the assessee had claimed the credit of entire amount of TDS.
Thus, the PCIT was of the view that the assessee had claimed the excessive TDS credit for which it was not entitled.
Before the Tribunal, the assessee submitted that the Company has recognized revenue as per Accounting Standard 7, and the method is recognized by Income Tax. As per this method, if the construction is completed more than 25% and consideration received is 20% then proportionate revenue is recognized. This system has been followed consistently. At the time of scrutiny we have explained each and every detail along with necessary supporting Documents submitted to A.O. To narrate the system, when booking of bungalow is taken and if work is not done same is considered as Advance, however when work is completed Revenue to the extent of completion is recognized is respective year.
Without prejudice to the above, the assessee further submitted that the entire project of the assessee has been completed in the later years which was also accepted by the revenue without making any modification. Thus, Ld. AR contended that there is no error causing prejudice to the interest of revenue. Accordingly, the revisional order passed under section 263 of the Act should be quashed.
The Tribunal noted that the assessee has been following the method for recognizing the revenue in proportion to construction of the project i.e. 25% viz a viz receipt of consideration i.e. 20% which was also accepted by the revenue in the assessment framed under section 143(3) of the Act for the preceding two assessment year. Likewise, there was no allegation by the PCIT that the assessee had not offered the income to tax in the later year.
The Tribunal found that it is the difference of the year in which the income has been offered to tax by the assessee from its project. An inference can be drawn that the income arising to the assessee from the activity of its real estate project has been offered to tax over a period. Furthermore, once a method of recognizing the revenue adopted by the assessee and accepted by the revenue in the earlier and later years, the same cannot be disturbed for the intervening year i.e. the year in dispute until and unless initial year is made subject to the modification.
Regarding excess TDS credit claimed by the assessee, the Tribunal noted that PCIT
himself had admitted the fact that the assessee was entitled for certain amount of TDS in the earlier year based on revenue recognition. Admittedly, there was no benefit of TDS credit claimed by the assessee in the earlier year, therefore, there cannot be any prejudice to the revenue because the entire exercise of claiming the TDS benefit is tax neutral.
Accordingly, it was held that there was no error in the order of the Assessing Officer causing prejudice to the interest of revenue. Accordingly, the order passed by the PCIT not sustainable.
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