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

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Section 145 makes it mandatory on the part of the assessee to follow either cash or mercantile system of accounting. Recognizing the revenue by developer (i.e., assessee) only when the sale deeds would be registered in favour of the buyers could not be regarded to be either cash or mercantile system of accounting. This method was neither project completion method nor percentage of completion method, thus, this was not a recognized method to recognize revenue under AS-7 too.

Facts :

a) Assessee was engaged in the business of real estate activities, such as construction of residential-cum-commercial project, developing of plots, etc. It had completed development work of plots on 31.3.2009, but it did not show the sale proceeds in the profit and loss account even after receiving 70-80% of the sale proceeds.

b) The Assessing Officer ('AO') was of the view that development had already been completed, therefore, he re-computed the profit relating to these projects.

c) Assessee contended that he was following project completion method as per AS-7 and it was showing the sales when the registration of the sale deed would be carried out.

d) On appeal, the CIT(A) deleted the additions on the ground that the AO had changed the profit recognition method from project completion to percentage completion. The aggrieved revenue filed the instant appeal before Tribunal.

The Tribunal held in favour of revenue as under:

1) The CIT(A) had agreed with assessee's contention that he was following the project completion method but assessee was not recognizing the revenue on the basis of the project completion method.

2) Registration of the sale deed represents only the transfer of the title in favour of the buyer once development work on the plots had been completed.

3) Assessee was recognizing the revenue only when the sale deeds would be registered in favour of the buyers. Under AS-7 this was not a recognized method of recognizing the revenue. This method of revenue recognition followed by assessee was neither project completion method nor percentage of completion method.

4) Section 145 makes it mandatory on the part of the Assessee to follow either cash or mercantile system of accounting regularly. This method of recognizing the revenue when the sale deeds would be registered in favour of the buyers could not be regarded as either cash or mercantile system of accounting.

5) Thus, the method adopted by the assessee was not in compliance with the ingredients as laid down under Section 145. Consequently, the order of AO was to be restored – ACIT. v. Alcon Developers (2015) 54taxmann.com 54 (Panaji - Trib.)

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