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Practical Case Study on Faceless Assessment u/s 143(3) on the Issue of Accounting for Revenue Recognition & Expenditure Booking in Real Estate Business
The issue of revenue recognition and expenditure booking in real estate business of the assessees is also a common scrutiny criterion under CASS.
There are two acceptable methods of accounting for Revenue Recognition & Expenditure Booking in Real Estate Business:
(i) Percentage of Completion Method: Under this method the revenue and expenditure of the real estate project are booked in proportion to the completion of such real estate project.
(ii) Completed Contract Method: Under this method the revenue and expenditure of the real estate project are booked only after the completion of such real estate project.
The Income Computation & Disclosure Standard (ICDS) stipulates adoption of ‘Percentage of Completion Method’ for revenue recognition and expenditure booking in real estate business and as such the Revenue Authorities always insist on adoption of this particular method only in the Books of Account of the assessees.
However, there are a catena of judgments of the Hon’ble High Courts, wherein the ‘Completed Contract Method’ for revenue recognition and expenditure booking in real estate business has also been held as acceptable method subject to the condition of consistency in the manner of adoption of this method by the assessee.
One such real time scrutiny case concerning the ‘Percentage of Completion’ method in the real estate business of the assessee is being discussed and demonstrated as under:
Step 1: Visiting the ‘e-filing portal’ in Income Tax site:
The assessee is required to visit the ‘e-filing portal’ in the Income Tax site by visiting the link: https://www.incometaxindiaefiling.gov.in/home
The assessee is required to click on ‘Login Here’ tab under the tab ‘Registered User’ located on the right side of the screen.
Step 2: Login to the ‘e-filing portal’ in Income Tax site:
The assessee needs to fill in his ‘user id’ which is his ‘PAN’ along with the ‘password’ and ‘captcha code’. After filing in all the details, the ‘Login’ button is to be clicked.
Step 3: Visiting ‘e-Proceedings’ tab:
After logging in, the assessee needs to select ‘e-Proceedings’ hyperlink from under the ‘e-Proceeding’ tab.
The assessee is redirected to a new page and this new page displays all the ‘assessment notices’ under section 143(1)(a)/143(2)/148, for different assessment years, which the assessee might have received, along with the under mentioned information:
u PAN,
u Assessment Year,
u Proceeding Name,
u Option for e-Proceeding,
u Proceeding Status,
u Proceeding Limitation Date,
u Proceeding Closure Date, and
u Action.
Step 4: Click ‘Assessment Proceedings under section 143(3)’ hyperlink:
To view the regular assessment proceeding details under section 143(3), the assessee needs to click on the hyperlink ‘Assessment Proceeding under section 143(3)’, which is available under the tab ‘Proceeding Name’.
By clicking on hyperlink ‘Assessment Proceeding under section 143(3)’, the assessee will be able to see the assessment proceeding details of that particular assessment year such as:
u Notice/Communication reference Id
u The section under which the notice is issued
u Date of issue
u Date of serving the notice
u The due date for response
u Response.
Step 5: Selecting the Notice under section 143(2) to Respond:
In order to see the details of any particular scrutiny notice under section 143(2), the assessee needs to click on the hyperlink under the tab ‘Notice/Communication reference Id’.
Step 6: Downloading the ‘Scrutiny Assessment Notice’ under section 143(2):
By clicking on the hyperlink under the tab ‘Notice/Communication Reference ID’, the assessee will be able to see a ‘computer generated communication’ containing the details of the scrutiny notice issued by the Assessing Officer:
The assessee is required to click on the ‘pdf hyperlink’ given at the bottom of the page to download the scrutiny notice.
After downloading the scrutiny notice by clicking on the ‘pdf hyperlink’, the assessee can view the scrutiny notice sent by the AO.
Under the New Faceless Assessment Scheme, 2019, the Notice under section 143(2) of the Act is not issued by the jurisdictional Assessing Officer of the assessee but by the National e-Assessment Centre (NeAC).
The downloaded real time Notice issued under section 143(2) of the Act as per Computer Aided Scrutiny Selection (CASS) looks like as under:
On receipt of such scrutiny notice under section 143(2) on this issue, the assessee is required to explain and justify the amounts of revenue recognised and expenditure booked in their real estate projects under the ‘Percentage of Completion’ method.
Step 4: Filing of ‘e-Response’ within 15 days of receipt of Notice under section 143(2) of the Act
Under the ‘New Scheme of e-Assessment 2019’, the assessee is required to file his ‘e-Response’ to the Notice under section 143(2) of the Act issued by NeAC, within 15 days of the receipt of such notice.
For the purpose of filing/furnishing a ‘reply’ in response to a notice under section 143(2), the assessee needs to click on the hyperlink ‘Submit’ present under the tab ‘Response’ as shown below:
Step 5: Practical Tips for Filing Effective Responses/Submissions to Scrutiny Notice under section 143(2) and Other Requisitions
(a) Submission of Partial Responses: If the assessee is submitting its response on piecemeal basis, then he needs to choose ‘response type’ as ‘partial’. Practically it is always advisable to opt for ‘partial response’ in order to enable filing of subsequent responses to the notice.
(b) Submission of Full Response: If the submissions are made on piecemeal basis, then there would be multiple partial responses. After submitting his ‘last partial response’, the assessee needs to update the ‘Response type’ to ‘Full Response’ instead of ‘Partial response’. And if the assessee wants to file just one response to the scrutiny notice then he may opt for the ‘response type’ as ‘Full Response’.
(c) Brief Remark to Response: The assessee may also furnish a brief ‘remark’ to its response under the tab ‘Response/Remark’, not exceeding the character limit of 4000 characters. Previously this limit was 1000 characters only.
(d) Uploading of Supporting Documents as Attachments: If the assessee so requires, he may attach the supporting documents as ‘attachments’ in substantiation of his response/submission by choosing different specified categories of attachments mentioned in the dropdown list. The assessee can attach scanned documents in .pdf, .xls, .xlsx, .csv format. A maximum of 10 attachments/files with each attachment not exceeding 10 MB can be uploaded.
The different specified categories of documents and records which can be attached as attachments along with the ‘e-Responses’ are mentioned in the dropdown list under the tab ‘Attachment Description’.
The Specimen of an ideal ‘e-response’ to the Scrutiny Notice/Requisition/Questionnaire/Show Cause Notice under section 143(2)/142(1) of the Act, on the issue of ‘Accounting for Revenue Recognition & Expenditure Booking in Real Estate Business’ is being reproduced below for ready reference of the worthy readers.
|
S M MOHANKA & ASSOCIATES |
MohankaTax Chambers
B-1/801, Cleo County, Sector-121
Noida, UP-201301
Tel.: 9999981515 / 9999090757
E-mail: mayankmohanka@gmail.com
20.8.2020
The NeAC
New Delhi
In the Matter of: M/s ABC Pvt Ltd. (hereinafter referred to as ‘the assessee company’)
PAN: AAACA1234H; Address: XYZ Nagar, New Delhi, India
Subject: Submission w.r.t. Notice under section 143(2) for AY 2018-19.
Dear Sir,
This is in reference to the captioned Notice under section 142(1) read with section 143(2) of the Act, dated 6-10-2019 for the AY 2018-19, and the subsequent requisitions u/s 142(1) wherein the assessee company has been required to furnish its reply in substantiation and corroboration of its recognition of revenue and booking of expenditure of its real estate project of a Commercial Plaza in XYZ Nagar.
In this regard it is respectfully submitted that during the FY 2017-18 corresponding to the AY 2018-19, presently under consideration, the assessee company has recognised the revenue and has booked the expenditure of its Real Estate Project of a Commercial Plaza in accordance with the ‘Percentage of Completion’ method of accounting as stipulated in the Income Computation Disclosure Standards as notified under section 145 of the Income-tax Act, 1961.
The point-wise reply to the queries raised in the captioned scrutiny notice are being addressed as under:
(i) Justification for Proper Revenue Recognition and Expenditure Booking in the Real Estate Project of Commercial Plaza:
In this regard, it is respectfully submitted that the assessee company is consistently following the ‘Percentage of Completion’ method for booking of income as well as expenditure in relation to its Commercial Plaza Project in XYZ Nagar. The Percentage of Completion method has been stipulated by the Income Computation Disclosure Standards (ICDS) as notified by CBDT under section 145 of the Income-tax Act.
The detailed calculations concerning the recognition and booking of income as well as expenditure in relation to its Commercial Plaza Project in XYZ Nagar, in accordance with the mandated ‘Percentage of Completion’ method is furnished as under:
|
Particulars |
|
|
Amount in INR |
|
Total Saleable Area in Sq. Ft. |
A |
5,00,000 |
|
|
Total Area Sold in Sq. Ft. uptill 31-3-2018 |
B |
2,25,000 |
|
|
Percentage % of Area Sold (A/B) |
C |
45% |
|
|
Total Estimated Project Cost |
D |
|
100,00,00,000 |
|
Total Cost Incurred uptill 31-3-3018 |
E |
|
50,00,00,000 |
|
% of Completion of Work (D/E) |
F |
50% |
|
|
Sale Consideration to be received as per Sale Agreements uptill 31-3-2018 |
G |
|
100,00,00,000 |
|
Gross Revenue to be recognised in proportion to the % of Completion of Work uptill 31-3-2018 (G*F) |
H |
|
50,00,00,000 |
|
Less: Gross Revenue recognised uptill 31-3-2017 |
I |
|
25,00,00,000 |
|
Proportionate Revenue recognised in FY 2017-18 (H-I) |
|
|
25,00,00,000 |
|
Gross Expenditure to be recognised in proportion to percentage of Area Sold uptill 31-3-2018 (E*C) |
J |
|
22,50,00,000 |
|
Less: Proportionate Cost booked uptill 31-3-2017 |
L |
|
10,00,00,000 |
|
Proportionate Cost recognised in FY 2017-18 |
M |
|
12,50,00,000 |
Therefore, the accounting for revenue recognition and expenditure booking w.r.t. the Real Estate Project of Commercial Plaza Project in XYZ Nagar, has been done, strictly in compliance with the stipulated Percentage of Completion method, in conformity with the Income Computation Disclosure Standards as notified under section 145 of the Income-tax Act, 1961.
(ii) Higher Turnover reported in GST Return as compared to ITR:
As has been explained in point no. 1 above that in the audited Books of Account & ITR, the actual revenue determined on the basis of stipulated percentage % of completion method as calculated in above table, in full compliance with Income Computation Disclosure Standards, has been accounted for and it has not been booked on the basis of any personal discretion of the assessee company.
On the other hand, GST is applicable on Receipt of Advances, as well. Therefore, in GST Returns, the advance receipts, as per executed sale agreements, have been reflected as taxable services.
Therefore, in view of afore-stated facts, it is respectfully submitted that the taxable services in the GST returns have been reflected inclusive of all receipts including advance receipts whereas in the ITR, revenue has been booked on the basis of stipulated percentage of completion method, which is a statutory requirement. There is no understatement, whatsoever, of the revenue booked by the assessee company, on the Commercial Plaza Project in XYZ Nagar.
(iii) Sale Consideration of Property in ITR is less than Sale Consideration reported in Form 26QB:
In this regard, it is respectfully submitted that as discussed above, in detail, the revenue in respect of sale consideration of units in Commercial Plaza Project in XYZ Nagar, has been lawfully recognised and booked in Books of Account and reflected in ITR, as per the stipulated Percentage of Completion Method.
On the other hand, in Form 26QB, the details of TDS deduction @ 1% by the buyers on gross sale consideration are reflected. The values in Form 26QB reflect the full value of consideration whereas, in ITR, the revenue is recognised as per the stipulated percentage of completion method.
We sincerely believe that the above explanations and clarifications will suffice your purpose. However, if any further information, explanation or clarification is required, we would be readily furnishing the same.
Thanking You
Yours Sincerely
For S M Mohanka & Associates
--sd--
(Authorised Counsel of the Assessee Company)
Passing of the Final Assessment Order by NeAC
The NeAC forwards the ‘e-Responses’ of the assessee to the Show Cause Notice to the Regional Assessment Unit which in turn after taking due cognizance of all the e-responses of the assessee passes the revised assessment order.
In the new Faceless Assessment Scheme, 2019, the assessee is not having any ‘by-default’ right of personal hearing and the assessee may only request for a personal hearing by way of video conferencing/telephony, in case of disagreement with the additions/disallowances proposed in the draft assessment order. The Chief Commissioner or the Director General, ReAC, may approve such request for personal hearing, if he is of the opinion that the case falls in the list of specified circumstances as notified by CBDT. The circumstances where the request of the assessee for personal hearing via video conferencing may be approved are yet to be notified by CBDT.
The regional assessment unit after taking cognizance of the inputs from such personal hearing as provided to it by NeAC, again passes the final assessment order, which is uploaded by NeAC in the registered ‘e-Filing’ account of the assessee, within the time barring limitation period of completion of assessments under section 143(3) of the Act, which can be seen and downloaded by the assessee from the main window under the tab ‘e-proceedings’. The NeAC also transfers the final assessment order and all the assessment records to the file of jurisdictional AO for imposition of penalty if any and recovery of outstanding income tax demand, if any.
