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2023 (5) TMI 872 - AT - Income TaxDetermination of correct profits by applying correct principles of percentage completion method - justification of percentage completion method in case of real estate development - HELD THAT:- In light of the principle laid down in S.S. Enterprises [2019 (11) TMI 698 - ITAT MUMBAI] read alongwith guidelines of the ICAI in its Guidance Note on Accounting for Real Estate Transactions (Revised 2012) we find that in case of real estate projects when a stage is arrived that risk and rewards shift from the developer to buyer irreversibly, then project revenue and project cost associated with the real estate project should be recognised as revenue and expenses by reference to the stage of completion of the project activity at the reporting date. The effect of a change in the estimate of project costs, should be used in determination of the amount of revenue and expenses recognised in the statement of profit and loss in the period in which the change is made and in subsequent periods. Project computed following the percentage completion of method is sustained. Revision of estimated cost of repairs/renovation caused due to delay in project and damage to the building on account of various litigations not being considered by the ld. CIT(A) - HELD THAT:- The events behind escalation of Renovation cost have arisen in period subsequent to AY 2011-12, and therefore, any effect of said estimate can’t be given in AY 2011-12 and can only be given in subsequent assessment years. Therefore, these grounds are dismissed for AY 2011-12. Valuation of unsold flats at cost not been considered by the ld. CIT(A) - assessee has followed percentage completion method for computation of profits from the project - HELD THAT:- Under this method, after working out the profit commensurate with the construction work carried out, further expenses for maintenance of the corporate structure and other administrative and selling expenses for running the business are debited to Profit & Loss A/c. and net profit is worked out accordingly. For the purpose of computing profit from the project, the valuation of closing stock has no role to play under this method. Accordingly, the ground challenging the valuation of unsold flats at market value is irrelevant, whether taken at cost or market value. We set aside the finding of the ld. CIT(A) on the issue of dispute for considering valuation of unsold flats at market value Thus, this ground of the assessee is allowed. As profit from the project computed following the percentage completion of method is sustained in the case of the assessee, as worked out above. We accordingly direct so. AO is directed to adopt above profit worked out for AY 2011-12 to AY 2013-14 for the purpose of net profit of the assessee from business or profession.
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