🚨 Important Update for Our Users
We are transitioning to our new and improved portal - www.taxtmi.com - for a better experience.
⚠️ This portal will be discontinued soon
Home
2025 (7) TMI 374 - AT - Income TaxIncome recognition method - Method of accounting - System of accounting Percentage Completion Method (PCM) as per Accounting Standard 7 (AS-7) and Section 43CB - applicability of percentage completion method adoption in the assessee s case since out of the total sale consideration of total units sold have been received as advance from the customers which works out to 78% and estimated cost of the project including the land cost of Rs. 59.35 crores out of which total cost incurred including the land cost is Rs. 42.89 crores - HELD THAT - As undisputed fact that the assessee firm since its inception is following the method of accounting for revenue recognition that Revenue will be recognized as and when significant risk and rewards in the Housing / Commercial Units in the scheme Vandemataram Fabula are transferred to the purchasers as per Accounting Standard-9 i.e. when conveyance deed is executed and possession of Housing / Commercial Units were given to the purchasers. This method has been accepted by the Assessing Officer while passing regular assessment order u/s 143(3) for the A.Ys. 2016-17 and 2017-18 and also intimation u/s 143(1) for the A.Ys. 2019-20 to 2024-25. Thus the Revenue consistently accepted the project completion method submitted by the assessee for all other assessment years except the present A.Y. 2017-18 that too for the very same project Vandemataram Fabula. It is seen from record the assessee itself is developing the land and not as a contractor. Therefore it recognized income only when possession of flat is handed over and sale deed is executed to various purchasers. Further the assessee firm from its inception any amount received against booking are credited to advances against booking account. Similarly all expenditure for purchase of land seeking sanctions from the concerned authorities developing the land in accordance with those sanctions all types of expenses incurred on construction i.e. capital expenditure incurred for getting pre-launch or post launch booking including were debited to work-in-progress. Thus neither advances received on booking of flats were treated as revenue nor expenditure incurred was claimed as revenue expenditure till the sale of flats started i.e. transfer of apartments was made. In fact the assessee had capitalized the cost of construction and reflected the cost of construction as project in progress and as such the adverse inference drawn by the AO is patently misconceived and Accounting Standard 7 is not applicable to the facts of the present case. As relying on AARYAN BUILDSPACE LLP 2025 (3) TMI 528 - ITAT AHMEDABAD and SHIVALIK BUILDWELL (P) LTD. 2011 (8) TMI 1179 - ITAT AHMEDABAD we have no hesitation in deleting the additions made by the lower authorities and the grounds raised by the assessee are hereby allowed.
The core legal questions considered in this appeal revolve around the appropriate method for revenue recognition by a real estate developer under the Income Tax Act, 1961, specifically for the Assessment Year 2018-19. The principal issues examined include:
1. Whether the Assessing Officer (AO) was justified in applying the Percentage Completion Method (PCM) as per Accounting Standard 7 (AS-7) and Section 43CB of the Income Tax Act to estimate income, despite the assessee following the Project Completion Method (PCM) based on Accounting Standard 9 (AS-9) and ICAI Guidance Notes. 2. The applicability and correctness of revenue recognition principles for a real estate developer engaged in constructing and selling units on its own land, particularly the timing of revenue recognition-whether on execution of conveyance deed and possession transfer or on percentage completion of construction. 3. Whether the AO and the Commissioner of Income Tax (Appeals) (CIT(A)) erred in denying the assessee the opportunity for personal hearing via video conferencing, thereby violating principles of natural justice. Issue-wise Detailed Analysis 1. Applicability of Percentage Completion Method (PCM) versus Project Completion Method for Revenue Recognition Legal Framework and Precedents: The Income Tax Act, particularly Section 43CB, mandates that profits and gains from construction contracts and contracts for providing services be computed using PCM in accordance with Income Computation and Disclosure Standards (ICDS). AS-7 governs construction contracts, prescribing PCM for revenue recognition. Conversely, AS-9, along with the ICAI Guidance Note on Accounting for Real Estate Transactions (Revised 2012), applies to real estate developers and prescribes revenue recognition upon transfer of significant risks and rewards of ownership, typically coinciding with execution of sale deeds and possession delivery. Judicial precedents from various tribunals and High Courts have consistently held that Section 43CB and AS-7 apply exclusively to contractors undertaking construction projects for clients under contractual obligations, not to developers constructing on their own land and selling completed units. The distinction hinges on ownership and contractual relationships: contractors build for third parties, whereas developers own the land and sell finished properties. Court's Interpretation and Reasoning: The Tribunal observed that the assessee consistently followed the project completion method, recognizing revenue only when conveyance deeds were executed and possession was transferred. This approach was accepted by the AO in prior assessment years (2016-17, 2017-18) and in subsequent years (2019-20 to 2024-25) under Section 143(1) intimations. The AO's departure in the impugned year to apply PCM based on AS-7 and Section 43CB was found to be misplaced, as the assessee was not a contractor but a developer. The Tribunal relied on a coordinate bench decision in Aaryan Buildspace LLP, which elaborated that Section 43CB and AS-7 are applicable only to construction contracts involving a contractor performing work for a client, not to developers selling their own constructed units. The Tribunal emphasized that advances received by the developer are not contract revenue but part of the consideration for sale of property, and the stage-wise payment terms do not convert the transaction into a construction contract. Key Evidence and Findings: The assessee's accounting records showed advances credited to "advances against booking" and costs capitalized to work-in-progress, with revenue recognized only upon sale deed execution and possession transfer. The AO's estimate based on percentage completion was contradicted by the consistent accounting treatment accepted in other years and by the nature of the business. Application of Law to Facts: Given the legal distinction and accounting standards, the Tribunal held that the AO erred in applying PCM and Section 43CB to the assessee. The revenue recognition method adopted by the assessee complied with AS-9 and ICAI Guidance Note and was consistent with accepted principles for real estate developers. Treatment of Competing Arguments: The Revenue's argument that Section 43CB applies regardless of the developer-contractor distinction was rejected. The Tribunal noted that the legislative intent and accounting standards clearly differentiate between construction contracts and property sales by developers. The Revenue's reliance on judicial precedents predating Section 43CB was countered by the enduring principle that revenue recognition for developers occurs upon transfer of ownership and possession. Conclusion: The Tribunal concluded that the AO's addition based on PCM was unjustified and that the assessee's project completion method was appropriate and lawful. The addition of Rs. 3,56,16,215/- was deleted accordingly. 2. Denial of Opportunity for Personal Hearing via Video Conferencing Legal Framework: Section 250(1) of the Income Tax Act mandates that upon filing an appeal, the Commissioner must schedule a hearing and notify the parties. The principle of natural justice, particularly audi alteram partem, requires that no one should be condemned unheard, ensuring fair opportunity to present one's case. Court's Interpretation and Reasoning: The assessee contended that despite repeated requests, the CIT(A) did not grant personal hearing via video conferencing, rendering the order arbitrary and violative of natural justice. However, the Tribunal did not find sufficient merit in this ground to affect the substantive decision on revenue recognition. The procedural grievance was noted but did not outweigh the correctness of the accounting treatment issue. Conclusion: While recognizing the importance of fair hearing, the Tribunal did not disturb the order on this ground, implying that the procedural lapse did not vitiate the substantive correctness of the revenue recognition method upheld. 3. Consistency and Precedential Acceptance of Revenue Recognition Method Evidence and Findings: The assessee demonstrated consistent application of the project completion method across multiple assessment years, accepted by the Revenue in earlier years through regular assessments and subsequent intimation under Section 143(1). This consistency reinforced the legitimacy of the method and underscored the absence of any material change warranting deviation. Court's Reasoning: The Tribunal emphasized the principle of consistency in accounting methods and tax treatment, noting that selective application of PCM for a single year was unwarranted. The prior acceptance of the method by the Revenue in similar factual circumstances was a critical factor in the Tribunal's decision. Significant Holdings "The AO's reliance on Section 43CB of the Act is misplaced because this provision is applicable only to construction contracts and contracts for providing services, whereas the assessee is a real estate developer engaged in constructing and selling residential units on its own land." "Section 43CB of the Act aligns with AS-7, which applies solely to contracts where a contractor undertakes obligations for a third party. The assessee is not a contractor but a real estate developer engaged in constructing and selling units on its own land." "The assessee's method of revenue recognition is consistent with ICAI's AS-9 and the Guidance Note, both of which allow revenue recognition only upon sale deed execution and possession transfer." "The advances received from customers are not 'contract revenue' but part of the consideration for the ultimate sale of property." "The principle of consistency must be followed. The Revenue had accepted the same method in earlier and subsequent assessment years, and there is no material change in facts warranting a deviation." "The addition made by the AO based on percentage completion method is deleted." In sum, the Tribunal established the core principle that for real estate developers, revenue recognition must follow AS-9 and the ICAI Guidance Note, recognizing income only upon transfer of significant risks and rewards through execution of sale deeds and possession delivery. Section 43CB and AS-7, prescribing PCM, are applicable solely to contractors executing construction contracts for clients, not to developers selling self-constructed properties. The Tribunal upheld the assessee's consistent accounting practice and rejected the Revenue's attempt to apply PCM for the disputed assessment year, thereby allowing the appeal and deleting the addition made by the AO and confirmed by the CIT(A).
|