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Facts
Ganga Estate Developers, a real estate partnership firm, filed returns for AY 2017-18 and 2018-19, applying the percentage completion method for revenue recognition. Following a Section 133A survey, the Assessing Officer and subsequently the CIT(A) re-computed project profits, leading to additions. The assessee contended that the authorities failed to correctly consider all direct and indirect project costs and subsequent financial data, arguing that the project actually resulted in a loss.
Held
The Tribunal observed that the CIT(A) had himself re-computed a loss for AY 2018-19. It agreed with the assessee that a correct application of the percentage completion method, factoring in all direct and indirect project costs up to the completion, would result in a loss for both assessment years. The Tribunal concluded that the additions made by the Assessing Officer and partially sustained by the CIT(A) were not justified and should be deleted.
Key Issues
Whether the tax authorities were justified in re-computing project profits using the percentage completion method without adequately considering all project costs and financial data, and whether the books of accounts were properly rejected before applying an alternative profit computation method.
Sections Cited
133A, 143(3)
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Income Tax Appellate Tribunal, “H(SMC
Before: SHRI PAWAN SINGH & SHRI GIRISH AGRAWAL
Present for: Assessee : Shri. Devendra Jain and Ms. Laxmi Gupta, Advocate Revenue : Shri. Pravin Salunkhe, Sr. DR Date of Hearing : 09.10.2025 Date of Pronouncement : 31.10.2025 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: These two appeals filed by the assessee are against the orders of CIT (A), Pune - 11, vide order Nos. ITBA/APL/S/250/2024- 25/1063833814(1) and ITBA/APL/S/250/2024-25/1063833972(1), dated 01.04.2024 passed against the assessment orders u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 31.12.2019 for Assessment year 2017-18 and dated 19.08.2021 for Assessment Year 2018-19.
1. In the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in upholding the impugned assessment order passed by the Ld. Assessing Officer under section 143(3); even after observing in para 16 of its order that the profits were estimated without first rejecting the books of accounts.
2. In the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in adopting the project revenue as Rs. 16,16,99,630/- disregarding the factual matrix of the case.
3. In the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in adopting the project cost as Rs. 10,72,87,747/- disregarding the factual matrix of the case. 4. In the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in upholding the addition by computing the project profit at Rs. 5,31,20,768/-; disregarding the factual and legal matrix of the case.
In the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in upholding the Impugned assessment order passed by the Ld. Assessing Officer under section 143(3); even after observing in para 16 of its order that the profits were estimated without first rejecting the books of accounts.
In the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in adopting the project revenue as Rs. 19,68,33,821/-disregarding the factual matrix of the case.
3. In the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in adopting the project cost as Rs. 14,14,16,03/- disregarding the factual matrix of the case. 4. In the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in upholding the addition by computing the project profit at Rs. 5,54,17,788/-; disregarding the factual and legal matrix of the case.
2.1. Common issues are involved in both the appeals with identical grounds except for variation in quantum of addition. Accordingly, both the appeals are taken up together for adjudication by passing a
Brief facts of the case are that assessee is a partnership firm engaged in the business of real estate development. Assessee filed its return on 31.10.2017, reporting total income at Rs.930/-. Assessee follows percentage completion method for recognition of its revenue from construction of real estate projects. During the year under consideration, assessee was developing a project namely, “Omkar Heights” at Bhopar, Dombivli.
3.1. A survey u/s.133A was conducted in the case of assessee on 09.02.2019. Ld. Assessing Officer observed that during the course of survey operations, it was found that the project “Omkar Heights” was completed and was occupied by customers. However, no revenue from the said project was recognised in the year. When confronted, partners from the assessee firm stated in their statement recorded that during the year, the project was completed less than 25% of the total construction and therefore, in view of the Guidance Note issued by Institute of Chartered Accountant of India (ICAI), no revenue is to be recognised. It was also stated that assessee is likely to incur loss in the project, for which a detailed working was given and the same is extracted below: Saleable Area 1, 04,230 sqft. Actual sold area 59,940 sqft. Actual Sales as on 09.02.2019 Rs. 20.24 Crores Estimated sale proceeds of unsold flat (1 734 sqft) Rs. 70,00,000/- Estimated sales of unsold commercial shops Rs. 2.02 Crores and 3017/Mum/2024 Ganga Estate Developers AYs 2017-18 and 2018-19 Balance area to be given to Omkar Shriram Kokate As per 42, 556 sqft supplement agreement dated 10.11.2014 Commercial area to-be given to Kokate 3322 sqft Details of estimated cost + estimated sales of Omkar Heights Rupees (In Crs)
Sales Realisation as on date 09/02/2019 20.24 Estimated sale proceeds of Unsold Residential Flats 0.70 Estimated Sale proceeds of Unsold commercial shops 2.02 Total Sales realization 22.96 Work in progresses as on Date 09.02.2019 22.26 Lift estimate Cost 0.75 open land tax payable 2.25 Concrete Water Tank 0.25 Occupancy & Other Cost 1.00 Total Cost 26.51 Estimated Loss (-) 3.55 3.2. According to the assessee, it had made an application for construction of total 21 floors building with six wings, admeasuring total 6,66,000 sq ft. In the first phase, the approving authority sanctioned construction of building for seven floors. The total constructed area as on 31.03.2017 was Rs.1,20,321 sq. ft. Thus, the percentage of work completed as on 31.03.2017 was only 18.07%. Contrary to this fact, ld. Assessing Officer took into consideration only seven floors as against 21 floors of each wing to compute profit for the relevant Assessment Year. Details of the project as considered by the ld. Assessing Officer is tabulated below: and 3017/Mum/2024 Ganga Estate Developers AYs 2017-18 and 2018-19 Sr. Name of the Date of Projected Total no Saleable Total No. Project Commence Date of units area construction ment completion proposed area (Sq. Ft) 1 Omkar Heights
Building A 14.11.2008 14.11.2011 133 flats 104230 6654.39 (Gr +7 & 20 sqft sqmt Floors) shops Building B 14.11.2008 (Gr +7 Floors) Building B 1 14.11.2008 (Gr +7 Floors)
3.3. Based on the above, ld. Assessing Officer computed the total profit derived from the said project in the year Assessment Year 2017-18 at Rs.6,52,72,748/-, details of which is tabulated below:
Total WIP shown by the assessee in A.Y 2017-18 Rs 19,66,05,530/- The share of total constructed Area 6441 1 sq.ft Total area sold 39880 sq.ft Proportionate cost of sold area = Rs 12,17,28,098/- 196605530/64411*39880 Total Sale amount for the sold area Rs 18,70,00,846/- Less- Cost of sold area Rs 12,17,28,098/- Total Profit Derived Rs 6,52,72,748/- 3.4. In the first appeal, ld. CIT(A) re-worked the above profit at Rs.5,31,20,768/- for Assessment Year 2017-18 and a loss at Rs.6,08,813/- for Assessment Year 2018-19.
In appeal before us, ld. Counsel contended that calculations made by ld. CIT(A) suffers from errors and defects on account of several and 3017/Mum/2024 Ganga Estate Developers AYs 2017-18 and 2018-19 factual aspects not considered which when considered would eventually give a correct portray of the profit/(loss) from the said project by applying percentage completion method. The correct position which emerges is a loss scenario in both the Assessment Years. It is important to note that ld. CIT(A) himself had re-computed a loss position for Assessment Year 2018-19. According to the assessee these are not the correct figures since certain factual aspects have not been considered.
4.1. For Assessment Year 2017-18, the profit re-computed by ld. CIT(A) upon factual correction gets converted into a loss situation and therefore, according to the ld. Counsel, in both the Assessment Years no addition is called for. Detailed working after incorporating the correct factual aspects not considered by ld. CIT(A) is tabulated for both the Assessment Years as under:
Computation of Project Profit or Loss based on % AY 2017-18 AY 2018-19 completion method (a) Total saleable area of the project [Sq ft.] 1,04,320 1,04,320 (b)Area to be given to Anant S Kakote [Sq ft.] 46,525 46,525 (c) Total Saleable area .with the appellant [Sq ft.] [(a) 57,795 57,795 - :(b)] (d) Total area sold upto the end of relevant years 44,105 52,490 [Sq.ft.] (e) Actual Direct Cost of the project 21,76,77,106 21,76,77,106 (f) Estimated Direct project cost to be incurred 4,25,00,000 4,25,00,000 (g) Total Direct Cost of the Project [(e)+(f)J . 26,01,77,106 26,01,77,106 (h) Actual Direct Cost incurred upto the end of 17,95,12,676 19,88,17,634 relevant years towards the entire project and 3017/Mum/2024 Ganga Estate Developers AYs 2017-18 and 2018-19 (i) Percentage of work completed based on direct 69.00 % 76.42 % cost incurred upto relevant years to the total cost of project [(h)/(g)*100] (j) Total Sale Consideration 17,85,16,169 20,55,27,640 (k) Revenue recognition for the relevant AY [(j) x 12,31,76,157 15,70,64,222 W] [17,85,16,169 [20,55,27,640 x 69%] x 76.42%] (1) Proportionate Direct Cost for the actual area sold 13,69,91,203 18,05,68,174 upto the relevant years [(h) x (d) / (c)] [17,95,12,676 [19,88,17,634 x44,105/ x 52490/ 57,795] 57,795] (m) Total gross profit/ (loss) of the project upto (1,38,15,046) (2,35,03,951) the end of relevant years [(k) - (1)] (n) Deduction for Indirect Cost (1,70,92,854) (1,87,05,572)
(o) Total' net profit/ (loss) of the project upto the (3,09,07,900) (4,22,09,523) end of relevant years [(m)-(n)] (p)Less: Loss for AY 2017-18 (3,09,07,900) 3,09,07,900 (q) Loss for AY 2018-19 [ (o) - (p)] - (1,13,01,623)
4.2. Ld. Counsel for the purpose of above re-working pointed out that ld. CIT(A) computed direct cost only up to Assessment Year 2019-20 which aggregates to Rs.20,76,00,000/-. According to him, all cost of the project up to the completion is required to be taken into consideration, when the total project cost is to be computed for determining profit/loss for each financial year. Thus, the total direct cost to be considered is Rs.21,76,77,106/- which includes actual cost incurred up to Assessment Year 2022-23 and further cost which were yet to be incurred. He pointed out that actual cost up to Assessment Year 2022- 23 was adopted as the same was readily available from the audited financial statements furnished at the first appellate stage. In this respect, it is to be noted that the date of order passed by ld. CIT(A) is and 3017/Mum/2024 Ganga Estate Developers AYs 2017-18 and 2018-19 01.04.2024, hence financial details for the preceding years were available for consideration. Ld. Counsel also submitted that details of estimated costs were furnished in the assessment proceedings which are captured in para-4 of the said order. Accordingly, estimated direct cost of Rs.4,25,00,000/- has to be taken into account, forming part of the total project cost, after having factored in actual cost incurred upto Assessment Year 2022-23 as readily available from audited financial statements.
4.3. Ld. Counsel also pointed out that indirect costs have been altogether ignored while computing the total cost of the project which is not in accordance by the Guidance Note issued by ICAI. Ld. CIT(A) has allowed indirect cost incurred for the two years under consideration of Rs.12,91,115/- for Assessment Year 2017-18 and Rs.16,12,718/- for Assessment Year 2018-19 but failed to consider the same for the period prior to these Assessment Years, that is from the inception of the project. Ld. Counsel thus, claimed that both direct and indirect costs are required to be taken into account for computing the gross profit/loss for the entire project which should, not only be the two years under consideration but also which is incurred up to the relevant years. Thus, by considering the above contentions, the re-working was furnished which gave rise to loss scenario for both the Assessment Years, out of which for Assessment Year 2018-19, ld. CIT(A) had also re-computed a loss scenario.
4.4. Ld. Counsel also asserted that ld. Assessing Officer has applied percentage completion method without rejecting the books of accounts and re-computed the profits for making the addition. What ld. Assessing Officer has considered, is the position that the project is completed and accordingly, made his working based on actual sales of the flats in the and 3017/Mum/2024 Ganga Estate Developers AYs 2017-18 and 2018-19 said project. However, from the re-computation made by the ld. CIT(A) by factoring in the actual cost incurred for the period beyond the two Assessment Years which was made available by the assessee from the audited financial statements, it is evidently demonstrated that the project was still under construction, phase by phase, as it got the sanction from the approving authority and therefore, the change of method of accounting resorted to be by ld. Assessing Officer is uncalled for. According to the assessee, the project is under construction phase by phase and it has been regularly reporting its revenue and profit/loss thereon year on year basis by applying percentage completion method for which detailed working is already placed on record and tabulated above. In these details, actual data is factored in upto Assessment Year 2022-23, available from the audited financial statements which has not been disputed.
Taking into account these factual matrices, more importantly when ld. CIT(A) himself factored in audited financial data for period subsequent to the two years under appeal, i.e., cost incurred till Assessment Year 2019-20 for working of percentage of work completion till 31.03.2017, we do not agree with the change of method adopted by ld. Assessing Officer as well as re-computation of profit made thereafter for the purpose of making addition in the hands of the assessee. From the perusal of the order of ld. CIT(A), we note that certain factual aspects were missed by ld. CIT(A) while re-computing the profits from the project by applying percentage completion method after incorporating actual data till Assessment Year 2019-20 which ld. Counsel for the assessee has elaborately explained. We are in agreement with the submissions made by the ld. Counsel on the factual aspects which ought to be have been taken into account while re-computing the profit /loss under the percentage completion method to arrive at profit/loss for the two years and 3017/Mum/2024 Ganga Estate Developers AYs 2017-18 and 2018-19 under consideration before us. Having considered the same, the correct position emanates into loss scenario for both the years, details of which are tabulated above after having factored in actual financial data upto Assessment Year 2022-23. Accordingly, in this state of facts, the addition made by ld. Assessing Officer and thereafter, partially sustained by ld. CIT(A) are deleted. Grounds raised by the assessee in this respect are allowed.