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Facts
The assessee, engaged in real estate development, entered into a joint development agreement. The primary dispute revolves around the calculation of revenue recognition using the Percentage of Completion Method (POCM), specifically whether the cost of land and development rights should be included in determining the project's completion percentage. The Assessing Officer (AO) included these costs, leading to a significant addition, which was later reduced by the CIT(A) based on a remand report. The assessee contended that land cost should be excluded as per its accounting interpretation.
Held
The Tribunal held that the assessee had rightly worked out the revenue recognition for both projects based on the ICAI Guidance Note. The Tribunal found that the authorities below had abruptly rejected the assessee's claim without plausible reasoning. Consequently, the Tribunal directed the revenue authorities to vacate the addition made by the AO, which was sustained by the CIT(A).
Key Issues
Whether the cost of land and development rights should be included in determining the percentage of completion for revenue recognition under the POCM method as per the ICAI Guidance Note.
Sections Cited
143(3), 250, 156, 234B, 143(2), 142(1)
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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SMT. BEENA PILLAI, JM & SHRI ARUN KHODPIA, AM
The captioned appeal filed by the assessee is directed against the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (in short ‘ld. CIT(A)’), passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act'), dated 21.02.2024, for the Assessment Year (in short ‘A.Y.’) 2017-18 which in turn arises from the assessment order u/s. 143(3) of the Act, passed by Deputy Commissioner of Income Tax, Circle-2(3)(1), Mumbai , dated 30.12.2019.
“1. The assessment order passed in violation of the procedure for limited scrutiny
1.1 On the facts and in the circumstances of the case and in law, the assessment order passed by the Deputy Commissioner of Income Tax 2(3)(1) ('learned DCIT') is void ab initio, being based on limited scrutiny notice under section 143(2) of the Income-tax Act, 1961 (the Act'), issued without complying with the procedure laid by the Central Board of Direct Taxes in this regard.
2. Addition to revenue of Rs. 47,26,83,699
2.1 The learned CIT(A) [NFAC] erred in not deleting the complete addition made in the original assessment order, since as per the working furnished by the learned DCIT in his Remand Report the learned DCIT himself has accepted that the addition of Rs. 2,29,29,00,338 made originally was incorrect due to which he has reworked the addition to Rs. 47,26,83,699.
2.2 The learned CIT(A) [NFAC] has erred in not appreciating that the learned DCIT himself during the course of the remand proceedings was not able to justify and or substantiate the manner in which the addition had been made in the original assessment order and hence the learned CIT(A) [NFAC] ought to have deleted the entire addition made by the learned DCIT.
2.3 The learned CIT(A) [NFAC] erred in sustaining the addition of Rs. 47,26,83,699 to the total income of the Appellant basis the Remand Report issued by the learned DCIT.
2.4 The learned CIT(A) [NFAC] erred in accepting the contention of the learned DCIT that the advance payment of 212 crores, adjustable against future payables is the cost of land incurred by the appellant and therefore it is incorrect to exclude the cost of land to determine the percentage of completion of the project.
2.5 The learned CIT(A) [NFAC] and learned DCIT failed to appreciate that the land does not belong to the Appellant and the Appellant's obligation was only to develop/construct the residential properties and therefore its activities are in a manner confined to construction for which it would calculate the percentage of competition of the construction activities. Hence, there can be no question whatsoever of considering the cost of land.
2.6 The learned CIT(A) [NFAC]and the learned DCIT failed to appreciate that the Appellant followed Guidance Note on Accounting of Real Estates Transactions" ('Guidance Note') issued by "The Institute of Chartered Accountants of India" ('ICAI') and excluded the land cost while computing the Percentage of Completion Method.
2.7 The learned CIT(A) [NFAC] erred in accepting percentage of completion adopted by the learned DCIT as 66.29% and 39.59% as against 48.56% and 19.52% adopted by the Appellant in respect of Phase 1 and Phase 2A maple project respectively without appreciating the fact that learned DCIT has not furnished any justification or basis to negate the calculation of percentage of completion of 48.56% and 19.52% in respect of Phase 1 and Phase 2A Maple project respectively as computed by the Appellant.
2.8 The learned CIT(A) [NFAC] and the learned DCIT failed to appreciate that the details referred to from Real Estate Regulatory Authority (RERA) perspective while being correct are not relevant for recognition of revenue in books of accounts and that the revenue has been recognized by the Appellant as per prescribed accounting standards.
2.9 The learned CIT(A) [NFAC] erred in accepting the ad hoc method of computation adopted by learned DCIT in recomputing the addition basis the sustainable estimation of profit for Phase 1 for AY 2017-18, estimating a profit of Rs. 927 per sqft (basis estimated profit of AY 2018-19) and applying the percentage of completion of 66.39% for Phase 1 and 39.59% for Maple which is not in line with the method of percentage of work completed as per the "Guidance Note" issued by Institute of Chartered Accountants of India (ICAI).
2.10 The learned CIT(A) [NFAC] erred in upholding the unsustainable addition of Rs. 20,27,83,224 determined by learned DCIT without appreciating the fact that no revenue is required to be recognized in relation to Phase 2A Maple project where the percentage of work completed is less than 25% as per the Guidance Note issued by ICAI.
2.11 Without prejudice to the Appellant's contention that the learned DCIT has adopted ad hoc / instinctive method for computing sustainable addition, if the method were to be adopted and percentage of completion of 48.56% as computed by the appellant for Phase 1 was to be considered, the addition would reduce to 8,08,25,216.
2.12 Without prejudice to the Appellant's contention that there ought to be no addition for AY 2017-18, the Appellant adopting the percentage of completion method followed by it has computed its income and offered the same to tax in AY 2018-19 and thus any addition to its income in AY 2017-18 will result in double taxation of the same income.”
Brief facts: The assessee is engaged in the real estate development, entered into a Development Agreement (‘The Agreement’) dated 28th March, 2011 with ETA Star Info Park, ETA Karnataka Estates Limited and ETA Constructions (India) Limited (collectively referred to as ‘Land Owners’) for development of a residential complex at Binnypet, Bengaluru (‘The Project’). In the said project, the Land owners and assessee are entitled to receive 31% and 69% of the net revenue, respectively. The assessee also placed a refundable deposit of Rs. 212/- Crores with the Land owners, which is adjustable against the share of net revenue receivable by the Land Owners in accordance with the realisation mechanism laid out in the Agreement. The project is developed in 2 phases i.e., Phase 1 and Phase 2A -Maple.
Relationship Properties Private Limited vs. DCIT, Circle-2(3)(1), Mumbai 3.1 For the year under consideration (AY 2017-18), the assessee filed its return of income on 02-11-2012, declaring a loss of (Rs. 11,60,12,579/-). During the year assessee shown income from House Property and Business and Profession. Case of assessee was selected for limited scrutiny assessment under CASS, accordingly a notice u/s 143(2) of the Act was issued on 11-08- 2018. During the course of assessment proceedings notices u/s 142(1) were issued on 12-10-2019, 24-10-2019 and 17-12-2019, seeking various details, which were furnished by the assessee through ITBA portal on 31-10-2019, 14- 11-2019 and 19-12-2019, respectively. The assessment was completed on 30- 12-2019 u/s 143(3) of the Act, with an addition to the income of assessee for Rs. 229,29,00,338/- on account of alterations to the working of percentage of completion method and revenue recognition, thereby the total income of assessee has been determined at Rs. 217,68,87,760/- (as against the loss of (Rs. 11,60,12,579/-) declared by the assessee. Consequential notice of demand u/s 156 for tax and interest u/s 234B was issued.
3.2 During the assessment proceedings, Ld. AO raised a query to the assessee company to submit calculations of cost and revenue under Percentage of Completion Method (POCM). The assessee submitted the details as under:
3.3 It is also clarified by the assessee that the percentage of completion cannot be calculated on gross consideration, since the assessee company’s entitlement is only for 69% of the gross revenue and balance 31% belongs to the Land Owners. Accordingly, the cost of land development rights has been excluded and POCM was adopted on the assessee’s entitlement on sale proceeds of Rs. 606,85,36,699/- for phase-1 and 229,50,02,524/- for phase- 2A Maple. Accordingly, the land cost / cost of development rights at 31% of the total sale proceed was arrived at Rs. of Rs. 272,64,44,024/- for phase-1 and 103,10,88,091/- for phase-2A Maple. It is contended before the Ld. AO that the books of account of the assessee company are duly audited by Deloitte Haskin and Sells LLP and no deviation qua the cost recognition was pointed 3.4 Ld. AO perused the submissions of assessee and raised the issue that whether cost of the land is to be included in the project cost or not. Ld. AO observed that as per Development Agreement, the Land Owners had already receive an amount of Rs. 212/- crores due to them in the form of interest free advance against the sale of land. Ld. AO referred to relevant paras of the agreement and observed that the assessee has already incurred the actual cost of the project even before he has started the project but under the garb of advance. He opined that because the assessee prefers the payment in advance, it does not imply that the land cost has not been incurred for the project. As per agreement the advance extended to the Land Owners was a sunk lost and there is no going back to recover the same except by paying back if any amount stands due after the complete sale of the project. Hence, Ld. AO rejected the assessee’s contention that the Land Cost is to be excluded from the actual cost of the project for working the complete %. Ld. AO then re- computed the revenue for relevant year as under:
3.5 Based on aforesaid workings, it is concluded by the Ld. AO that following adjustments are to be made to the taxable income of the assessee on account of revenue recognition under POCM and accordingly the taxable income of assessee has been enhanced in the impugned assessment order:
Relationship Properties Private Limited vs. DCIT, Circle-2(3)(1), Mumbai 4. Aggrieved with the aforesaid addition, assessee preferred an appeal before the first appellate authority, wherein the assessee pointed out that the workings done by Ld. AO are neither matching nor co-relating with the facts and calculations provided in assessment order. Ld. CIT(A) has called a remand report for clarification from the Ld. AO. In the remand report, Ld. AO proceeded to rework the revenue recognition of the assessee under POCM and had made certain modifications, in consideration with provisions of Karnataka RERA applicable in the present case, as per directions of Ld CIT(A). Finally, Ld. AO after revisiting the working done earlier in Assessment order had corrected the same and arrived at a conclusion to reduce the addition to Rs. 47,26,83,699/- instead of Rs. 229.29 crores originally added. The remand report, since has substantial information to be referred to has been culled out hereunder:
4.1 In rebuttal to the aforesaid remand report furnished by the Ld. AO, assessee raised following points as observations / objections: a. The AO had realised the mistakes in original computation under POCM, therefore corrected the same. b. The AO had not addressed the preliminary contention of the assessee regarding non-inclusion of land cost in computation of revenue for the year under POCM. c. Assessee disagree with calculation under POCM by the AO even in remand report. d. The addition proposed for Rs. 47.26 Crores is unsustainable.
4.2 After considering the remand report and assessee’s submissions in rebuttal, Ld. CIT(A) held that the working in remand report by the Ld. AO does not call for any further variation, as the rebuttal of assessee does not hold any merit to be considered. Accordingly, the figure of addition scaled down Relationship Properties Private Limited vs. DCIT, Circle-2(3)(1), Mumbai and arrived at in the Remand Report was directed to be maintained at Rs. 47.26 crore and appeal of assessee was partly allowed.
5. The assessee still dissatisfied with the addition made by the Ld. AO and to the extent sustained by the ld. CIT(A), had filed the instant appeal.
Before us Ld. AR representing the assessee reiterated the facts of the case, made the submission that as per the terms of development agreement (DA) dated 28-03-2011, registered on 30-03-2011 vide receipt no. 3525/10- 11, the assessee was permitted by the landowners to develop the property in terms of the DA. The revenue share entitlement of the Land Owners and assessee would be in the ratio of 31:61. Assessee has placed a refundable deposit of Rs. 212/- Crores with the Landowners, adjustable against the share of net revenue receivable according to realisation mechanism as per DA. From revenue on account of sale of flats received in the Primary Bank Account, 31% share of land owner is transferred after reducing the same by 15% of such 31% to adjust the Advance Refundable Deposit to that extant. Assessee followed the POCM method for revenue recognition in its P&L Account, which is not disputed by the ld. AO. To complete the books of accounts under POCM assessee strictly adhered to the “Guidance Note on Accounting of Real Estate Transactions” issued by the Institute of Chartered Accountants of India (ICAI). It is submitted that according to POCM revenue recognition is subject Relationship Properties Private Limited vs. DCIT, Circle-2(3)(1), Mumbai to completion of certain events. Accordingly, the assessee had arrived at an amount of Rs. 89,15,59,966/- for phase-1. Since phase-2A, Maple has not crossed the benchmark of 25% of cost of construction, but had completed only 19.52% in the year under context, so no revenue has been recognised in terms of Guidance Note. Ld. AO, reworked the entire revenue recognition under POCM under his own perceptions and reached to a figure of Rs. 229.29 Crores, which was later corrected at the appellate stage by way of a remand report and reported at Rs. 47.27 crores. The working of AO was under wrong impression that the land cost would also be considered while computing the % of completion, thus he computed the % of completion for Phase-1 at 66.39% (as against assessee’s working at 48.5614%) and for Phase-2A, Maple at 39.59% (as against assessee’s working at 19.5205%). It is submitted that, during remand proceedings Ld. AO himself was unable to justify the workings done at assessment stage, thus, had realised the mis takes in workings but % of completions was kept same. Ld. CIT(A) accepted the revised workings and sustained the additions to that extent, however the moot question as to whether the Land Cost / Cost of Development Right (CDR) would be part of cost to work our the % of Completion under POCM could not be answered by both the authorities. To strengthen he accounting treatment of the revenue recognition, Ld. AR submitted that the method has been consistently adopted by the assessee, excluding the CDR in earlier AY 2015-16 also and accepted should not be doubted, as this is just a matter of timing difference as the income which Ld. AO had added by reworking the revenue recognition under POCM, had already offered by the assessee in subsequent AY 2018-19, if the same is sustain in AY 2017-18, it would be double taxation of the same income. With such submissions Ld. AR furnished before us the working of revenue recognition by the assessee for AY 2017-18 along with the bifurcation of actual cost of project incurred from FY 2014-15 to FY 2016-17, which are extracted here under for the sake of completeness of facts:
'Actual Cost incurred till year ended 31 March 2017 (including Cost of Developments Rights)'(As per ROI – A.Y. 2017-18)
Particulars Phase 1 Phase 2A Maple Total number of Units 703 units 552 units Total Units sold (Secured sales) 674 units 273 units Sales value of Secured units sold (Rs.) (A) 879,49,80,723 332,60,90,615 Landowners share (i.e. 31%) (Rs.) (B) 272,64,44,024 103,10,88,091 appellant's share (i.e. 69%) (A-B=C) 606,85,36,699 229,50,02,524 Estimated cost of construction (Rs.) (D) 540,26,01,718 378,98,67,111 Estimated cost of development rights (Rs.) 272,64,44,024 125,88,41,925 Total project cost 812.90,45,742 504,87,09,036 Actual cost incurred till year ended 31 March 539,68,37,968 199,86,43,398 2017 (including cost of development rights) Less: Cost of development rights relating to (277,32,56,586) (125,88,41,925) units sold Total project cost incurred till year ended 31 (E) 262,35,81,382 73,98,01,473 March 2017
% of work completed (E/D-F) 48.5614% 19.5205% Revenue excluding cost of development rights (CxF-G) 294,69,69,021 NA (i.e. appellant's share x % of work completed) Add: Cost of development rights relating to H 272,64,44,024 NA secured orders Total revenue to be recognized (G+H=I) 567,34,13,045 NA Less: Revenue already recognized in the J 478,18,53,079 0 earlier years Current year's revenue recognized in the (I-J) 89,15,59,966 0 profit and loss account For Phase 1- Particulars FY 2014-15 FY 2015-16 FY 2016-17 Cumulative cost
Cost of development rights 2,37,62,44,197 31,50,95,945 8,19,16,444 2,77,32,56,586
Statutory approval fees 7,30,99,875 1,05,000 - 7,32,04,875
Material and contractual pymts 36,76,77,048 56,79,96,186 62,31,99,189 1,55,88,72,423
Professional and technical fees 56,21,81,723 2,33,07,206 2,74,61,330 61,29,50,259
Other expenses 27,76,19,622 7,76,29,661 2,33,04,542 37,85,53,825
Total-Phase 1 3,65,68,22,465 98,41,33,999 75,58,81,504 5,39,68,37,968 Phase 2A-Maple Particulars FY 2014-15 FY 2015-16 FY 2016-17 Cumulative cost Cost of development rights 9,99,03,873 1,15,89,38,052 1,25,88,41,925 - 4,97,39,007 - Statutory approval fees 4,97,39,007 Material and contractual pymts 6,68,92,401 1,20,62,067 15,43,37,293 23,32,91,761 Other expenses 3,23,81,066 9,12,23,271 7,42,67,145 19,78,71,483 Professional and technical fees 15,21,37,561 5,29,34,425 5,38,27,236 25,88,99,222 TOTAL - Phase 2A - Maple 25,14,11,028 30,58,62,642 1,44,13,69,726 1,99,86,43,398
Per contra, Ld. CIT-DR representing the revenue submitted that the Ld. AO had correctly adopted the workings in remand report the same are justifiable in accordance with accepted accounting policies, thus correctly Relationship Properties Private Limited vs. DCIT, Circle-2(3)(1), Mumbai sustained by the Ld. CIT(A). He further submitted that as per para 2 of the Guidance Note (supra), the project cost includes cost of Land and Cost of Development Rights (CDR) (para 2.2(a)), therefore assessee’s perception and working without considering the Land / CDR was not in consonance with the narrative in the Guidance Note. Ld. CIT-DR agreed that there is no dispute qua the facts and figures or the method of revenue recognition, the point of difference is only about inclusion of Land Cost / CDR while computing the % cost of completion. He further referred to para 5.4 of the guidance note and submitted that for computation of revenue the stage of completion is arrived at with reference to the entire project cot incurred including land cost, borrowing costs and construction and development costs. It is submitted that the workings done by assessee are arbitrary on the basis of cherry picking of the terms in guidance note. Alternatively, he submitted that, even if the cost of land /CRD is excluded from the actual cost of project, the same should not be more than 31%, which represents the share of Land Owners in the total cost, in that circumstance also the % completion would be more than 25% of the total estimated project cost. Ld. CITDR supported the orders of revenue authorities and requested to upheld the same.
We have considered the rival submissions and perused the material available on records. Having given a thoughtful consideration to the facts of present case, we find that there is no dispute regarding the maintenance of facts and figure emanating there from. Both the parties also have the consensus qua the method of revenue recognition under Percentage of Completion Method (POCM), as recommended by the ICAI in the “Guidance Note on Accounting for Real Estate Transactions (revised 2012). Before proceeding any further, the relevant para’s of the said guidance note by the ICAI are extracted here under:
Definitions 2.1 Project – Project is the smallest group of units/plots/saleable spaces which are linked with a common set of amenities in such a manner that unless the common amenities are made available and functional, these units/plots/saleable spaces cannot be put to their intended effective use. A larger venture can be split into smaller projects if the basic conditions as set out above are fulfilled. For example, a project may comprise a cluster of towers or each tower can also be designated as a project. Similarly, a complete township can be a project or it can be broken down into smaller projects.
2.2 Project Costs – Project costs in relation to a project ordinarily comprise: (a) Cost of land and cost of development rights -All costs related to the acquisition of land, development rights in the land or property including cost of land, cost of development rights, rehabilitation costs, registration charges, stamp duty, brokerage costs and incidental expenses. (b) Borrowing Costs – In accordance with Accounting Standard (AS) 16, Borrowing Costs which are incurred directly in relation to a project or which are apportioned to a project. (c) Construction and development costs – These would include costs that relate directly to the specific project and costs that may be attributable to project activity in general and can be allocated to the project.
2.3 Construction costs and development costs that relate directly to a specific project include: (a) land conversion costs, betterment charges, municipal sanction fee and other charges for obtaining building permissions; (b) site labour costs, including site supervision; (c) costs of materials used in construction or development of property; (d) depreciation of plant and equipment used for the project; (e) costs of moving plant, equipment and materials to and from the project site; (f) costs of hiring plant and equipment; Relationship Properties Private Limited vs. DCIT, Circle-2(3)(1), Mumbai (g) costs of design and technical assistance that is directly related to the project; (h) estimated costs of rectification and guarantee work, including expected warranty costs; and (i) claims from third parties.
2.4 The following costs should not be considered part of construction costs and development costs if they are material: (a) General administration costs; (b) selling costs; (c) research and development costs; (d) depreciation of idle plant and equipment; (e) cost of unconsumed or uninstalled material delivered at site; and (f) payments made to sub-contractors in advance of work performed.
2.5 Costs that may be attributable to project activity in general and can be allocated to specific projects include: (a) insurance; (b) costs of design and technical assistance that is not directly related to a specific project; (c) construction or development overheads; and (d) borrowing costs.
Such costs are allocated using methods that are systematic and rational and are applied consistently to all costs having similar characteristics. The allocation is based on the normal level of project activity. Construction overheads include costs such as the preparation and processing of construction personnel payroll.
2.6 Project revenues – Project revenues include revenue on sale of plots, undivided share in land, sale of finished and semi-finished structures, consideration for construction, consideration for amenities and interiors, consideration for parking spaces and sale of development rights. Project revenues are measured as the consideration received or receivable. The measurement of project revenues is affected by a variety of uncertainties that depend on the outcome of future events. The estimates often need revision as events occur and uncertainties are resolved. Therefore, the amount of project revenue may increase or decrease from one reporting period to the next.
3. Accounting for Real Estate Transactions Relationship Properties Private Limited vs. DCIT, Circle-2(3)(1), Mumbai 3.1 Real estate activities and transactions take diverse forms. While some are for sale of land (developed or undeveloped), others are for construction, development or sale of units that are not complete at the time of entering into agreements for construction, development or sale.
3.2 The typical features of most construction/development of commercial and residential units have all features of a construction contract – land development, structural engineering, architectural design and construction are all present. The natures of these activities are such that often the date when the activity is commenced and the date when the activity is completed usually fall into different accounting periods. It is not unusual for such activities to spread over two or more accounting periods.
3.3 For recognition of revenue in case of real estate sales, it is necessary that all the conditions specified in paragraphs 10 and 11 of Accounting Standard (AS) 9, Revenue Recognition, are satisfied. As stated above, real estate sales take place in a variety of ways and may be subject to different terms and conditions as specified in the agreement for sale. Accordingly, the point of time at which all significant risks and rewards of ownership can be considered as transferred, is required to be determined on the basis of the terms and conditions of the agreement for sale. In case of real estate sales, the seller usually enters into an agreement for sale with the buyer at initial stages of construction. This agreement for sale is also considered to have the effect of transferring all significant risks and rewards of ownership to the buyer provided the agreement is legally enforceable and subject to the satisfaction of conditions which signify transferring of significant risks and rewards even though the legal title is not transferred or the possession of the real estate is not given to the buyer. Once the seller has transferred all the significant risks and rewards to the buyer, any acts on the real estate performed by the seller are, in substance, performed on behalf of the buyer in the manner similar to a contractor. Accordingly, revenue in such cases is recognised by applying the percentage of completion method on the basis of the methodology explained in AS 7, Construction Contracts. Further, where individual contracts are part of a single project, although risks and rewards may have been transferred on signing of a legally enforceable individual contract but significant performance in respect of remaining components of the project is pending, revenue in respect of such an individual contract should not be recognised until the performance on the remaining components is considered to be completed on the basis of the aforesaid principles. This Guidance Note, thus, provides guidance in the application of: • Principles of AS 9 in respect of sale of goods for recognising revenue, costs and profits from transactions of real estate which are in substance similar to delivery of goods where the revenues, costs and profits are recognised when the revenue recognition process is completed; and Relationship Properties Private Limited vs. DCIT, Circle-2(3)(1), Mumbai • Percentage completion method for recognising revenue, costs and profits from transactions and activities of real estate which have the same economic substance as construction contracts. 3.4 The application of the methods described in paragraph 3.3 above requires a careful analysis of the elements of the transaction, agreement, understanding and conduct of the parties to the transaction to determine the economic substance of the transaction. The economic substance of the transaction is not influenced or affected by the structure and/or legal form of the transaction or agreement.
Application of principles of AS 9 in respect of sale of goods to a real estate project
4.1 The application of principles of AS 9 in respect of sale of goods requires recognition of revenues on completion of the transaction/activity when the revenue recognition process in respect of a real estate project is completed as explained in paragraph 4.2 below.
4.2 The completion of the revenue recognition process is usually identified when the following conditions are satisfied: (a) The seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with ownership; (b) The seller has effectively handed over possession of the real estate unit to the buyer forming part of the transaction; (c) No significant uncertainty exists regarding the amount of consideration that will be derived from the real estate sales; and (d) It is not unreasonable to expect ultimate collection of revenue from buyers.
4.3 Where transfer of legal title is a condition precedent to the buyer taking on the significant risks and rewards of ownership and accepting significant completion of the seller’s obligation, revenue should not be recognised till such time legal title is validly transferred to the buyer.
Application of Percentage Completion Method 5.1 The percentage completion method should be applied in the accounting of all real estate transactions/activities in the situations described in paragraph 3.3 above, i.e., where the economic substance is similar to construction contracts. Some further indicators of such transactions/activities are: (a) The duration of such projects is beyond 12 months and the project commencement date and project completion date fall into different accounting periods. (b) Most features of the project are common to construction contracts, viz., land development, structural engineering, architectural design, construction, etc.
Relationship Properties Private Limited vs. DCIT, Circle-2(3)(1), Mumbai (c) While individual units of the project are contracted to be delivered to different buyers these are interdependent upon or interrelated to completion of a number of common activities and/or provision of common amenities. (d) The construction or development activities form a significant proportion of the project activity. 5.2 This method is applied when the outcome of a real estate project can be estimated reliably and when all the following conditions are satisfied: (a) total project revenues can be estimated reliably; (b) it is probable that the economic benefits associated with the project will flow to the enterprise; (c) the project costs to complete the project and the stage of project completion at the reporting date can be measured reliably; and (d) the project costs attributable to the project can be clearly identified and measured reliably so that actual project costs incurred can be compared with prior estimates. When the outcome of a project can be estimated reliably, project revenues and project costs associated with the project should be recognised as revenue and expenses respectively applying the percentage of completion method in the manner detailed in paragraphs 5.3 to 5.8 below.
5.3 Further to the conditions in paragraph 5.2 there is a rebuttable presumption that the outcome of a real estate project can be estimated reliably and that revenue should be recognised under the percentage completion method only when the events in (a) to (d) below are completed. (a) All critical approvals necessary for commencement of the project have been obtained. These include, wherever applicable: (i) Environmental and other clearances. (ii) Approval of plans, designs, etc. (iii) Title to land or other rights to development/construction. (iv) Change in land use
(b) When the stage of completion of the project reaches a reasonable level of development. A reasonable level of development is not achieved if the expenditure incurred on construction and development costs is less than 25 % of the construction and development costs as defined in paragraph 2.2 (c) read with paragraphs 2.3 to 2.5.
(c) Atleast 25% of the saleable project area is secured by contracts or agreements with buyers.
Relationship Properties Private Limited vs. DCIT, Circle-2(3)(1), Mumbai (d) Atleast 10 % of the total revenue as per the agreements of sale or any other legally enforceable documents are realised at the reporting date in respect of each of the contracts and it is reasonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts. To illustrate - If there are 10 Agreements of sale and 10 % of gross amount is realised in case of 8 agreements, revenue can be recognised with respect to these 8 agreements.
5.4 When the outcome of a real estate project can be estimated reliably and the conditions stipulated in paragraphs 5.2 and 5.3 are satisfied, project revenue and project costs 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. For computation of revenue the stage of completion is arrived at with reference to the entire project costs incurred including land costs, borrowing costs and construction and development costs as defined in paragraph 2.2. Whilst the method of determination of stage of completion with reference to project costs incurred is the preferred method, this Guidance Note does not prohibit other methods of determination of stage of completion, e.g., surveys of work done, technical estimation, etc. However, computation of revenue with reference to other methods of determination of stage of completion should not, in any case, exceed the revenue computed with reference to the 'project costs incurred' method. Illustration appended to this Guidance Note clarifies the method of computation of revenue.
5.5 The project costs which are recognised in the statement of profit and loss by reference to the stage of completion of the project activity are matched with the revenues recognised resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. Costs incurred that relate to future activity on the project and payments made to sub-contractors in advance of work performed under the sub-contract are excluded and matched with revenues when the activity or work is performed. This method provides useful information to the extent of contract activity and performance during a period.
5.6 The recognition of project revenue by reference to the stage of completion of the project activity should not at any point exceed the estimated total revenues from 'eligible contracts’/other legally enforceable agreements for sale. 'Eligible contracts’ means contracts/agreements specified in paragraph 5.3 where atleast 10% of the contracted amounts have been realised and there are no outstanding defaults of the payment terms in such contracts. 5.7 When it is probable that total project costs will exceed total eligible project revenues, the expected loss should be recognised as an expense immediately. The amount of such a loss is determined irrespective of:
5.8 The percentage of completion method is applied on a cumulative basis in each reporting period to the current estimates of project revenues and project costs. Therefore, the effect of a change in the estimate of project costs, or the effect of a change in the estimate of the outcome of a project, is accounted for as a change in accounting estimate. The changed estimates are 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. 5.9 The changes to estimates referred to in paragraph 5.8 above also include changes arising out of cancellation of contracts and cases where the property or part thereof is subsequently earmarked for own use or for rental purposes. In such cases any revenues attributable to such contracts previously recognised should be reversed and the costs in relation thereto shall be carried forward and accounted in accordance with AS 10, Accounting for Fixed Assets.
As per the aforesaid guidance note for Real Estate Accounting, the cost of land and development rights are to be considered as direct project costs under the Percentage of Completion Method (POCM), but they are supposed to be excluded while finding out the threshold to trigger the mark of work completion of 25%, so as to render it liable for revenue recognition under POCM, once the completion of work has exceeded the threshold of 25%. For this purpose, as per clause (b) of para 5.3, only expenditure incurred on construction and development cost has to be considered as defined in clause (c) of para 2.2, which is further elaborated in paragraph 2.3 to 5.5 of the guidance note. However, once that threshold is met (using construction and development costs), the entire project costs, including the cost of land and development rights, are used to determine the stage of completion and to calculate the amount of revenue to be recognized for that period.
Relationship Properties Private Limited vs. DCIT, Circle-2(3)(1), Mumbai 10. In the instant case, the aforesaid methodology is correctly followed by the assessee for revenue recognition, thereby have offered revenue in Phase-1 of the project which exceeds the thresh hold of 25% (i.e. 48.5614%), however, no revenue for phase-2A, Maple could be recognised as the thresh hold of 25% of the construction and development costs (excluding Land and CDR) was not triggered, in fact the percentage of work completion calculated was only 19.5205% at the end of relevant financial year i.e., 31.03.2017.
Further, it is also submitted by the Ld. AR that the revenue, which could not be recognized during the year under consideration has been duly recognized in the subsequent years and offered for tax purposes. It is also a fact that the tax rate for the year under consideration and the year in which such revenue was offered remain unchanged. In view of such facts and circumstances, it cannot be presumed that the assessee had intentionally made any violation by way of wrongly computing the percentage of threshold for revenue recognition under POCM so as to evade the payment of taxes.
It is also brought to our notice that the assessee is following a method of accounting consistently in the preceding as well as succeeding years to the relevant assessment year which cannot be disturbed without any cogent reason leading to tax evasion, unless the same is otherwise proved by the revenue. In present case, a consistent method of accounting and working Relationship Properties Private Limited vs. DCIT, Circle-2(3)(1), Mumbai of revenue recognition under POCM has been followed by the assessee therefore, dehors any observation or allegation regarding change in such practices, the working cannot be doubted or changed based on surmises as there was no change in the facts and law in the year under consideration as compared to the preceding or succeeding years.
Reliance is placed on the following judgments: (i) Radhasoami Satsang v. CIT [1992] 193 ITR 321/ 60 Taxman 248 (ii) Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 SCC 1, it was held that: “20. The decisions cited have uniformly held that res judicata does not apply in matters pertaining to tax for different assessment years because res judicata applies to debar Courts from entertaining issues on the same cause of action whereas the cause of action for each assessment year is distinct. The Courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position. The reason why Courts have held parties to the opinion expressed in a decision in one assessment year to the same opinion in a subsequent year is not because of any principle of res judicata but because of the theory of precedent for the precedential value of the earlier pronouncement. Where facts and law in a subsequent assessment year are the same, no authority whether quasi-judicial or judicial can generally be permitted to take a different view.
Relationship Properties Private Limited vs. DCIT, Circle-2(3)(1), Mumbai 14. In backdrop of the above facts and circumstances, in term of interpretation of accounting principles as explained by the ICAI in their Guidance Note on Accounting for Real Estate transactions (Revised 2012), we are convinced that the assessee had rightly worked out the revenue recognition for its both the projects, which was attempted to shuffle by the revenue under distorted working modalities, with own presumptions, with no explanatory reasons assigned to such conclusions. Both the authorities below have abruptly rejected the claim of assessee but have not come forward with any plausible reasoning to do so. Consequently, we are unable to subscribe and persuade with the findings of Ld. AO as well as the conclusion drawn by the Ld. CIT(A), without any cogent points to such decisions. We, therefore, direct the revenue authorities to vacate the addition made by the Ld. AO, which is further reduced in remand proceedings and to the extent finally sustained by the Ld. CIT(A), on account of addition to revenue by disputing the working of revenue recognition under percentage of completion method (POCM). In result, ground no. 2 of the present appeal of the assessee stands allowed.
As the substantive quantum addition made by the Ld. AO, which is further maintained by the Ld. CIT(A), after reducing the same as conceded in the remand report by the Ld. AO, has been deleted by us in terms of our observations hereinabove, the legal contention raised by the assessee to challenge the validity Relationship Properties Private Limited vs. DCIT, Circle-2(3)(1), Mumbai of jurisdiction of Ld. AO in ground no. 1 of the present appeal, became academic only, the same therefore, has not been deliberated upon.
In result, the appeal of assessee is allowed in terms of our aforesaid observations. Order pronounced in pursuance of Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1963 on 27/10/2025.
Sd/- Sd/- (SMT. BEENA PILLAI) (ARUN KHODPIA) �याियक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER Mumbai; िदनांक Dated 27/10/2025 आदेशक� �ितिलिप अ�ेिषत / Copy of the Order forwarded to : 1. अपीलाथ�/ The Appellant- Relationship Properties Private Limited 2. ��यथ�/ The Respondent- DCIT, Circle- 2(3)(1), Mumbai 3. The Pr. CIT 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण / DR, ITAT 5. गाड� फाईल / Guard file.