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Facts
For AY 2018-19, the assessee, a real estate developer, was assessed with an addition of ₹12,18,46,800/- by the AO for non-disclosure of revenue from its 'ALTIUS' project, based on ICDS-III and AS-7 (Percentage Completion Method), despite the assessee following AS-9 and Project Completion Method. Additionally, the AO disallowed ₹1,66,95,828/- of interest expenses, alleging that interest-free advances were made to land co-owners using interest-bearing funds.
Held
The Tribunal upheld the CIT(A)'s decision to delete both additions. It ruled that the assessee consistently followed AS-9 and Project Completion Method, accepted in previous years, and the construction commenced before ICDS-III applicability. The AO's calculation for revenue recognition was also found erroneous. For interest expenses, the advances were deemed commercially expedient, made against the land co-owners' share of sale proceeds, and thus not liable for disallowance.
Key Issues
1. Applicability of ICDS-III and AS-7 versus AS-9 and Project Completion Method for revenue recognition in real estate projects, and adherence to the rule of consistency. 2. Whether proportionate interest expenses should be disallowed for interest-free advances given to land co-owners when these advances are against their share of sale proceeds.
Sections Cited
143(1)
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Income Tax Appellate Tribunal, “B” BENCH, KOLKATA
O R D E R Per Rajesh Kumar, AM:
This is an appeal preferred by the Revenue against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 24.06.2024 for the AY 2018-19.
The issue raised in ground nos.1,2 and 3 is against the deletion of addition by ld. CIT (A) of ₹12,18,46,800/- which was added by the AO on the ground of non disclosure of revenue from project Altius by the assessee as per ICDS-III issued by ICAI and by applying AS-7.
The facts in brief are that the return of income was filed on 08.10.2018, declaring total income at ₹1,98,137/- which was processed u/s 143(1) of the Act. Thereafter, the case of the assessee was selected for complete scrutiny under Cass and accordingly, statutory notices were duly issued along with questionnaires and also
In the appellate proceedings, the ld. CIT (A) allowed the appeal of the assessee on this issue after taking into consideration the contentions and submissions made by observing as under:-
6.11 From the above discussion, it is clear that the AO has invoked ICDS-III and AS7 in the case of the appellant during the relevant financial year for recognition of revenue under POCM, whereas in the scrutiny proceedings of the immediately preceding year, the AO had accepted AS-9 and Project Completion method of accounting. The appellant has established that it is regularly following ‘Project Completion method’ of accounting and AS-9 for recognition of revenue w.r.t ALTIUS project and has further established on a without prejudice basis that even under ICDS-III sought to be applied by the AO, the appellant is allowed to continue the regularly followed method of accounting for recognition of revenue, since its construction had started before the stipulated date as laid out in ICDS and CBDT notifications. The appellant has further also established, on a without prejudice basis, that the computation of the AO regarding revenue recognized during the relevant FY by following POCM suffers from certain mistakes and by considering the specific two changes – i.e considering only the cost of land incurred by the appellant ( and resultant percentage) and share of sales attributable/receivable by the appellant - the figure of revenue to be recognized during the relevant FY under POCM comes out as a loss. 6.12 Therefore, the claim of the appellant that it is a developer and regularly following AS-9 and ‘Project Completion Method’ of accounting which has been accepted by the Department in the immediately preceding year and therefore the same should also be followed in the relevant FY w.r.t ‘ALTIUS’ project is found correct. 6.13 Based on the above discussion, the addition of Rs 12,18,46,800/- made by the AO as revenue recognized from the project ‘ALTIUS’ is not found correct, and is directed to be deleted. Consequently, the figure of Work in Progress revised by the AO also stands canceled, and accordingly WIP gets restored to the original claim. Based on the above discussion, Grounds 2 to 9 taken by the appellant are considered as partly allowed.
The ld. Authorized Representative vehemently submitted before us that the assessee was engaged in the business of real estate
The ld. Authorized Representative submitted that the assessee is a real estate developer and is not a civil contractor. It was argued that the civil contract could not be equated with the contract for sale of flats by relying on the decision of the co-ordinate Bench in the case of Avadesh Builders (2010)37 SOT 122 (Mum). The ld. Authorized Representative submitted that ICDS-III was not applicable in the case of the assessee for revenue ecognition. Since the definition of construction contract as given in ICDS-III did not apply to the construction of flats by the assessee as a real estate developer which was in the nature of combined contract. The ld. Authorized Representative further stated that ICDS-III was applicable only if the construction work commenced on or after 1st April 2015, whereas the
The ld. DR on the other hand vehemently submitted before us that the addition was rightly made by the ld. AO in the hands of the assessee by invoking the ICDS-III and AS-7 which was wrongly reversed by the First Appellate Authority. The ld DR though admitted that there may be factual mistakes while calculating the addition as the entire sale value was taken instead of 48.44% belonging to the assessee however relied heavily on the order of the ld. AO and prayed that same may be restored by reversing the order of ld. Commissioner of Income-tax (Appeals).
After hearing the rival conventions and perusing the material available on record, we find that the assessee has undertaken a project named Altius for construction of flats which was commenced in the F.Y. 2012-
We further note that even the ld. AO has wrongly computed the addition under the Percentage Completion Method by even taking the whole sale value of the project including the one attributable to the
The issue raised in ground no.4 and 5 is against the deletion of addition of ₹1,66,95,828/- by ld. CIT (A) as made by the ld. AO under the head interest expenses paid to land co-owners.
In the appellate proceedings, the ld. CIT (A) allowed the appeal of the assessee after taking into consideration the reply and contention of the assessee by observing and holding as under:-
“6.14 In Ground 10 of appeal, the appellant has disputed the addition of Rs.1,66,95,828/- made by the AO on account of excess interest expenses claimed by the appellant. The AO has stated that the appellant was taking interest bearing funds, but has made interest free advances to the land co- owner parties during the relevant financial year and has accordingly disallowed the excess interest expenses quantified by him at Rs.1,66,95,828/-, In this regard, it is noted that in the reply dated 12/4/2021 filed by the appellant in response to the show cause notice issued by the AO, the appellant had claimed that the advances made to the 15 land owners are much lesser than the amounts due to be payable to them ( @ 51.56% of total sale proceeds), and that in terms of the development agreement. the appellant had made such advances to the land owners of Rs 13,82,73,184/-. In this regard, the relevantcolumns of the development agreement dated 11/5/2011 have been discussed while dealing with the other grounds of appeal 2 to 9 in paragraphs above. It has been discussed that the entire sale proceeds were wrongly considered in the hands of the appellant, whereas the land co-owner companies
The ld. DR on the other hands, relied on the order of the ld. AO.
After hearing the rival contentions and perusing the materials available on record, we find that the ld. AO has himself appreciated the facts of the case by taking into account the advances given to 15 land co-owners of ₹7,80,19,021/- against the total amount payable of ₹576605385/- and the balance outstanding was ₹49,85,86,364/-. Therefore, there is no question charging any interest from advances
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 15.01.2025.