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Facts
The Revenue appealed against the CIT(A)'s order deleting an addition made by the AO under Section 43CB of the Income Tax Act, 1961. The AO applied the Percentage Completion Method (PCM) for revenue recognition to a real estate developer, which was contested by the assessee.
Held
The Tribunal held that Section 43CB of the Income Tax Act is applicable only to construction contracts and contracts for providing services, not to real estate developers who construct and sell units on their own land. The assessee correctly followed AS-9 and the ICAI Guidance Note for revenue recognition upon transfer of risks and rewards.
Key Issues
Whether Section 43CB of the Income Tax Act, mandating Percentage Completion Method (PCM) for revenue recognition, applies to real estate developers or only to construction contractors.
Sections Cited
43CB, 143(2), 142(1)
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Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: MS. SUCHITRA KAMBLE & SHRI MAKARAND V. MAHADEOKAR
आयकर अपीलीय अिधकरण, अहमदाबाद "ायपीठ “बी“, अहमदाबाद । IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, AHMEDABAD सु"ी सुिच"ा का"ले, "ाियक सद" एवं "ी मकरंद वसंत महादेवकर, लेखा सद" के सम"। ] ] BEFORE MS. SUCHITRA KAMBLE, JUDICIAL MEMBER AND SHRI MAKARAND V. MAHADEOKAR, ACCOUNTANT MEMBER आयकर अपील सं / Year : 2018-19 Deputy Commissioner of Aaryan Buildspace LLP बनाम/ Income-tax, 406, Aaryan Work Space v/s. Central Circle-1(1) St.Xaviers College Corner Ahmedabad Navrangpura Ahmedabad – 380 009 "थायी लेखा सं./PAN: AAYFA 3357 J अपीलाथ%/ (Appellant) &' यथ%/ (Respondent) Assessee by : Shri Dhiren Shah, AR & Shri Karan Shah, AR Revenue by : Shri Kavan Limbasiya, Sr.DR सुनवाई की तारीख/Date of Hearing : 05 /03/2025 घोषणा की तारीख /Date of Pronouncement: 07 /03/2025 आदेश/O R D E R PER MAKARAND V. MAHADEOKAR, AM:
The present appeal has been filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-11, Ahmedabad [hereinafter referred to as "CIT(A)"] dated 08.05.2021 for the Assessment Year (AY) 2018- 19, wherein the CIT(A) deleted the addition of Rs.2,08,61,570/- made by the Assessing Officer [hereinafter referred to as "AO"] under Section 43CB of the Income Tax Act, 1961 [hereinafter referred to as "the Act"] by applying the Percentage Completion Method ("PCM") for revenue recognition. DCIT vs. Aaryan Buildspace LLP Asst. Year : 2018-19 2 Facts of the Case:
The assessee, Aaryan Buildspace LLP, engaged in the business of real estate development, filed its return of income for AY 2018-19, declaring a total income of Rs.1,92,62,080/-. The case was selected for scrutiny, and notices under Section 143(2) and Section 142(1) of the Act were issued. The assessee was developing a real estate project named "ARYAN OPULENCE" on its own land and followed Accounting Standard-9 ("AS-9") and the ICAI Guidance Note on Real Estate Transactions (2012, Revised) to recognize revenue on execution of conveyance deeds and possession transfer. During the relevant year, 27 units were sold, and revenue was recognized accordingly. The AO, in his assessment order dated 24.04.2021, held that since the assessee was engaged in a "construction contract", its income should have been computed under Section 43CB of the Act, which mandates revenue recognition on a Percentage Completion Method (PCM) basis. The AO treated the customer advances of Rs.28,30,86,301/- crore as revenue and computed the total taxable income at Rs.4,01,23,650/-, making an addition of Rs.2,08,61,570/-.
The assessee preferred an appeal before CIT(A), who deleted the addition, holding that: • The assessee is a real estate developer, not a construction contractor, and hence, Section 43CB of the Act does not apply. • The assessee followed AS-9 and the ICAI Guidance Note, which provide that revenue is recognized only when significant risks and rewards are transferred through a registered sale deed and possession handover. • The AO incorrectly applied PCM, which is applicable only to construction contractors and not to real estate developers. DCIT vs. Aaryan Buildspace LLP Asst. Year : 2018-19 3 • The method of accounting followed by the assessee had been accepted in previous years (A.Y. 2015-16, 2017-18) and could not be arbitrarily changed.
Aggrieved by the order of CIT(A), the Revenue filed an appeal before us with the following ground of appeal: a) In the facts and on the circumstances of the case and in law, the Id. CIT(A)has erred in deleting the addition of Rs.2,08,61,570/-, in view of provision of section 43CB of the Income Tax Act.
During the course of hearing before us, the Departmental Representative (DR) contended that the assessee had entered into an agreement of sale specifying stage-wise payments, which made it a "construction contractor" rather than a real estate developer. The DR further contended that section 43CB of the Act does not distinguish between different classes of contractors and hence applies to both construction contractors and real estate developers acting as contractors. The DR also stated that since advances were received and substantial work was completed, PCM should be applied, and the AO was justified in making the addition. The DR argued that the judicial precedents relied on by the CIT(A) were for assessment years before the introduction of Section 43CB of the Act and, therefore, not applicable.
The Authorized Representative (AR), representing the assessee, contended that the addition made by the AO was erroneous and legally unsustainable. The AR emphasized that the assessee is engaged in the business of real estate development and constructs residential flats on its own land, thereby distinguishing itself from a construction contractor providing DCIT vs. Aaryan Buildspace LLP Asst. Year : 2018-19 4 services to third parties. It was submitted that the assessee retains ownership of the land and develops housing projects independently, selling completed units to buyers through legally executed sale deeds/conveyance deeds. Since the assessee does not undertake construction on behalf of any third party, its activities do not fall under the ambit of construction contracts, and consequently, Section 43CB of the Act has no application to the present case.
The AR relied on the order of CIT(A) and stated that at during the appellate proceedings before the CIT(A), it was submitted that real estate developers are required to follow Accounting Standard-9 (AS-9) "Revenue Recognition," which prescribes revenue recognition upon the transfer of significant risks and rewards of ownership.
7.1. The AR also brought to our attention that the assessee had consistently followed the same revenue recognition policy since its inception, and the department had accepted this method in earlier assessments for AYs 2015-16, 2017-18, and 2019-20. There was no change in facts or circumstances in the current year that would justify a deviation from the established accounting method. The AR placed on record the copy of assessment orders passed by the same AO for the AY 2021-22 indicating that the AO has not raised any objection in the method of accounting adopted by the AO.
7.2. In support of its arguments, the AR placed reliance on multiple judicial precedents by way of written submission. These judicial precedents include: - Decision of Co-ordinate Bench in the case of ITO v. Shivalik Buildwell (P) Ltd. (ITA No. 1698/Ahd/2009, Order dated 05.08.2011), which was affirmed by the Hon’ble Gujarat High Court in the case of Shivalik Buildwell (P) Ltd. (40 Taxmann.com 219, 2013). The Bench held that DCIT vs. Aaryan Buildspace LLP Asst. Year : 2018-19 5 real estate developers' profits arise only upon the transfer of title, and advances received from customers cannot be treated as trading receipts in the year of receipt.
- Decision of Co-ordinate Bench in the case of Unity Construction v. ITO (ITA No. 1577/Ahd/2008, Order dated 28.07.2011), where it was held that once a revenue recognition method is accepted by the department in earlier years, it cannot be arbitrarily rejected in subsequent years. - Decision of Co-ordinate Bench in the case of DCIT v. Maxworth Infrastructure P. Ltd. (ITA No. 202/Del/2018, Order dated 21.10.2021), where the Bench held that the PCM, as applying AS-7 applies strictly to construction contracts and not to real estate developers.
We have carefully considered the arguments of both parties and perused the material on record. The core issue in this appeal is whether the assessee, a real estate developer, was required to follow the Percentage Completion Method under Section 43CB of the Act or could recognize revenue based on AS-9 and the ICAI Guidance Note.
8.1. 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. The legislative intent behind Section 43CB of the Act and its placement within the framework of the Act clarify that it governs income recognition for contractors undertaking construction projects for clients, not for developers executing real estate projects on their own account. Section 43CB of the Act was introduced through the Finance Act, 2018, with retrospective application from 01.04.2017, to regulate the computation of income from construction DCIT vs. Aaryan Buildspace LLP Asst. Year : 2018-19 contracts and contracts for providing services. The section explicitly mandates that profits and gains from a "construction contract" or "contract for services" must be determined on the basis of the PCM in accordance with the Income Computation and Disclosure Standards (ICDS). The phrase "construction contract" is critical to understanding the section’s applicability, as it indicates that the provision applies only to contractors executing projects on behalf of a third party, where a contractual obligation exists. A construction contract, in accounting and legal parlance, refers to an agreement where a contractor undertakes to execute construction work for a specified price under a contract with a customer. These contracts can include fixed-price contracts, cost-plus contracts, and time-and-material contracts, but they inherently require the contractor to perform work for another party. Section 43CB of the Act aligns with this understanding, as it follows the accounting principles established in AS-7 (Construction Contracts), 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 crucial distinction between a contractor and a developer lies in ownership of the land and the nature of contractual obligations. A contractor undertakes construction on behalf of another party under a contract and does not own the land on which construction takes place. The project belongs to the customer, and the contractor merely executes the work as per the terms of the agreement. A developer, in contrast, owns the land, undertakes the project at its own risk, and sells completed units to customers. The buyer does not engage the developer for "construction services" but purchases a completed asset from the developer. The transaction is one of sale of property, not a contractual construction assignment. DCIT vs. Aaryan Buildspace LLP Asst. Year : 2018-19 8.2. Since the assessee does not provide construction services to any third party under a contract, it does not fall within the ambit of Section 43CB of the Act, which is specifically designed to regulate the revenue recognition of contractors executing construction projects for clients rather than developers selling self-constructed properties.
8.3. The Accounting Standard (AS) applicable to a business further reinforces the distinction. AS-7 (Construction Contracts) applies only to construction contracts where revenue is recognized based on project milestones and the Percentage Completion Method (PCM). Since Section 43CB of the Act adopts the PCM as the prescribed method, it is clear that this section was meant to align with AS-7, which governs the accounting treatment for construction contracts. AS-9 (Revenue Recognition), on the other hand, applies to real estate developers and mandates that revenue should be recognized when the transfer of significant risks and rewards of ownership takes place. The assessee follows AS-9, as it recognizes revenue only when conveyance deeds are executed, and possession is handed over to buyers. The Institute of Chartered Accountants of India (ICAI) has also clarified in its Guidance Note on Accounting for Real Estate Transactions (2012, Revised) that real estate developers should follow AS-9, not AS-7. Thus, the AO’s attempt to apply Section 43CB of the Act, which mirrors AS-7, is fundamentally flawed.
8.4. 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. DCIT vs. Aaryan Buildspace LLP Asst. Year : 2018-19 8.5. The DR’s contention that the assessee is a contractor is misplaced, as it fails to recognize the fundamental distinction between a contractor executing a construction project for a client and a real estate developer constructing and selling units on its own land. The assessee is not providing a service to a third party under a contractual obligation but is developing a project at its own risk and selling completed units to buyers. In contrast, a contractor undertakes construction for another party based on predetermined specifications. The DR’s assertion that Section 43CB of the Act does not differentiate between a real estate developer and a contractor is incorrect. A careful reading of Section 43CB of the Act makes it evident that it applies exclusively to "construction contracts" and "contracts for providing services"—terms that inherently require the existence of a contractual obligation between the service provider (contractor) and the recipient (client). The assessee’s business model does not involve entering into construction contracts but rather the sale of completed units. The fact that the agreement specifies stage-wise payments does not convert the nature of the transaction into a construction contract. Advances received from customers are not "contract revenue" but part of the consideration for the ultimate sale of property. The DR’s contention that the judicial precedents relied upon by the CIT(A) relate to periods before the introduction of Section 43CB of the Act and are therefore not applicable is flawed. The principle that real estate developers must recognize revenue upon the transfer of ownership and not on a percentage completion basis has been established through long-standing jurisprudence, which remains applicable even after the introduction of Section 43CB of the Act.
8.6. The judicial precedents relied upon by the assessee conclusively establish that revenue from real estate development is taxable only upon the DCIT vs. Aaryan Buildspace LLP Asst. Year : 2018-19 transfer of title and possession. 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.
8.7. In view of the above, we find no infirmity in the order of the CIT(A), who rightly deleted the addition made by the AO.