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Facts
The assessee, engaged in construction business, filed its return for AY 2018-19. The AO assessed income at INR 2,36,30,393/-, adding Rs. 2,13,49,415/-. The CIT(A) partly allowed the appeal. The assessee's appeal before the Tribunal challenges the confirmation of this addition.
Held
The Tribunal held that the AO's action of treating the entire stock of finished goods as sales was incorrect, contrary to the assessee's consistently followed 'Project Completion Method'. The Tribunal followed various High Court and Supreme Court judgments that support recognizing income upon sale deed execution and physical possession, not on receiving advances.
Key Issues
Whether advances received for property bookings can be treated as sales and taxed in the year of receipt, contrary to the assessee's adopted 'Project Completion Method' of revenue recognition.
Sections Cited
250, 143(3), 144B, 143(2), 142(1), 145(1), 145(2)
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Income Tax Appellate Tribunal, DELHI B BENCH: NEW DELHI
Before: SHRI YOGESH KUMAR U.S & SHRI MANISH AGARWAL
ITA No.616/Del/2025
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI “B” BENCH: NEW DELHI BEFORE SHRI YOGESH KUMAR U.S, JUDICIAL MEMBER & SHRI MANISH AGARWAL, ACCOUNTANT MEMBER ITA No.616/Del/2025 [Assessment Year : 2018-19] M/s. M.S. Builders vs ITO Opp. Gaur Gracious, Ward-1(1) Kanth Road, Moradabad, Moradabad Uttar Pradesh-244001 Uttar Pradesh-244001 PAN-AAWFM1964H APPELLANT RESPONDENT Assessee by Shri Mayank Patawari, Adv. & Shri Akash Ojha, Adv. Revenue by Shri Rajesh Kumar Dhanesta, Sr.DR Date of Hearing 17.11.2025 Date of Pronouncement 16.01.2026 ORDER PER MANISH AGARWAL, AM : The present appeal is filed by the assessee against the order dated 20.12.2024 by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld. CIT(A)”] in Appeal No. NFAC/2017-18/10041203 assessed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of the assessment order dated 19.04.2021 passed u/s 143(3) r.w.s. 144B of the Act pertaining to Assessment Year 2018-19.
Brief facts of the case are that assessee company is engaged in the business of construction of housing Estates, Apartments, shopping Centers, industrial building, offices, colonies, clubs, cinemas, development of lands etc. and filed its return of income on
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30.10.2018, declaring total income of INR 5,92,243/-. The case was selected for complete scrutiny under CASS for the reason “income from Real Estate Business”. A notice u/s 143(2) was issued on 22.09.2019 followed by notices us/ 142(1) alongwith questionnaires from time to time. In response, assessee company filed replies y alongwith documents/evidences and after considering the same, the AO assessed the income of the assessee company at INR 2,36,30,393/- vide assessment order dated 19.04.2021 passed u/s 143(3) r.w.s. 144B of the Act.
Against the said order, assessee filed an appeal before Ld. CIT(A) who vide impugned order dated 20.12.2024, partly allowed the appeal of the assessee.
Aggrieved by the order of Ld. CIT(A), assessee is in appeal before the Tribunal by taking following grounds of appeal:-
“The Ld. CIT(A) has erred in law and against the facts & circumstances of the case for confirming the addition of Rs. 21349415/-made in the assessment order dated 19/04/2021. 2. That the Ld. CIT (A) has erred in law against the facts and circumstances of the case for confirming the addition of Rs. 21349415/- by alleging that- In the instant case, it is seen that the appellant has given possession of the flats to prospective buyers. The clause 2 of the sample agreements submitted by the appellant during the appellate proceedings clearly states as under-.’2. That Vendor has already handed over the physical possession of above said apartment agreed to be transferred herein to the vendee." 6.2.3 The purchasers thus have received a right to enjoy the property. Hence, the Ld. AO has rightly held that there is transfer of property and thus the sale proceeds in the form of advances received are liable to be taxed without going to the facts of the case that where the full rights of the property sold are passed on to the buyers, the revenue is recognized to the financial statement as well as without
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considering the legal position as prescribed in accounting standards as well as decided by higher courts. 3. That the Ld. CIT (A) has erred in law for confirming the addition of Rs. 21349415/- without going through principles the accounting being adopted continuously by the assessee firm and this action of Ld. CIT(A) will not only effect the taxation of the year under consideration but also the taxability of subsequent years wherein the profitability on the sum of advances alleged have been recognized to its financial statements. 4. That the Ld. CIT (A) has erred in law for confirming the action of Ld. AO for not following the procedure as prescribed in section 145 of the I.T. Act by alleging that it is notable that the Ld. AO in the para 4(f) of the Assessment Order has clearly mentioned that the assessee is not maintaining the stock records. The same is appearing in the Point no. 5 of Form 3CB of the audit report. Hence, though the Ld. AO has not specifically mentioned that section 145 is invoked, however, it is obvious that the book results of the appellant were not found to be reliable by the Ld. AO and therefore, he had brought the advances to tax on the basis of GP ratio shown by the appellant without making any comment on the issue that the order is not speaking as well as why the prescribed procedure for rejecting the books of accounts have not been followed by the Ld.AO.”
All the grounds of appeal are in relation to the computation of income of the assessee by applying the profit rate on the gross amount of advances received at INR 20,91,02,986/- by observing that assessee has received advances against flat booking however has shown sales of only INR 9,27,58,567/- and the amount of INR 20,98,79,793/- as shown under the head “finished goods”.
Before us, Ld.AR for the assessee submits that assessee has recognized its revenue on ‘Project Completion Method’ wherein the sale is booked when sale deed is executed and physical possession is handed over to the prospective buyer. He further submits that the amount shown under the head “finished goods” have been booked under sale in subsequent years when sales has taken place and the
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assessee has filed a chart before us, showing year-wise sales declared in subsequent years out of such finished goods. Ld.AR submits that due taxes are paid as and when sales have been booked and further filed copy of the balance sheet for immediately succeeding year where sales of INR 16,18,95,725/- is declared. He thus submits that action of the AO in taxing the entire stock in the year under appeal by treating the same as sales is not correct in terms of the accepted accounting principles followed by the assessee on regular basis and therefore, he prayed for the deletion of the addition so made by the AO.
On the other hand, Ld. Sr. DR for the Revenue vehemently supported the orders of the lower authorities and submits that the assessee has received advances of more than INR 31 crores out of which sales of only INR 9.28 crores were booked during the year under appeal and INR 21,45,53,581/- is shown as liability against advances received. He submits that once the assessee has received majority of the sale amount, AO has rightly made the addition. With respect to the claim of the assessee that tax has been paid in subsequent year after booking the sales, ld. DR submits that matter may be remanded back to the file of AO for necessary verification of the facts as stated by Ld.AR for the assessee.
Heard the contentions of both parties and perused the material available on record. Admittedly, the assessee has followed ‘Project Completion Method’ and as observed by the AO at page 6 in para 4 (f) that only 23.64% of the project was completed and 20% of the
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same was sold and the entire cost incurred is transferred to the finished goods accounts. It is further observed by the AO that the assessee has received 82% of the gross projected sale value as advanced. Since assessee has followed Project Completion Method to recognize its revenue where the sales have been booked as and when physical possession of the flats handed over to the buyer, after getting Transfer Deed registered in the name of the buyer therefore, in our considered view, the action of the AO in treating the entire finished goods available at the end of the previous year relevant to Assessment year under appeal not correct more particularly when the same was actually be the cost of work-in-progress and treating the same as sales is contrary to the accepted accounting method regularly followed by the assessee.
It is further seen that the assessee has shown turnover out of such stock in subsequent Assessment Years which is tabulated as under:-
Since the assessee has already offered the sales in subsequent AYs and paid due taxes thereon on the profits which is evident from the copy of financial statement for subsequent AYs and the chart
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reproduced herein above. It is further observed that the assessee has declared net profit of INR 3,97,794/- on the sales of INR 6,18,95,725/- in AY 2019-20 and likewise in other AYs has declared profits which has not been doubted by the Revenue. Further this action of the AO tantamount to double taxation of income where the assessee has paid taxes in subsequent assessment years on the sales declared out of such stock and further in the year under appeal when profit is estimated by treating the said stock as sales.
The Hon’ble Jurisdictional Delhi High Court in the case of Paras Buildtech India Pvt.Ltd. vs CIT in ITA Nos. 602 & 603/2015 vide order dated 18.11.2015 has followed the judgement of Hon’ble Apex Court in the case of CIT vs Bilahari Investment P.Ltd. [2008] 299 ITR 1 (SC) and further following the judgment of Hon’ble Supreme Court in the case of CIT vs Excel Industrie Ltd. 2013 ITR 295 (SC) wherein it is held that when income of offered to tax in subsequent year and there was no actual loss to the Revenue, no further addition is required to be made hence, confirmed the order of ITAT in deleting the additions made by taking advances/inventories as the turnover. The relevant observations of the Hon’ble Jurisdictional High Court has observing as under:-
“At the outset, it is required to be noticed that the ITAT has in the impugned order dated 17th February, 2015 in ITA No. 4316/Del/2010 upheld the finding rendered by the CIT (A) that the Assessee was only a developer and not a contractor. This finding is significant because, as noticed hereinbefore, the agreements entered into by the Assessee are only on the basis that it is a developer. The Assessee has throughout been contending that it is not a contractor. This finding has been accepted by the Revenue inasmuch as it has not filed any appeal against the impugned order of the ITAT.
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The other significant aspect is that the Assessee has been able to make good its plea regarding treatment of the sum received by it as advance in its books of accounts. The balance sheets filed by the Assessee, copies of which are enclosed with the memorandum of Appeal, do bear out the fact that the cost of construction is capitalized as regards the flats the construction of which is yet to be completed, and no conveyance deed has been executed or possession has not been handed over. The Assessee’s balance sheet dated 31st March, 2005 discloses under the sub-head 'Inventory' under the head ‘Current loans and advances’ a sum of Rs.7,09,93,957. The explanatory Schedule 4 describes the said figure as ‘Stock and inventory’. It is also stated in Item No. 1 (b) of Schedule 19 in the Notes to the Accounts forming part of the final audit statement as under: “b)Revenue Recognition Sale of building: i) When building is ready to be delivered – Sale is booked in the books of accounts on the date of possession agreed upon or on the date of sale if the sale deed is executed before the date of possession agreed. ii) When the building is not ready to be delivered- Sale is booked on the date of the building transferred and possession handed over.
The income and expenditure are accounted for on accrual basis revenue of sale of offices/shops etc is recognized on signing of title deeds. All sums received till then for the construction project are treated as advances and shown as liability.”
Section 145 (1) of the Act states that the income chargeable under the heads ‘Profits and gains of business or profession’ shall be computed in accordance with either cash or mercantile system of accounting "regularly employed by the Assessee”. It is only with effect from 1st April 2015 that a change has been brought about in Section 145 (2) which permits the central government to notify in the Official Gazette from time to time the income computation and disclosure standards to be followed by any class of Assesses or in respect of any class of income. That change is prospective and in any event does not apply to the case on hand.
The settled legal position as far as Section 145 of the Act is concerned is that it is not open to an AO to reject the accounts of an Assessee unless he comes to a determination that notified accounting standards have not been regularly followed by the Assessee. As pointed out by the CIT (A) in the order dated 2nd July, 2010, the AS of the ICAI did not have any statutory recognition under the Act although it was binding under the Companies Act, 1956. The method
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of accounting followed by the Assessee in the present case i.e. project completion method was certainly one of the recognized methods and has been consistently followed by it.
In Commissioner of Income Tax v. Bilahari Investment P Ltd. (2008) 299 ITR 1 (SC) it was observed as under:
“Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. The completed contract method is one such method. Similarly, the percentage of completion method is another such method.
Under the completed contract method, the revenue is not recognized until the contract is complete. Under the said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the contract is completed. This method leads to objective assessment of the results of the contract.
On the other hand, the percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under the method determined by reference to the stage of completion of the contract. The stage of completion can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract. The above indicates the difference between the completed contract method and the percentage of completion method.”
In the present case, there was therefore no good reason for the ITAT to have reversed the finding of the CIT (A). The only reason given in the impugned order of the ITAT is that ‘risks and rewards' of ownership were transferred to the buyers who had paid the booking advance amounts and in some cases these rights were transferred to third parties. However, this does not in any manner affect the treatment of the said amounts in the books of the Assessee. As noted hereinbefore, the expenses of construction were not debited to the P & L account of the Assessee. It was shown as cost of construction or block of buildings. It is only as and when a conveyance deed was executed or possession delivered that the receipt was shown as
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income. The explanation added by way of Notes to the Accounts was not taken note of by the ITAT when it came to the conclusion that the percentage completion method should apply to the Assessee.
The other aspect that appears to have escaped the attention of the ITATis that the Assessee offered to tax in the subsequent FY the amounts received and therefore there was no actual loss to the revenue. In similar circumstances, the Supreme Court in CIT v. Excel IndustriesLimited2013ITR 295 (SC) observed that the dispute if any raised at the instance of the Revenue would be at best academic. The stand of the Assessee in the present case also finds support in the decision of the Gujarat High Court in CIT-IV v. Shivalik Buildwell (P) Ltd. (2013) 40 taxmmann.com 219 (Gujarat).It was held that the Assessee in that case, who was a developer, was entitled to book the amount received as booking advance as income on transfer of the property. Till then the advance booking amounts could not be treated as his trading receipt. The High Court recognized that the Assessee in that case was entitled to apply the project completion method in terms of the applicable AS.
This Court too has by order dated 7th January 2015 in ITA 111/2014 (CIT v. SABH Infrastructure Ltd.) held likewise, after noticing the decisions of the Supreme Court in CIT v. Bilahari Investment P.Ltd. (supra) and the order dated 15th November 2011 in ITANo.928of2011(CIT v. Manish Buildwell Pvt. Ltd.).
For the aforementioned reasons this Court answers question (a) as far as AY 2005-06 is concerned in the negative, i.e. favour of the Assessee and against the Revenue.
As far as AY 2006-07 is concerned, it is apparent that the ITAT in the impugned order lost sight of the fact that the advances received by the Assessee were in respect of a project that never took off. A part of the advance amount was returned in the following FY since the transaction itself fell through. In the circumstances the question of treating the amounts as income in the hands of the Assessee did not arise. No purpose was going to be served in remanding the matter to the AO for a fresh determination. Consequently, as far as AY 2006- 07 is concerned, question (b) is answered in the negative i.e. in favour of the Assessee and against the Revenue.
The impugned orders dated 17th February 2015 of the ITAT to the above extent are hereby set aside.”
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In view of the above discussion and by respectfully following the judgements of hon’ble Supreme court in the case of CIT vs Excel Industrie Ltd. (supra) and Hon’ble Delhi High Court in the case of Paras Buildtech India Pvt. Ltd. (supra), we find that the action of the AO in holding the finished goods of INR 20,91,02,986/- as sales is incorrect and therefore, the entire addition of INR 2,13,49,415/- is hereby, deleted. All the grounds of appeal raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 16.01.2026.
Sd/- Sd/- (YOGESH KUMAR U.S) (MANISH AGARWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER
Date:- 16.01.2026 *Amit Kumar, Sr.P.S*