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Facts
The Revenue appealed against the CIT(A)'s order deleting an addition of Rs. 6,33,30,063/- made by the Assessing Officer (AO) for alleged excess claim of construction expenses. The assessee, a real estate developer, followed the percentage completion method for revenue recognition. The AO disallowed a portion of the cost claimed by the assessee as excess.
Held
The Tribunal held that the AO's approach was based on an incorrect factual assumption and flawed methodology. The AO wrongly considered indirect expenses and selling/marketing expenses as part of construction cost and ignored opening work-in-progress. The assessee correctly allocated costs based on area sold, aligning with accounting guidance and established precedents.
Key Issues
Whether the CIT(A) was justified in deleting the addition made by the AO on account of alleged excess claim of construction cost.
Sections Cited
143(3), Income-tax Act, 1961
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Income Tax Appellate Tribunal, MUMBAI BENCH “B” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI SANDEEP SINGH KARHAIL
ORDER PER OM PRAKASH KANT, AM
This appeal by the Revenue is directed against order dated 29.01.2025 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2022-23, raising following grounds:
1. Whether on the facts and in circumstances of the case and in law, the Ld.CIT(A) was justified in deleting the addition of Rs.
Supreme Mega Construction LLP Supreme Mega Construction LLP 6,33,30,063/ 6,33,30,063/- made on account of excess claim of expenses without made on account of excess claim of expenses without appreciating the facts of the case. appreciating the facts of the case.
2. Whether on the facts and in circumstances of the case and in 2. Whether on the facts and in circumstances of the case and in 2. Whether on the facts and in circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs. law, the Ld.CIT(A) erred in deleting law, the Ld.CIT(A) erred in deleting the addition of Rs. the addition of Rs. 6,33,30,063/ 6,33,30,063/- made on account of excess claim of expenses without made on account of excess claim of expenses without appreciating the fact that the actual amount of cost incurred for 36 appreciating the fact that the actual amount of cost incurred for 36 appreciating the fact that the actual amount of cost incurred for 36 flats comes to Rs.31,08,96,400/ flats comes to Rs.31,08,96,400/-, however the total expense , however the total expense claimed by the assessee for the year under consideration is Rs. claimed by the assessee for the year under consideration is Rs. claimed by the assessee for the year under consideration is Rs. 37,42,26,463/ 3/-.
Briefly stated, the assessee is a limited liability partnership Briefly stated, the assessee is a limited liability partnership Briefly stated, the assessee is a limited liability partnership firm engaged in the business of construction and development of firm engaged in the business of construction and development of firm engaged in the business of construction and development of real estate projects. For the assessment year under consideration, real estate projects. For the assessment year under consideration, real estate projects. For the assessment year under consideration, the assessee filed its return of income on 19.10.2022 declaring a the assessee filed its return of income on 19.10.2022 the assessee filed its return of income on 19.10.2022 total income of ₹5,93,86,830/ 5,93,86,830/-. The return was selected for scrutiny . The return was selected for scrutiny on account of, inter alia, large investment in properties, substantial on account of, inter alia, large investment in properties, substantial on account of, inter alia, large investment in properties, substantial other expenses claimed, significant variation between the opening other expenses claimed, significant variation between the opening other expenses claimed, significant variation between the opening stock of the current year and the clo stock of the current year and the closing stock of the preceding sing stock of the preceding year, and a considerable increase in capital during the year. year, and a considerable increase in capital during the year. year, and a considerable increase in capital during the year.
The Assessing Officer issued statutory notices under the 2.1 The Assessing Officer issued statutory notices under the The Assessing Officer issued statutory notices under the Income-tax Act, 1961 (in short ‘the Act’) on 01.06.2023 and duly tax Act, 1961 (in short ‘the Act’) on 01.06.2023 and duly tax Act, 1961 (in short ‘the Act’) on 01.06.2023 and duly served upon the assessee. In the scrutiny assessment order served upon the assessee. In the scrutiny assessment order served upon the assessee. In the scrutiny assessment order completed u/s 143(3) of the Act on 28.03.2024, the Assessing completed u/s 143(3) of the Act on 28.03.2024, the Assessing completed u/s 143(3) of the Act on 28.03.2024, the Assessing Officer disallowed owed (i) (i) cost cost of of construction construction amounting to Rs.6,33,30,063/- holding it to be holding it to be excess than legitimate cost, (ii) than legitimate cost, (ii) penalty of TDS of Rs.5,600/ TDS of Rs.5,600/-,(iii) claim claim of donation of of donation of Rs.1,68,500/- and (iv) (iv) provident fund deduction of Rs.58,119/ provident fund deduction of Rs.58,119/-.
Supreme Mega Construction LLP Supreme Mega Construction LLP The assessee filed furt The assessee filed further appeal before the Ld. CIT(A), her appeal before the Ld. CIT(A), who allowed the appeal of the assessee deleting all the additions. the appeal of the assessee deleting all the additions. the appeal of the assessee deleting all the additions.
Aggrieved with the finding of the Ld. CIT(A) Aggrieved with the finding of the Ld. CIT(A), the Revenue , the Revenue is in appeal on the first issue of alleged excess claim of the cost appeal on the first issue of alleged excess claim of the cost appeal on the first issue of alleged excess claim of the cost construction amounting t construction amounting to Rs.6,33,30,063/-.
Before us, the Ld. counsel for the assessee filed a Paper Book Before us, the Ld. counsel for the assessee filed a Paper Book Before us, the Ld. counsel for the assessee filed a Paper Book containing pages 1 to 29. containing pages 1 to 29.
The sole issue arising in the present appeal of the Revenue is The sole issue arising in the present appeal of the Revenue is The sole issue arising in the present appeal of the Revenue is whether the learned Commissioner of Income whether the learned Commissioner of Income-tax (Appeals) was tax (Appeals) was justified in deleting the addition of justified in deleting the addition of ₹6,33,30,063/ 6,33,30,063/- made by the Assessing Officer on account of the alleged excess claim of cost of Assessing Officer on account of the alleged excess claim of cost of Assessing Officer on account of the alleged excess claim of cost of construction.
5.1 The relevant facts, in brief, are that during the year under The relevant facts, in brief, are that during the year under The relevant facts, in brief, are that during the year under consideration the assessee was engaged in execution of a real estate consideration the assessee was engaged in execution of a real estate consideration the assessee was engaged in execution of a real estate project known as “Supreme Elenor”, comprising construction of 75 project known as “Supreme Elenor”, comprising construction of 75 project known as “Supreme Elenor”, comprising construction of 75 residential flats. The assessee followed t residential flats. The assessee followed the percentage completion he percentage completion method for recognition of revenue and profits from the project, in method for recognition of revenue and profits from the project, in method for recognition of revenue and profits from the project, in accordance with the revised Guidance Note on Accounting for Real accordance with the revised Guidance Note on Accounting for Real accordance with the revised Guidance Note on Accounting for Real Estate Estate Estate Transactions Transactions Transactions issued issued issued by by by the the the Institute Institute Institute of of of Chartered Chartered Chartered Accountants of India. It was explained tha Accountants of India. It was explained that, as on 31.03.2022, the t, as on 31.03.2022, the total total total cost cost cost incurred incurred incurred on on on the the the said said said project project project aggregated aggregated aggregated to to to ₹64,77,00,833/-. Reference was drawn to the audited financial . Reference was drawn to the audited financial . Reference was drawn to the audited financial statements placed in the paper book (PB statements placed in the paper book (PB-87), which disclosed 87), which disclosed
Supreme Mega Construction LLP Supreme Mega Construction LLP opening work-in-progress progress of of ₹35,19,92,728/- - and direct construction expenditure incurred during the year amounting to construction expenditure incurred during the year amounting to construction expenditure incurred during the year amounting to ₹29,57,08,105/-, cumulatively forming the aforesaid project cost. , cumulatively forming the aforesaid project cost. , cumulatively forming the aforesaid project cost.
5.2 It was further submitted that the total saleable area of the It was further submitted that the total saleable area of the It was further submitted that the total saleable area of the project was 61,346 sq. ft. Out of 75 flats, agreements for sale had project was 61,346 sq. ft. Out of 75 flats, agreements for sa project was 61,346 sq. ft. Out of 75 flats, agreements for sa been executed in respect of 36 flats up to the end of the financial been executed in respect of 36 flats up to the end of the financial been executed in respect of 36 flats up to the end of the financial year 2021–22, covering an area of 29,479 sq. ft. On the basis of 22, covering an area of 29,479 sq. ft. On the basis of 22, covering an area of 29,479 sq. ft. On the basis of total project cost of ₹64,77,00,833/-, the assessee for computing total project cost of the assessee for computing profit from the project under the percentage completion method, profit from the project under the percentage compl profit from the project under the percentage compl allocated the cost of project in cost of project in proportionate to the area sold and proportionate to the area sold and unsold in following manner in following manner.:
Particulars Computation Amount Amount Cost of 29,479 Sq. Ft. for 36 Cost of 29,479 Sq. Ft. for 36 64,77,00,833 / 31,12,43,97 31,12,43,97 Flats sold Debited to Flats sold Debited to 61,346 X 29,479 4 Trading Account Trading Account Cost in respect of unsold stock Cost in respect of unsold stock 64,77,00,833 / 61,346 33,64,56,859 33,64,56,859 of 31,867 Sq. Fts. (39 flats of 31,867 Sq. Fts. (39 flats X 31,867 unsold) Shown as closing unsold) Shown as closing balance of Work- -in-Progress. 5.3 Accordingly, cost attributable to the area sold was worked out Accordingly, cost attributable to the area sold was worked out Accordingly, cost attributable to the area sold was worked out at ₹31,12,43,974/-, which was debited to the trading account, while , which was debited to the trading account, while , which was debited to the trading account, while the balance cost of the balance cost of ₹33,64,56,859/- relatable to the unsold area relatable to the unsold area was carried forward as closing work was carried forward as closing work-in-progress. It was thus progress. It was thus contended that the cost attributable to the sold area had been contended that the cost attributable to the sold area had been contended that the cost attributable to the sold area had been correctly computed and accounted for. rectly computed and accounted for.
5.4 The learned counsel for the assessee submitted that the The learned counsel for the assessee submitted that the The learned counsel for the assessee submitted that the Assessing Officer, however, proceeded on an erroneous premise that Assessing Officer, however, proceeded on an erroneous premise that Assessing Officer, however, proceeded on an erroneous premise that Supreme Mega Construction LLP Supreme Mega Construction LLP the assessee had claimed total cost of the assessee had claimed total cost of ₹37,42,26,463/ 37,42,26,463/- during the year. This figure was arriv year. This figure was arrived at by aggregating construction ed at by aggregating construction expenses of ₹29,57,08,105/ 29,57,08,105/-, indirect expenses of , indirect expenses of ₹1,73,91,900/- and project selling and marketing expenses of ₹6,11,26,458/ and project selling and marketing expenses of 6,11,26,458/- in the following manner: Rs. 29,57,08,105 29,57,08,105 Construction expenses incurred during the F.Y. 2021-22: Construction expenses incurred during the F.Y. 2021 Indirect Expenses: Rs. 1,73,91,900 Rs. 1,73,91,900 Project Sales & Marketing Expenses: Project Sales & Marketing Expenses: Rs. 6,11,26,458 Rs. 6,11,26,458 Total: Rs.37,42,26,463 Rs.37,42,26,463 5.5 The Assessing Officer further apportioned the total project cost The Assessing Officer further apportioned the total project cost The Assessing Officer further apportioned the total project cost on the basis of number of units sold, instead o on the basis of number of units sold, instead of area sold, and f area sold, and computed the proportionate cost at ₹31,08,96,400/ computed the proportionate cost at 31,08,96,400/- by applying the ratio of 36 units sold out of 75 units i.e. the ratio of 36 units sold out of 75 units i.e. (64,77,00,833/75X36). (64,77,00,833/75X36). The The assessment assessment unit unit further compared compared the the cost cost of of Rs.37,42,26,463/- which was wrongly believed as the cost which was wrongly believed as the cost which was wrongly believed as the cost claimed by the assessee, with the amount of Rs.31,08,96, with the amount of Rs.31,08,96, with the amount of Rs.31,08,96,400/- and the difference of Rs.6,33,30,063/ difference of Rs.6,33,30,063/- was accordingly computed for was accordingly computed for addition on account of alleged excess cost claimed by the assessee. addition on account of alleged excess cost claimed by the assessee. addition on account of alleged excess cost claimed by the assessee.
5.6 On appeal, the assessee reiterated before the learned On appeal, the assessee reiterated before the learned On appeal, the assessee reiterated before the learned Commissioner of Income Commissioner of Income-tax (Appeals) that the Assessing Officer tax (Appeals) that the Assessing Officer had fundamentally erred both in identifying the cost claimed and in had fundamentally erred both in identifying the cost claimed and in had fundamentally erred both in identifying the cost claimed and in the method of apportionment. It was explained that indirect the method of apportionment. It was explained that indirect the method of apportionment. It was explained that indirect expenses and selling and marketing expenses were not part of expenses and selling and marketing expenses were not part of expenses and selling and marketing expenses were not part of construction cost under the applicable accounting guidance and nstruction cost under the applicable accounting guidance and nstruction cost under the applicable accounting guidance and were rightly charged to the profit and loss account. It was also were rightly charged to the profit and loss account. It was also were rightly charged to the profit and loss account. It was also Supreme Mega Construction LLP Supreme Mega Construction LLP contended that allocation of project cost had necessarily to be made contended that allocation of project cost had necessarily to be made contended that allocation of project cost had necessarily to be made on the basis of area sold and not merely on the number of units on the basis of area sold and not merely on the number of uni on the basis of area sold and not merely on the number of uni sold. The learned Commissioner of Income sold. The learned Commissioner of Income-tax (Appeals), after tax (Appeals), after examining the accounting method consistently followed by the examining the accounting method consistently followed by the examining the accounting method consistently followed by the assessee, the guidance notes issued by the Institute of Chartered assessee, the guidance notes issued by the Institute of Chartered assessee, the guidance notes issued by the Institute of Chartered Accountants of India, and the judicial precedents relied upon, Accountants of India, and the judicial precedents relied upon, Accountants of India, and the judicial precedents relied upon, accepted the assessee’s explanation and held that there was no ccepted the assessee’s explanation and held that there was no ccepted the assessee’s explanation and held that there was no excess claim of cost as alleged by the Assessing Officer. excess claim of cost as alleged by the Assessing Officer. excess claim of cost as alleged by the Assessing Officer. Consequently, the addition of ₹6,33,30,063/- was deleted. Consequently, the addition of was deleted. The relevant finding of the Ld. CIT(A) is reproduced as under: relevant finding of the Ld. CIT(A) is reproduced as under: relevant finding of the Ld. CIT(A) is reproduced as under:
“6. Upon perusal of all the details submitted by the appellant it is 6. Upon perusal of all the details submitted by the appellant it is 6. Upon perusal of all the details submitted by the appellant it is noticed that the only difference between the AO and the appellant noticed that the only difference between the AO and the appellant noticed that the only difference between the AO and the appellant firm is that the AO has not allowed the indirect cost of Rs. firm is that the AO has not allowed the indirect cost of Rs. firm is that the AO has not allowed the indirect cost of Rs. 6,33,30,063/ while computing the revenue and also the net pro 6,33,30,063/ while computing the revenue and also the net pro 6,33,30,063/ while computing the revenue and also the net profit. The appellant claimed that they have given a detailed submissions The appellant claimed that they have given a detailed submissions The appellant claimed that they have given a detailed submissions before the AO by contending that they have been following before the AO by contending that they have been following before the AO by contending that they have been following percentage completion method for revenue recognition consistently. percentage completion method for revenue recognition consistently. percentage completion method for revenue recognition consistently. In para 3.3.1 of the assessment order, the appellant has fur In para 3.3.1 of the assessment order, the appellant has fur In para 3.3.1 of the assessment order, the appellant has furnished the direct cost details incurred in the relevant AY 2022 the direct cost details incurred in the relevant AY 2022 the direct cost details incurred in the relevant AY 2022-23 as Rs. 29,57,08,105/. The opening WIP was Rs. 35,19,92,728/. As per the 29,57,08,105/. The opening WIP was Rs. 35,19,92,728/. As per the 29,57,08,105/. The opening WIP was Rs. 35,19,92,728/. As per the appellant, the total project cost / estimated cost for Supreme Elenor appellant, the total project cost / estimated cost for Supreme Elenor appellant, the total project cost / estimated cost for Supreme Elenor was Rs. 114,26,21,684. Out of the total estimat was Rs. 114,26,21,684. Out of the total estimated cost, the cost ed cost, the cost incurred by them up to 31.03.2022 was Rs. 64,77,00,833/ (Rs. incurred by them up to 31.03.2022 was Rs. 64,77,00,833/ (Rs. incurred by them up to 31.03.2022 was Rs. 64,77,00,833/ (Rs. 35,19,92,728 + Rs. 29,57,08,105). This is estimated into 56.69%. 35,19,92,728 + Rs. 29,57,08,105). This is estimated into 56.69%. 35,19,92,728 + Rs. 29,57,08,105). This is estimated into 56.69%. Accordingly, the revenue recognised against each unit sold in the Accordingly, the revenue recognised against each unit sold in the Accordingly, the revenue recognised against each unit sold in the relevant AY is given by the appellant is as un relevant AY is given by the appellant is as under: ................................. .................................
7. In the relevant AY, the appellant recognized revenue of Rs.
7. In the relevant AY, the appellant recognized revenue of Rs.
7. In the relevant AY, the appellant recognized revenue of Rs. 45,88,90,759/ 45,88,90,759/ 45,88,90,759/ out out out of of of total total total sale sale sale value value value (bocking) (bocking) (bocking) of of of Rs. Rs. Rs. 80,95,38,147/. Till this point, there is no dispute. Tire AO has 80,95,38,147/. Till this point, there is no dispute. Tire AO has 80,95,38,147/. Till this point, there is no dispute. Tire AO has noticed that, out of total 75 uni noticed that, out of total 75 units, in the relevant AY the appellant ts, in the relevant AY the appellant actually sold only 36 units and hence he recomputed the direct cost actually sold only 36 units and hence he recomputed the direct cost actually sold only 36 units and hence he recomputed the direct cost into Rs. 31,08,96,400/. The working given by the AO is as under: into Rs. 31,08,96,400/. The working given by the AO is as under: into Rs. 31,08,96,400/. The working given by the AO is as under: 64,77,00,833 x 36 (units sold)/75 (total units) = Rs.31,08,96,400 64,77,00,833 x 36 (units sold)/75 (total units) = Rs.31,08,96,400 64,77,00,833 x 36 (units sold)/75 (total units) = Rs.31,08,96,400
Supreme Mega Construction LLP Supreme Mega Construction LLP As the appellant cla As the appellant claimed the expenditure of Rs. 37,42,26,463/, the imed the expenditure of Rs. 37,42,26,463/, the excess claim of expenditure of Rs. 6,33,30,063/ was not allowed by excess claim of expenditure of Rs. 6,33,30,063/ was not allowed by excess claim of expenditure of Rs. 6,33,30,063/ was not allowed by the AO. However, the appellant submitted that, in addition to this the AO. However, the appellant submitted that, in addition to this the AO. However, the appellant submitted that, in addition to this direct cost, the AO failed to allow various indirect expenditures of direct cost, the AO failed to allow various indirect expenditures of direct cost, the AO failed to allow various indirect expenditures of Rs. 1,73,91,900/ and seiling 73,91,900/ 73,91,900/ and seiling and seiling and and and marketing marketing cost marketing cost cost of Rs. of Rs. of Rs. 6,11,20,458/. The AO in paragraph 3.3.5 of the assessment order 6,11,20,458/. The AO in paragraph 3.3.5 of the assessment order 6,11,20,458/. The AO in paragraph 3.3.5 of the assessment order recorded that claim of this expenditure against the total area sold in recorded that claim of this expenditure against the total area sold in recorded that claim of this expenditure against the total area sold in the relevant AY is not allowable as it is only an afterthought. the relevant AY is not allowable as it is only an afterthought. the relevant AY is not allowable as it is only an afterthought.
8. The contention of the AO is not correct. The appellant relied upon ontention of the AO is not correct. The appellant relied upon ontention of the AO is not correct. The appellant relied upon guidance notes issued by ICAI and submitted that the indirect cost guidance notes issued by ICAI and submitted that the indirect cost guidance notes issued by ICAI and submitted that the indirect cost like "general administrative cost" and "selling cost" shall not be like "general administrative cost" and "selling cost" shall not be like "general administrative cost" and "selling cost" shall not be considered as a part of construction cost, rather that has t considered as a part of construction cost, rather that has t considered as a part of construction cost, rather that has to be separately claimed in the P & L account. As the AC failed to allow separately claimed in the P & L account. As the AC failed to allow separately claimed in the P & L account. As the AC failed to allow those indirect cost, that has resulted into incorrect computation of those indirect cost, that has resulted into incorrect computation of those indirect cost, that has resulted into incorrect computation of revenue and disallowance of expenditure of Rs. 6,33,30,063/. revenue and disallowance of expenditure of Rs. 6,33,30,063/. revenue and disallowance of expenditure of Rs. 6,33,30,063/. Further, in addition to this submission the appellant Further, in addition to this submission the appellant Further, in addition to this submission the appellant also placed their reliance on the decision of Jurisdictional ITAT In the case of their reliance on the decision of Jurisdictional ITAT In the case of their reliance on the decision of Jurisdictional ITAT In the case of Trident Estates Pvt Ltd. vs. ITO that has approved the Guidance Trident Estates Pvt Ltd. vs. ITO that has approved the Guidance Trident Estates Pvt Ltd. vs. ITO that has approved the Guidance Notes issued by ICAI. As per the appellant, even if the expenditure Notes issued by ICAI. As per the appellant, even if the expenditure Notes issued by ICAI. As per the appellant, even if the expenditure has to be differed, that will reduce only t has to be differed, that will reduce only the subsequent AY profit he subsequent AY profit and at the end of the project, there will not be any difference in the and at the end of the project, there will not be any difference in the and at the end of the project, there will not be any difference in the net profit ultimately. The appellant placed their reliance on the net profit ultimately. The appellant placed their reliance on the net profit ultimately. The appellant placed their reliance on the jurisdictional ITAT decision and contended that it was a revenue jurisdictional ITAT decision and contended that it was a revenue jurisdictional ITAT decision and contended that it was a revenue neutral exercise. Upon perusal neutral exercise. Upon perusal of all these details, it is noticed that of all these details, it is noticed that the AO computed the cost without allowing the indirect cost debited the AO computed the cost without allowing the indirect cost debited the AO computed the cost without allowing the indirect cost debited into the P&L account as well as the opening WIP. There is no such into the P&L account as well as the opening WIP. There is no such into the P&L account as well as the opening WIP. There is no such afterthought as recorded by the AO as the indirect expenditure were afterthought as recorded by the AO as the indirect expenditure were afterthought as recorded by the AO as the indirect expenditure were already debited into the P&L Account. The method followed by the ted into the P&L Account. The method followed by the ted into the P&L Account. The method followed by the AO is not in accordance with the Guidance Notes issued by ICAI. By AO is not in accordance with the Guidance Notes issued by ICAI. By AO is not in accordance with the Guidance Notes issued by ICAI. By respectfully following the decision of Hon'ble ITAT, the AO is respectfully following the decision of Hon'ble ITAT, the AO is respectfully following the decision of Hon'ble ITAT, the AO is directed to delete the disallowance of expenditure of Rs. directed to delete the disallowance of expenditure of Rs. directed to delete the disallowance of expenditure of Rs. 6,33,30,063/ as 6,33,30,063/ as there was no such excess claim of expenditure as there was no such excess claim of expenditure as observed by the AO in the assessment order. observed by the AO in the assessment order.
Accordingly, the grounds of appeal
from 9. Accordingly, the grounds of appeal from Gr.No.1 to 4 are Gr.No.1 to 4 are allowed.”
6. Before us the Ld. Departmental Representative (DR) relied on Ld. Departmental Representative (DR) relied on Ld. Departmental Representative (DR) relied on the order of the Assessing O the order of the Assessing Officer and submitted that the assesses and submitted that the assesses incorrectly claimed excess cost of the project incorrectly claimed excess cost of the project. Per contra, the ld Per contra, the ld Counsel relied on the order of ld CIT(A). Counsel relied on the order of ld CIT(A).
Supreme Mega Construction LLP Supreme Mega Construction LLP ITA No. 1891/MUM/2025
We have carefully considered the rival submissions and We have carefully considered the rival submissions and We have carefully considered the rival submissions and perused the material placed on record. It is perused the material placed on record. It is undisputed that the undisputed that the assessee is engaged in the business of real estate development and assessee is engaged in the business of real estate development and assessee is engaged in the business of real estate development and has consistently followed the percentage completion method for has consistently followed the percentage completion method for has consistently followed the percentage completion method for recognition of revenue and profits. Under this method, profit for a recognition of revenue and profits. Under this method, profit for a recognition of revenue and profits. Under this method, profit for a particular year is determined by alloc particular year is determined by allocating the project cost ating the project cost proportionate to the revenue recognised during that year. In the proportionate to the revenue recognised during that year. In the proportionate to the revenue recognised during that year. In the present case, there is no controversy with regard to the quantum of present case, there is no controversy with regard to the quantum of present case, there is no controversy with regard to the quantum of revenue recognised; the dispute is confined solely to the manner of revenue recognised; the dispute is confined solely to the manner of revenue recognised; the dispute is confined solely to the manner of allocation of the project cost r allocation of the project cost relatable to such revenue. elatable to such revenue.
7.1 The Assessing Officer proceeded on the premise that the The Assessing Officer proceeded on the premise that the The Assessing Officer proceeded on the premise that the assessee had claimed a cost of ₹37,42,26,463/- against the revenue assessee had claimed a cost of against the revenue recognised during the year, whereas, according to him, the recognised during the year, whereas, according to him, the recognised during the year, whereas, according to him, the admissible cost was only ₹31,12,43,974/-, resulting in an alleged admissible cost was only sulting in an alleged excess claim of ₹6,33,30,063/ 6,33,30,063/-.
7.2 Upon a careful examination of the record, we find ourselves Upon a careful examination of the record, we find ourselves Upon a careful examination of the record, we find ourselves unable to concur with this approach due to following reasons: unable to concur with this approach due to following unable to concur with this approach due to following 7.3 Firstly, we note that the Assessing Officer proceeded on an we note that the Assessing Officer proceeded on an we note that the Assessing Officer proceeded on an incorrect factual assumption. The assessee had not claimed a cost incorrect factual assumption. The assessee had not claimed a cost incorrect factual assumption. The assessee had not claimed a cost of ₹37,42,26,463/- in respect of the area sold. As is evident from in respect of the area sold. As is evident from in respect of the area sold. As is evident from the audited profit and loss account, the assessee computed the cost the audited profit and loss account, the assessee computed the cost the audited profit and loss account, the assessee computed the cost ibutable to the sold area of 29,479 sq. ft. at ₹31,12,43,974/ attributable to the sold area of 29,479 sq. ft. at 31,12,43,974/-.
Supreme Mega Construction LLP Supreme Mega Construction LLP This is clear from the profit and loss account (Refer Page No. 87 of This is clear from the profit and loss account (Refer Page No. 87 of This is clear from the profit and loss account (Refer Page No. 87 of the paper book). The cost claimed is as under: the paper book). The cost claimed is as under:
Opening Work in Progress Opening Work in Progress Rs. 35,19,92,728 Rs. 35,19,92,728 Add: Expenses during the year Add: Expenses during the year Rs. 29,57,08,105 Rs. 29,57,08,105 Total Expenses incurred Total Expenses incurred Rs. 64,77,00,833 Rs. 64,77,00,833 Less: Closing Work in Progress Less: Closing Work in Progress Rs. 33,64,56,895 Rs. 33,64,56,895 Net cost for 29479 Sq. Ft Net cost for 29479 Sq. Ft Rs. 31,12,43,974 Rs. 31,12,43,974 7.3.1 The computation was made by aggregating the opening work The computation was made by aggregating the opening work The computation was made by aggregating the opening work- in-progress of ₹35,19,92,728/ 35,19,92,728/- with the construction expenditure he construction expenditure incurred during the year of ₹29,57,08,105/-, resulting in a total incurred during the year of , resulting in a total project cost incurred of project cost incurred of ₹64,77,00,833/-, and thereafter allocating , and thereafter allocating the same between the sold and unsold area on the basis of area the same between the sold and unsold area on the basis of area the same between the sold and unsold area on the basis of area under construction. The balance cost of ₹33,64,56,859/ under construction. The balance 33,64,56,859/- was rightly carried forward as closing work rightly carried forward as closing work-in-progress. Thus, the very progress. Thus, the very foundation of the addition, namely that the assessee had claimed foundation of the addition, namely that the assessee had claimed foundation of the addition, namely that the assessee had claimed cost of ₹37,42,26,463/ 37,42,26,463/-, is factually erroneous.
7.4 Secondly, we find merit in the assessee’s Secondly, we find merit in the assessee’s contention, accepted contention, accepted by the learned Commissioner of Income by the learned Commissioner of Income-tax (Appeals), that tax (Appeals), that allocation of project cost under the percentage completion method allocation of project cost under the percentage completion method allocation of project cost under the percentage completion method has to be made on the basis of area sold and not merely on the has to be made on the basis of area sold and not merely on the has to be made on the basis of area sold and not merely on the number of units sold. number of units sold. In our opinion the correc In our opinion the correct method is to Supreme Mega Construction LLP Supreme Mega Construction LLP calculate on the basis of sq. ft and not on the basis of number of calculate on the basis of sq. ft and not on the basis of number of calculate on the basis of sq. ft and not on the basis of number of flats for the reason that flats for the reason that the record clearly shows that the flats in the record clearly shows that the flats in the project were of varying sizes and the project were of varying sizes and not of uniform size. not of uniform size. In such circumstances, apportionment of cost o circumstances, apportionment of cost on the basis of the number of n the basis of the number of flats would lead to distorted results, whereas allocation on the basis flats would lead to distorted results, whereas allocation on the basis flats would lead to distorted results, whereas allocation on the basis of area sold reflects the true and correct cost attributable to the of area sold reflects the true and correct cost attributable to the of area sold reflects the true and correct cost attributable to the revenue recognised during the year. revenue recognised during the year.
7.5 Thirdly, we are in agreement with the finding of Thirdly, we are in agreement with the finding of Thirdly, we are in agreement with the finding of the learned Commissioner of Income Commissioner of Income-tax (Appeals) that the Assessing Officer tax (Appeals) that the Assessing Officer committed a fundamental error in ignoring the opening work-in- committed a fundamental error in ignoring the opening work committed a fundamental error in ignoring the opening work progress while computing the cost attributable to the units sold of progress while computing the cost attributable to the units sold progress while computing the cost attributable to the units sold Rs. 31,08,96,400/-,. As can be seen from computation of cost by As can be seen from computation of cost by the ld the assessment unit i.e. AO as reproduced above, the the ld the assessment unit i.e. AO as reproduced above, the the ld the assessment unit i.e. AO as reproduced above, the assessment unit has considered only (a) the expenses incurred assessment unit has considered only (a) the expenses incurred assessment unit has considered only (a) the expenses incurred during the year; (b) Indirect Expenses and (c) Project Sales and during the year; (b) Indirect Expenses and (c) Project Sales and during the year; (b) Indirect Expenses and (c) Project Sales and Marketing Expenses to arr Marketing Expenses to arrive at the figure of Rs. 37,42,26,463/ ive at the figure of Rs. 37,42,26,463/-. This figure was then divided on the basis of the number of units This figure was then divided on the basis of the number of units This figure was then divided on the basis of the number of units sold and the amount of Rs. 31,08,96,400/ sold and the amount of Rs. 31,08,96,400/- was arrived at. was arrived at. Real estate projects ordinarily span over more than one financial year, estate projects ordinarily span over more than one financial year, estate projects ordinarily span over more than one financial year, and the expenditure and the expenditure incurred in earlier years, duly capitalised as incurred in earlier years, duly capitalised as work-in-progress, necessarily forms an integral part of the total progress, necessarily forms an integral part of the total progress, necessarily forms an integral part of the total construction cost. Exclusion of opening work construction cost. Exclusion of opening work-in-progress from the progress from the computation is wholly inconsistent with the principles underlying computation is wholly inconsistent with the principles underlying computation is wholly inconsistent with the principles underlying the percentage completion method. tage completion method.
Supreme Mega Construction LLP Supreme Mega Construction LLP 7.6 Lastly, the Assessing Officer erred in treating indirect expenses Lastly, the Assessing Officer erred in treating indirect expenses Lastly, the Assessing Officer erred in treating indirect expenses of Rs. 1,73,91,900/- - and selling and marketing expenses of and selling and marketing expenses of Rs. 6,11,26,458/- as part of construction cost for the purpose of as part of construction cost for the purpose of as part of construction cost for the purpose of reworking the allocation. The revised reworking the allocation. The revised Guidance Note on Accounting Guidance Note on Accounting for Construction Contracts issued by the Institute of Chartered for Construction Contracts issued by the Institute of Chartered for Construction Contracts issued by the Institute of Chartered Accountants of India expressly excludes general administrative Accountants of India expressly excludes general administrative Accountants of India expressly excludes general administrative expenses and selling costs from construction cost. The paragraph expenses and selling costs from construction cost. expenses and selling costs from construction cost. 2.4 of the guidance note, available 2.4 of the guidance note, available on Page No. 103 of the paper on Page No. 103 of the paper book, specifically excludes general administration costs and selling book, specifically excludes general administration costs and selling book, specifically excludes general administration costs and selling costs from cost of construction costs from cost of construction . Such expenses are required to be . Such expenses are required to be charged separately to the profit and loss account. The method charged separately to the profit and loss account. The method charged separately to the profit and loss account. The method adopted by the assessee is adopted by the assessee is thus in consonance with the recognised thus in consonance with the recognised accounting principles, whereas the approach of the Assessing accounting principles, whereas the approach of the Assessing accounting principles, whereas the approach of the Assessing Officer is contrary thereto. Officer is contrary thereto.
7.7 In view of the foregoing discussion, we find no infirmity in the In view of the foregoing discussion, we find no infirmity in the In view of the foregoing discussion, we find no infirmity in the well-reasoned order of the learned Commissioner of Income reasoned order of the learned Commissioner of Income reasoned order of the learned Commissioner of Income-tax (Appeals) deleting the addition of ₹6,33,30,063/- (Appeals) deleting the addition of -. The same is accordingly upheld. The grounds raised by the Revenue are accordingly upheld. The grounds raised by the Revenue are accordingly upheld. The grounds raised by the Revenue are dismissed.
Supreme Mega Construction LLP Supreme Mega Construction LLP ITA No. 1891/MUM/2025
In the result, the appeal of the Revenue is dismissed. In the result, the appeal of the Revenue is dismissed. In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open Court on ounced in the open Court on 19/01/2026. /01/2026.