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Income Tax Appellate Tribunal, PUNE “A” BENCH : PUNE
Before: SHRI RAMA KANTA PANDA & SHRI SATBEER SINGH GODARA
ORDER PER SATBEER SINGH GODARA, J.M. : This Revenue’s appeal for assessment year 2020-21, arises against the CIT(A), Pune-12, Pune's Din and Order No. 16.10.2023, ITBA/APL/S/250/2023-24/1057078474(1), dated involving proceedings u/s.143(3) of the Income Tax Act, 1961 (in short “the Act”).
Case called twice. None appears at assessee’s behest. It is accordingly proceeded ex-parte.
2. The Revenue pleads the following substantive grounds in the instant appeal :
2 ITA.No.25/PUN./2024 1. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the appeal of the assessee with regard to the addition of Rs.1,97,12,000/- made on account of variation in revenue recognition on the basis of percentage completion method without appreciating the fact that the provisions of section 43CB provides that the profit and gain arising from construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with Income Computation and Disclosure Standard (ICDS) with effect from 01/04/2017.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not considering decision of Champion Construction Co. Vs First Income-tax Officer (l983) 5 ITD 495 (BOM), while deciding the case of the assesses.
3. The appellant craves leave to add, modify or alter any of the grounds.”
Mr. Murkunde next took us to the Ld. CIT(A)'s detailed discussion reversing the assessment findings invoking sec.43CB of the Act and making the impugned addition of Rs.1,97,12,000/- as under :
“6.1. Vide this ground of appeal the appellant contended that the AO has erred in making addition of Rs. 1,97,13,000/- without 3 ITA.No.25/PUN./2024 appreciating the facts of the case in proper perspective. Hence, the appellant has requested to delete the addition. In support of the grounds raised the appellant submitted as under. “Submission of Appellant:- The appellant would like to submit as under:-
1. During the course of assessment hearing the learned AO asked us to submit revenue calculation as per the provisions of section 43 CB of the act. In response to the said notice we explained in detail that the provisions of section 43 CB are applicable to a construction contractor and not to a builder and it was also explained to him that the appellant firm is a promoter builder and developer and not a construction contractor
2. The appellant was also asked to submit a copy of agreement to sales entered into with the prospective customers which was also duly provided to the learned assessing officer
3. The appellant was also asked to submit a total tentative project calculations of revenue and cost which was also submitted in reply to the notice to the learned AO
4. In the show cause notice, the learned AO referring to certain clauses with respect to construction and payment plan, as mentioned in the agreement to sales, came to a conclusion that the assessee firm is a construction contractor and not builder and hence provisions of section 43 CB will be applicable to the Assessee
5. This conclusion drawn by the learned AO is nothing but Travisity of justice wherein a ridiculous interpretation of a 4 ITA.No.25/PUN./2024 very serious statement is made by any authority making a mockery of a very serious matter 6. We are still unable to understand that how a payment plan and a construction clause in any agreement to sales entered into with the prospective customer can lead to a conclusion that we are a construction contractor and not a builder. The learned AO failed to understand the difference between a construction contractor and a builder a. The building industry is composed of contractors and projects. It is a business with complex undertakings that employ contractors and sub-contractors, handling jobs of architects, engineers, surveyors, carpenters, plumbers, electricians, painters, and the list goes on. To make things straight, a building contractor is not a builder. The builder is the one responsible in facilitation of the home or building construction. A builder builds, sets the foundation of the home, its framing, and roofing a Construction Contractor. This view taken by you is really a surprise for us. A Builder purchases a Land on his own, Get the plans sanctioned on his own, starts construction on his own and later on the flats are offered for sales. When any prospective buyer likes the flat and the cost offered, he enters into an agreement to sales (ATS). Hence both are very different. After the said ATS, Builder continue doing construction of entire Building as per plans sanctioned and complete the construction. During this period the amounts are received from buyers as per stage of work completed. This is the modus operandi followed by all the Builders 5 ITA.No.25/PUN./2024 all over the world. If view of Learned AO holds good, than there are no builders in our country. All are construction contractor. b. Even the Income Tax Department has distinguished between a Contractor and a Builder. ICDS III (Construction contract) is already made effective for a construction contractor. Further Since this ICDS was not applicable to the Builders, hence another ICDS was proposed for real estates transactions which is not yet notified. If the Builder is a construction contractor than there was no need for a separate ICDS on Real Estates transaction. This clearly shows that a clear cut distinguish is made between a construction contractor and a builder in in the Income tax Act as well. c. The term ‘Construction contract’ is not defined under the Act. However, it is defined under ICDS III. '"Construction contract" is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use and includes: (i) contract for the rendering of services which are directly related to the construction of the asset ,for example, those for the services of project managers and architects; (ii) contract for destruction or restoration of assets, and the restoration of the environment following the demolition of assets.
6 ITA.No.25/PUN./2024 Plain reading of the above definition clearly suggests that the construction undertaken by real estate developer does not satisfy the above definition as the contract is not negotiated for the constriction of asset. The real estate developer constructs the asset as per his scheme and contracts with the buyer to sell the asset. d. CBDT vide Circular No. 10/2017, dated 23-3- 2017 clarified as under: “Question 12: Since there is no specific scope exclusion for real estate developers and Build - Operate - Transfer (BOT) projects from ICDS IV on Revenue Recognition, please clarify whether ICDS-III and ICDS-IV should be applied by real estate developers and BOT operators. Also whether ICDS is applicable for leases.
Answer: At present there is no specific ICDS notified for real estate developers, BOT projects and leases. Therefore, relevant provisions of the Act and ICDS shall apply to these transactions as may be applicable.”
The CBDT has tacitly accepted that ICDS III is not applicable to Real Estate Developers. e. ICAI in its Technical Guide on ICDS in Chapter 4 para 1.3 has made the following relevant observation /comments.
7 ITA.No.25/PUN./2024 ‘The differentiation between a contractor and a builder has also been accepted by ICAI in interpretation to AS 7 issued earlier.
The Tax Accounting Standards committee (‘TAS Committee’) in the final report published during August 2012 in para 8.1.5 observed that a separate ICDS dealing with income recognition by the real estate developers would be notified. The CBDT has clarified in the FAQ issued on 23rd March, 2017 vide Circular No 10/2017 (Reply to Question No.12) that this ICDS is not applicable to real estate developers’. f. Proposed ICDS by CBDT A draft ICDS on Real Estate Transactions has been published for public comment on 11th May, 2017. The said ICDS is in sync with the guidance note for accounting for real estate transactions issued by ICAI which only permits percentage completion method as a method for a computation of business income for real estate developers. The said ICDS is still under discussion. g. In view of the above discussion, we submit that the provisions of section 43CB read with ICDS III and IV does not apply to Real Estate Developer h. Since it is very clear that the provisions of section 43 CB are not applicable to a builder and appellant is a firm of promoter builder and 8 ITA.No.25/PUN./2024 developer therefore any addition made on the basis of provisions of section 43 CB needs to be deleted therefore it is requested that the addition made by applying section 43 CB may please be deleted. i. Without prejudice to above, it is further submitted that the assessee since its inception is following Project Completion method and the same is accepted by the department in all earlier assessments. Following the Principle of Consistency Rule without any change in law and facts, the method consistently adopted by the assessee cannot be changed. Reliance is placed upon the following judgements 1. Decision of Gujarat High Court in the case of Manjusha Estates (P) Ltd Vs ITO reported in (2017) 393 ITR 644.
Decision of ITAT- Mumbai in the case of Prem Enterprises ITO reported in (2012) 25 3. Decision of High Court of Punjab & Haryana in the case of CIT Vs. Principal Officer, Hill view Infrastructure reported in (2016) 384 ITR 451- Follows CIT Vs. Bilahari Investment (P) Ltd. reported in (2008) 299 ITR 1 (SC) 4. Decision of ITAT-Mumbai in the case of Hardware Infrastructure P. Ltd 5. Decision of ITAT- Ahmedabad in the case of Unity constructions V/s ITO 9 ITA.No.25/PUN./2024 6. Decision of Delhi High Court in the case of Manish Buildwell Pvt. Ltd. reported in (2016) 16 com 27 (Del) 7. Decision of Ashoka Hitech Builders Pvt Ltd Vs DCIT (Indore ITAT) There are many such judgements wherein it is held that the Method of accounting followed by the assessee and accepted by the department is binding upon AO unless a change in Law or facts is there. In our Case even in AY 2018- 19 and earlier year assessments, the department has accepted that Project Completion method and hence it cannot be changed now. Therefore in view of above it is submitted that the addition made may please be deleted.” Finding : 6.2. I have considered the facts of the case and the submissions made by the appellant. Briefly, the facts are that, the appellant had declared a profit of Rs. 11,70,84,960/- in its return of income in the relevant year on the basis of project completion method. During the course of assessment proceedings, the AO observed that the appellant had offered profits for taxation in respect of project ‘Armada’ situated at Wakad, Pune on piecemeal basis from AY 2019- 20 to AY 2021-22. The current status as on 31.03.2020 in respect of completion and the profits shown in the 10 ITA.No.25/PUN./2024 return of income related to the above project is tabulated as below.
Further, the appellant was issued notice u/s 142(1) on 25.08.2022 asking whether revenue was offered in accordance to section 43CB. In response to the same, appellant stated in its submission dated 08.09.2022 that the firm is a promoter, builder and developer and not executing any type of construction contract hence section 43CB is not applicable to it. The said section is applicable to a construction contractor. The appellant also stated that it has adopted completed contract method for recognition of revenue since last more than 15 years /beginning of the firm and was duly accepted by the department as well as in all earlier year assessment. Under the completed contract method the revenue on account of sales is recognized in P&L account on the basis of possession given to customers with undisputed amount of consideration. Vide notice u/s 142(1) issued to the appellant on 16.09.2022 the AO had asked for a sample copy of prospective buyer 11 ITA.No.25/PUN./2024 agreement duly signed by the buyer and to provide the details about the project cost and project revenue. In response to the same, the appellant had submitted the reply on 19.09.2022 providing one sample buyer agreement and project details. The AO calculated profit of the said project with respect to the section 43CB of the Act as per percentage of completion method of accounting as under.
As per working in the above chart, the profit for A.Y. 2020-21 on the basis of percentage completion method is Rs. 13,67,96,960/-. Later on, the AO issued a show cause notice to the appellant on 20.09.2022, asking it as to why the difference of Rs. 1,97,12,000/- (Rs. 13,67,96,960 – Rs. 11,70,84,960) should not be made taxable. In response to the show cause notice, the appellant had filed submission. However, same was not acceptable by the AO. Accordingly, the same was added to the total income of the appellant.
6.3 During the appellate proceedings, the appellant submitted that the appellant firm since 12 ITA.No.25/PUN./2024 its inception is following Project Completion method and the same is accepted by the department in all earlier assessments. Following the Principle of Consistency Rule without any change in law and facts, the method consistently adopted by the appellant cannot be changed. The appellant has relied upon the following judgments.
Decision of Gujarat High Court in the case of Manjusha Estates (P) Ltd Vs ITO reported in (2017) 393 ITR 644.
2. Decision of ITAT- Mumbai in the case of Prem Enterprises ITO reported in (2012) 25 3. Decision of High Court of Punjab & Haryana in the case of CIT Vs. Principal Officer, Hill view Infrastructure reported in (2016) 384 ITR 451 - Follows CIT Vs. Bilahari Investment (P) Ltd. reported in (2008) 299 ITR 1 (SC) 4. Decision of ITAT-Mumbai in the case of Hardware Infrastructure P. Ltd 5. Decision of ITAT- Ahmedabad in the case of Unity constructions V/s ITO 6. Decision of Delhi High Court in the case of Manish Buildwell Pvt. Ltd. reported in (2016) 16 com27 (Del) 7. Decision of Ashoka Hitech Builders Pvt Ltd Vs DCIT (Indore ITAT)
13 ITA.No.25/PUN./2024 There are many such judgements wherein it is held that the method of accounting followed by the appellant and accepted by the department is binding upon the AO unless a change in law or facts is there. However, in this case, it is seen that the appellant has followed the project completion method since last 15 years and the department has also accepted the same even in AY 2018-19 and earlier year assessments and hence it cannot be changed now. Accordingly, the addition of Rs. 1,97,12,000/- made by the AO is to be deleted. Therefore, this ground raised by the appellant is hereby allowed.”
4. Mr. Murkunde vehemently argued in support of the Revenue’s appeal above extracted pleadings that the CIT(A) has erred in law and on facts in deleting the impugned addition. He could hardly dispute the clinching fact that this is not the first year of the assessee having adopted Project Completion Method [“PCM”] as it has come on record that the very method of accounting stands accepted in preceding assessment years; and more particularly, in assessment year 2018-19. We wish to make it clear that this is not even the Revenue’s case in it’s pleadings that the relevant facts herein stand as an exception to those involved in the said preceding assessment year(s). Faced with this situation and keeping in mind the fact that the Ld. CIT(A) has already considered a 14 ITA.No.25/PUN./2024 catena of case law having decided the very issue in assessee’s favour, we see no merit in the Revenue’s instant sole substantive grievance. The same stands declined therefore. Ordered accordingly.
This Revenue’s appeal is dismissed in above terms.
Order pronounced in the open Court on 24.04.2024.