Revenue recognition in real estate: project completion method upheld; adhoc 10% addition on agreements disallowed after no possession or completion.

Revenue recognition for real estate projects was examined with emphasis on the project completion method: where transactions consisted of agreements to sell rather than registered sale deeds, possession and completion certificates were not delivered in the relevant year, and substantial receipts occurred subsequently, revenue need not be recognized earlier under the project completion method, consequently an adhoc addition of 10% on agreed values was unjustified. Treatment of common expenses capitalized to work in progress under the assessees consistent accounting system was accepted, and adhoc disallowance of expenses debited in profit and loss was held unwarranted.

---

---

Issues: (i) Whether the addition of Rs. 2,29,15,350/- computed as 10% of agreed sale proceeds of 54 units (treated as final sales) is sustainable when the assessee followed project completion method, agreements were registered but possession and substantial receipts occurred in subsequent year; (ii) Whether the adhoc disallowance of Rs. 3,27,91,602/- (10% of total expenses debited to P&L) is sustainable in absence of pointed deficiencies when audited accounts and allocation details for common/group expenses were furnished and similar treatment was accepted in preceding year.

Issue (i): Whether profits on the 54 units should be taxed in the year as estimated sales or excluded under project completion method.

Analysis: The issue involved examination of the nature of the documents (agreements to sell versus registered sale deeds), timing of possession and receipt of substantial consideration, the accounting method regularly followed by the assessee (project completion method) and precedents where similar facts were considered. The tribunal compared the factual matrix showing (a) agreements only for the 54 units, (b) possession handed over and substantial receipts occurring in subsequent year, (c) existence of termination clauses in agreements, and (d) acceptance of project completion method in preceding assessment year. The tribunal also considered authorities and submissions regarding applicability of section 43CB/ICDS but treated those authorities as distinguishable on facts where the assessee had not completed projects nor handed over possession in the year under appeal.

Conclusion: The addition of Rs. 2,29,15,350/- is not sustainable and is directed to be deleted. This conclusion is in favour of the assessee.

Issue (ii): Whether adhoc disallowance of 10% of P&L expenses is justified given allocation details and audited accounts supporting capitalization and apportionment of common/group expenses.

Analysis: The issue required assessment of evidence furnished for allocation of common expenses, prior acceptance of similar allocations in the immediately preceding assessment year, audited nature of accounts, and absence of pointed discrepancies by assessing authority. The tribunal found that detailed ledgers and allocation basis were filed, that a material component (specific salaries and other allocated items) was shown, and that the department had not challenged those particulars previously; the adhoc disallowance lacked specific basis and was inconsistent with prior acceptance.

Conclusion: The adhoc disallowance of Rs. 3,27,91,602/- is not sustainable and is directed to be deleted. This conclusion is in favour of the assessee.

Final Conclusion: The appeal is allowed in respect of both challenged additions; the Assessing Officer is directed to delete the impugned additions and recompute tax consequences consistent with these conclusions.

Ratio Decidendi: Where registered agreements do not result in transfer of possession or receipt of substantial consideration in the year and the assessee follows a consistently applied project completion method accepted in prior assessments, adhoc taxation of profits on such agreements and adhoc disallowance of audited and substantiated common expenses are not justified.

---