Real estate developer wins appeal on general expenses allocation and profit recognition timing under AS-7 accounting standards

ITAT Ahmedabad upheld CIT(A)'s decision in a real estate development case. The tribunal dismissed revenue's appeal regarding disallowance of general expenses, finding CIT(A)'s cost allocation between project phases appropriate. On additions for unsold flats and profit margins, ITAT ruled against revenue, holding that Percentage Completion Method doesn't deem all flats sold upon project completion. Following AS-7 guidelines and precedent, profit arises only upon property title transfer, not advance receipt. The assessee's audited accounts correctly followed accounting standards, making revenue additions baseless.

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Issues Involved:

1. Disallowance of general expenses of Rs. 42,65,761/-
2. Addition of Rs. 82,53,21,404/- towards undisclosed portion of profit pertaining to Phase 1
3. Addition of Rs. 1,84,31,150/- being profit on unrecorded sales

Issue-wise Detailed Analysis:

1. Disallowance of General Expenses of Rs. 42,65,761/-:

The assessee, engaged in the construction of a project named "Casa Vyoma," followed the percentage completion method to recognize its revenue. The total general expenses claimed were Rs. 1,54,94,955/-. The AO bifurcated these expenses into two parts according to the cost incurred in the ratio of Phase-1 & Phase-2 projects, disallowing Rs. 42,65,761/- as Phase-2 revenue was not recognized during the year. The CIT(A) restricted this disallowance to Rs. 19,28,265/- after examining the nature of the expenses and determining that Rs. 1,02,79,961/- was exclusively attributable to Phase-1. The ITAT upheld the CIT(A)'s decision, noting that the AO's apportionment without examining the actual nature of the expenses was incorrect. The disallowance of Rs. 19,28,265/- on account of general expenses was upheld, and the ground taken by the Revenue was dismissed.

2. Addition of Rs. 82,53,21,404/- towards Undisclosed Portion of Profit Pertaining to Phase 1:

The AO added Rs. 82,53,21,404/- to the income, representing the cost of construction of 149 unsold flats in Phase-1, which was completed 100%. The AO presumed that revenue should have been recognized for all flats under the percentage completion method. The CIT(A) deleted this addition, explaining that the percentage completion method does not imply that all flats are deemed sold upon project completion. The ITAT agreed, stating that the addition was based on a wrong presumption of accounting standards. The cost of construction of unsold flats could not be treated as profit, and the addition was found to be without merit. The ITAT upheld the CIT(A)'s deletion of the addition.

3. Addition of Rs. 1,84,31,150/- Being Profit on Unrecorded Sales:

The AO added Rs. 1,84,31,150/- as profit margin on 9 booked flats, assuming that the revenue should have been recognized under the percentage completion method. The CIT(A) deleted this addition, explaining that the revenue recognized for these flats was less than 10%, and some bookings were canceled. The ITAT upheld the CIT(A)'s decision, noting that the percentage completion method did not trigger revenue recognition for these flats as the advance received was less than 10%. The addition was found to be without basis, and the ITAT upheld the deletion of the addition.

Conclusion:

The ITAT dismissed the appeal preferred by the Revenue, upholding the CIT(A)'s order in all respects. The disallowance of general expenses was restricted to Rs. 19,28,265/-, and the additions of Rs. 82,53,21,404/- and Rs. 1,84,31,150/- were deleted. The ITAT found no merit in the Revenue's grounds and upheld the CIT(A)'s findings based on a correct understanding of the accounting standards and the methodology adopted by the assessee.

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