Real estate project revenue recognition: project completion vs percentage completion to avoid double taxation; addition and interest disallowance reversed

The dominant issue was whether the AO could reject the assessee's consistently followed project completion method and compel percentage completion merely because sales exceeded the 25% threshold under ICAI guidance. Since the assessee had offered the same flat-sale revenue to tax in subsequent years on completion in line with AS-9, adopting percentage completion for the year would cause impermissible double taxation, and consistency principles (SC) barred a changed stance absent changed facts; the deletion of the revenue addition was upheld. A further issue concerned disallowance of interest under s. 36(1)(iii) r/w s. 40A(2)(a) on dealings with a related party; as no interest was claimed in P&L and the interest was capitalised to work-in-progress, the disallowance was untenable and was reversed, dismissing the Revenue's appeal.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether the addition for non-recognition of revenue from sale of flats could be sustained by applying a revenue-recognition threshold (including the 25% saleable-area condition), when the assessee followed a consistent method of recognizing revenue in later years and the income was offered to tax subsequently, such that sustaining the addition would lead to double taxation and breach of consistency.

(ii) Whether an addition/disallowance on account of "interest receivable" from a related party could be sustained where the transactions were in the nature of a current account with frequent give-and-take (including purchase-related payments), the computation basis was not shown, and the assessee had capitalized interest rather than claiming it in the profit and loss account.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Addition for alleged non-recognition of revenue from real estate project during the year

Legal framework (as discussed by the Court/Tribunal): The decision turned on the assessee's accepted method of accounting for the project and the consequences of disturbing that method in a single year, particularly where the corresponding revenue was offered in subsequent years. The Court also applied the principles of consistency across assessment years and avoidance of double taxation of the same income, in the context of timing of taxation of project revenue.

Interpretation and reasoning: The Court found that the assessee had followed the project completion method and had offered income from the sale of flats in subsequent years upon completion. The assessing authority's approach of taxing revenue in the present year (on the premise that more than 25% of area was sold) would, on the Court's findings, lead to taxation of the same income again when already offered in later years. The Court accepted the appellate authority's conclusion that sustaining the addition would "tantamount to double taxation," which is impermissible. Additionally, the Court held that the revenue could not vary from the consistently accepted approach across years in the absence of any change in facts and circumstances, and therefore the rule of consistency required acceptance of the assessee's method.

Conclusion: The deletion of the addition was upheld. The ground challenging the deletion failed because restoring the addition would result in double taxation and would improperly disturb a consistent accounting method without a change in facts.

Issue (ii): Addition/disallowance of interest as "interest receivable" from a related party

Legal framework (as discussed by the Court/Tribunal): The Court examined whether the impugned adjustment could be made when the underlying dealings with the related party were not in the nature of a loan/advance attracting interest, and when the alleged interest impact was not reflected as a claim in the profit and loss account due to capitalization.

Interpretation and reasoning: The Court agreed with the appellate authority that the ledger demonstrated a running/current account with frequent advances and repayments, including statutory payments made for each other and purchase transactions, and that a payable balance existed at year end-indicating that the dealings could not "in any way be in the nature of loan & advances" requiring interest. The Court also noted that the assessing authority did not provide a clear computation basis for the adjustment and had, in effect, disallowed interest paid on borrowings without showing linkage between borrowings and the related-party account movements. Crucially, the Court accepted the finding that the assessee had not claimed interest as an expense in the profit and loss account but had capitalized it in the balance sheet under construction-related cost; therefore, adding the disallowance amount to profit was held to be incorrect on the facts found.

Conclusion: The deletion of the addition/disallowance was upheld. The adjustment was unsustainable because the transactions were held to be current account transactions rather than interest-bearing loans/advances, lacked demonstrated computation/linkage, and the relevant interest was not claimed in the profit and loss account but capitalized.

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