TaxTMI 
TaxTMI 
2022 (11) TMI 70
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....ts being that the assessee is in the business activity as builder/ developer and had adopted Percentage Completion Method (PCM) for recognizing its income/revenue. For the impugned year the income had not been recognized by the assessee for the reason that the Guidance Note for Accounting of Income of Construction and Development Activity, issued by the Institute of Chartered Accountants of India, the regulatory body for the accounting profession, required that where PCM is followed the income is to be recognized only when 25% of the construction and development cost ,as defined under Guidance Note, has been incurred, and as per the assessee's claim, its work was completed only to the extent of 22.73%. The working of the same is reproduced in the order of the ld.CIT(A) as under: 5. The AO however computed the work completed at 34%, and therefore held that income on the work completed needed to be recognized in the impugned year applying PCM as per the guidance note issued by the ICAI. The ld.CIT(A) noted that the AO while computing construction and development cost had wrongly added land cost to the same which even as per the Guidance Note needed to be excluded for the said purp....
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....pecifically reimbursable, can be clearly identified and measured reliably." 7.5 Following the guidance in AS-7 as above issued by institute of Chartered Accountants of India (ICAI) the developers and contractors follow PCM to recognise the income which have been accepted by the department as well as the judicial forums. In the case at hand also AO has in principle accepted this method followed by the appellant. The PCM has two major components, one is the total cost of project as estimated which is called Estimate Project Cost (EPC) and the second component is Construction and Development Cost (CDC). When the CDC reaches at least 25% of EPC the revenue is recognised as per PCM. Source of this method is guidance note issued by ICAI in this regard which according to the appellant have been adopted substantially and with regard to the sub components of CDC in toto in the draft of ICDS (Income Computation and Disclosure Standards) of real estate transactions circulated by CBDT in May, 2017. The relevant part of guidance note of ICAI are reproduced as below: "5. Application of Percentage Completion Method 5.1 The percentage completion method should be applied ....
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....le to land or other rights to development/ construction. (iv) Change in land use (b) When the stage of completion of the project reaches a reasonable level of development. A reasonable level of development is not achieved if the expenditure incurred on construction and development costs is less than 25 % of the construction and development costs as defined in paragraph 2.2 (c) read with paragraphs 2.3 to 2.5. (c) Atleast 25% of the saleable project area is secured by contracts or agreements with buyers. (d) Atleast 10 % of the total revenue as per the agreements of sale or any other legally enforceable documents are realised at the reporting date in respect of each of the contracts and it is reasonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts. To illustrate - If there are 10 Agreements of sale and 10 % of gross amount is realised in case of 8 agreements, revenue can be recognised with respect to these 8 agreements." Guidance Note of ICAI: Para 2.2 to 2.5 are reproduced as below: "2.2 Project Costs - Project costs in relation to a project ordinarily compr....
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.... rational and are applied consistently to all costs having similar characteristics. The allocation is based on the normal level of project activity. Construction overheads include costs such." 7.6 The contention of the appellant is that as per para 2.3 as above the CDC does not include land cost and finance cost but as per AO these cost should be included in the CDC. From the guidance note as above it is clear that the CDC does not include the land cost. Appellant has also relied upon the audited accounts available in public domain of some reputed developers as mentioned in the earlier part in support of its contention that the land cost and finance cost does not form part of the CDC. Without prejudice appellant has contended that even if the finance cost is included still the CDC will not reach 25%. As regards the land cost, I am inclined to agree with the appellant for the reason that (a) the guidance note as above do not include the land cost (b) logically if the land cost is included which have been done by the AO then the threshold of 25% may reach even if no construction is carried out or no booking money is received. However, I am not inclined to accept the contenti....
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....monstrated above. The above facts are coming out from the tables in the assessment order itself which make it very clear that after excluding the land cost the Construction and Development Cost (CDC) comes to less than 25% of the estimated project cost (EPC). Hence, no income can be recognised under PCM during the year. Accordingly, the addition made by the AO amounting to Rs.11,20,03,956/- are directed to be deleted. AO is directed to adopt the correct figure of Rs.23.88% as above. Ground No.3 to 7 of the appeal are accordingly partly allowed." 6. Before us, the ld.DR was unable to point any infirmity in the findings of the Ld.CIT(A) that as per the guidance note issued by the ICAI for accounting of construction contracts the cost of land was to be excluded for calculating the Construction and Development cost of the project, nor was he able to controvert the factual findings of the Ld. CIT(A) that after excluding this cost of land the CDC completed by the assessee during the year was below the prescribed 25% of the Estimated cost of the project. Since the basis of the AO for recognizing Revenue from construction contracts of the assessee during the impugned year wa....