TaxTMI 
TaxTMI 
2025 (11) TMI 451
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....ave recognized revenue on the percentage completion basis and not project completion basis ignoring that this method was accepted in the scrutiny assessment for earlier year. 3. Ld. CIT (A) (NFAC) erred in law and on facts not appreciating that as per para 3.3 of Guidance note 2012 issued by ICAI for recognition of revenue in real estate transaction is to be determined at a time when significant risks & rewards of ownership can be considered as transferred under sale agreement. 4. Ld. CIT (A) (NFAC) erred in law and on facts in confirming addition made by AO on the basis of revenue recognition as per Accounting Standard 7 whereas in absence of legal title being validly transferred to the buyer it shall be recognized as per Accounting Standard 9 followed by the appellant. 5. Ld. CIT (A) (NFAC) erred in law and on facts not appreciating submission that the appellant has already offered income on project completion method in subsequent years & the addition made during the year on percentage completion basis will tantamount to double taxation of the same income. 6. Ld. CIT (A) (NFAC) erred in law and on facts not taking into consideration that revenu....
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.... accounting for Real Estate Transactions in 2012, it is pertinent to reproduce the relevant portion of the said guidance note for adjudication of the issue: "3. Accounting for Real Estate Transactions 3.1 Real estate activities and transactions take diverse forms. While some are for sale of land (developed or undeveloped), others are for construction, development or sale of units that are not complete at the time of entering into agreements for construction, development or sale. 3.2 The typical features of most construction/development of commercial and residential units have all features of a construction contract - land development. structural engineering, architectural design and construction are all present. The natures of these activities are such that often the date when the activity is commenced and the date when the activity is completed usually fall into different accounting periods. It is not unusual for such activities to spread over two or more accounting periods. 3.3 For recognition of revenue in case of real estate sales, it is necessary that all the conditions specified in paragraphs 10 and 11 of Accounting Standard (AS) 9. Revenue....
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....described in paragraph 3.3 above requires a careful analysis of the elements of the transaction, agreement, understanding and conduct of the parties to the transaction to determine the economic substance of the transaction. The economic substance of the transaction is not influenced or affected by the structure and/or legal form of the transaction or agreement. 4. Application of Principles of AS 9 in Respect of Sale of Goods to a Real Estate Project 4.1 The application of principles of AS 9 in respect of sale of goods requires recognition of revenues on completion of the transaction/activity when the revenue recognition process in respect of a real estate project is completed as explained in paragraph 4.2 below. 4.2 The completion of the revenue recognition process is usually identified when the following conditions are satisfied: (a) The seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with ownership: Compendium of Guidance Notes Accounting (b) The seller has effectively handed over possession of the r....
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....iated with the project should be recognised as revenue and expenses respectively applying the percentage of completion method in the manner detailed in paragraphs 5.3 to 5.8 below. 5.3 Further to the conditions in paragraph 5.2 there is a rebuttable presumption that the outcome of a real estate project can be estimated reliably and that revenue should be recognised under the percentage completion method only when the events in (a) to (d) below are completed. (a) All critical approvals necessary for commencement of the project have been obtained. These include, wherever applicable: (i) Environmental and other clearances. (ii) Approval of plans, designs, etc. (iii) Title 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 ....
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....e by reference to the stage of completion of the project activity should not at any point exceed the estimated total revenues from eligible contracts/other legally enforceable agreements for sale. "Eligible contracts' means contracts/ agreements specified in paragraph 5.3 where at least 10% of the contracted amounts have been realised and there are no outstanding defaults of the payment terms in such contracts. 5.7 When it is probable that total project costs will exceed total eligible project revenues, the expected loss should be recognised as an expense immediately. The amount of such a loss is determined irrespective of: (a) commencement of project work; or (b) the stage of completion of project activity. 5.8 The percentage of completion method is applied on a cumulative basis in each reporting period to the current estimates of project revenues and project costs. Therefore, the effect of a change in the estimate of project costs, or the effect of a change in the estimate of the outcome of a project, is accounted for as a change in accounting estimate. The changed estimates are used in determination of the amount of revenue and expenses re....
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.... completed, and there is certainty both of the amount of consideration to be received as also of receipt of the consideration. 9. However para 3.3 of the guidance note recognizes that in Real Estate transactions the activity of sale may some times take place on initiation of the project itself, resulting in the activity remaining to be carried out being in essence only a construction contract activity. That in such circumstances the principles of revenue recognition prescribed for construction contracts in AS-7 should be applied, which is the percentage completion method. The said para emphasis that for determining the fact that sale has taken place on the initiation of the project itself, the terms of the agreement entered into with buyers are very relevant. 10. Para 3.3 notes that usually in real estate transactions an agreement to sell is entered into by buyers with sellers at the initial stages of construction. The guidance note states that the terms and conditions specified in the agreement for sale are determinative of the point of time when significant risks and rewards of ownership can be considered transferred. And once the agreement to sell significantly transfers a....
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....hen atleast 25% of the project cost is incurred, atleast 25% of the project is sold, and 10% of Revenues received thereon. 16. The guidance note states thereafter, that on fulfilment of the above conditions, Revenue should be recognized on the basis of and in the same percentage as the stage of completion of the project. 17. In essence, the guidance note states that the percentage completion method of Revenue recognition in Real Estate transactions is to be adopted when the project being executed is more in the nature of construction contract with significant risks and rewards of ownership being transferred, as per the agreement to sell entered into, at the initiation of the project itself and the outcome of the project being capable of reasonable estimation. 18. Therefore, as per the guidance note itself the determining factor for application of percentage completion method of accounting for Revenue recognition in Real Estate Transactions is, when the risks and rewards in the saleable units / project is transferred at the initiation of the project itself, when agreement to sell is entered into with buyers, and the Project thereafter remains more in the nature of a constru....
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....; and Percentage completion method for recognising revenue, costs and profits from transactions and activities of real estate which have the same economic substance as construction contracts. 19. In the present case, we have noted that the assessee has consistently pleaded that in its case it cannot be said to be a construction contract, pointing out that the builder employs his own money in the project, there is no certainty of receiving bookings initially and even the agreement entered into with the buyers at the initial stage cannot be said to tantamount to transfer of all risks and rewards to the buyers. The assessee has pointed out that the buyers had liberty to cancel the booking at any stage and there was no penalty leviable for cancellation of bookings and that even the revenue from sale of units was not fixed, but, it was always negotiable with the buyer. The assessee has consistently pleaded that the risk and rewards stood transferred to the buyers only at the time of transfer of ownership by legal title or at the time of handing over possession of property. The contention of the assessee in this regard are contained at Page 8 of the assessment order as under:....
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....n method for Revenue recognition, we find that the Revenue has not controverted this very pertinent contention of the assessee by examining any agreement to sale entered into by the buyers as noted above. 21. The guidance note strictly prescribes Revenue to be recognized only when all risks and rewards of ownership of a unit are transferred to the buyers as per AS-9, i.e project completion method for Revenue recognition and categorically states that percentage completion method is to be applied only when the economic substance of the project can be said to be of a construction contract. The guidance note recommend the examination of the terms of contracts entered into with buyers by the project developers for determining its nature, whether construction contract or not. And the assessee repeatedly pointing out elements of its project pointing to the fact that it was not in the nature of a construction contract, the Revenue has miserably failed in controverting this contention of the assessee from the terms of contracts/agreement to sell entered into by the assessee with its buyers. While the assessee has consistently stated that risks and rewards of ownership were not transferre....