TaxTMI 
TaxTMI 
2026 (7) TMI 193
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.... was recorded as and when units constructed were sold and physical possession was handed over to the buyer. Meaning thereby when the significant risk and rewards of the ownership transferred to the buyer, the sale has been recognized. By following the said method, the return of income was filed on 31.10.2018, declaring total income of INR 2,28,75,410/-. The case was selected for complete scrutiny and the AO observed that the assessee should have followed the guidance notes issued by Institute of Chartered Accountant of India ("ICAI") for accounting of real estate transaction as revised in the year 2012 according to which the Revenue on such type of real estate project has to be recognized on Percentage of Completion Method ("POCM"). Accordingly, the AO observed that the assessee has received total advance of INR 67,25,65,661/- from the customer in respect of Eden Garden Project and has almost constructed upto 89% therefore, to the extent of advance received, the revenue needs to be recognized. Thereafter, the AO has taken the total agreed value at INR 67,30,39,528/- of the total area to be sold and recognized the revenue @ 89% of the completed area at INR 59,90,05,180/- and worked ....
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....89% of the project got completed and assessee has booked almost 100% units to be constructed and received major portion of the sale proceeds as advance, therefore, the assessee should have disclosed the income based on POCM advised by the Institute of Chartered Accountant. Ld. CIT DR thus, submits that the AO has correctly computed the profits of the project on the sale of 89% of the area at INR 26,25,68,120/- which deserves to be upheld. She prayed accordingly. 7. On the other hand, Ld.AR vehemently supported the order of Ld. CIT(A) and submits that assessee had regularly recognized its revenue in terms of Accounting Standard-9 prescribed and followed the PCM since inception. Ld.AR submits that same method was followed by the assessee in preceding AYs where the income was recognized based on the units finally sold and all the significant risk and rewards were transferred to the buyers after registration of Sale Deed. Ld. AR submits that in preceding AYs, sales to the extent of INR 28,98,38,115/- from 68 units was recognized and due taxes were paid which have been accepted by the revenue. For this, Ld.AR placed on record the copy of the assessment order for AY 2017-18 where the ....
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.... of land was in progress. The said project was commenced on 14.08.2007 and completed on 08.05.2017 in terms of the completion certificate issued by the Directorate of Town and Country planning Unit. As per the Agreement to Sale, the company hold the full authority of every such flats unless corresponding Sale Deed was registered and physical position was handed over to the buyer. Till then, the advances received was kept as liability which could be refunded to the buyers in case of unwillingness to take the possession after the execution of Sale Deed. The total units constructed year-wise and the revenue recognized, was submitted before Ld. CIT(A) and reproduced at page 44 of the appellate order which are as under:- "A total of 314 units/flats were developed in the above categories, out of which- 1. Conveyance deed of 68 units was registered prior to 31.03.2017, and corresponding sale revenue of Rs. 28,98,38,115/- was duly recognized in the books of accounts of preceding years. 2. Conveyance deed of 56 units was registered during the year under consideration (i.e. FY 2017-18) and therefore, corresponding sale revenue of Rs. 23,01, 13,394/- was duly offere....
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....36,750/- on the basis of PCM has been accepted by the Revenue without raising any doubts about the method of revenue recognition. 11. It is further observed that during the year under appeal, the assessee has recognized the Revenue of 56 units at INR 23,01,13,394/- i.e. units for which the Convenance Deeds were executed and physical possession were handed over to the respective buyers. The remaining units were sold in subsequent AYs where the year-wise revenue was recognized and due taxes were paid which could be seen from the observations of Ld. CIT(A)'s order as reproduced herein above. 12. All these facts clearly suggests that the assessee since beginning of the project, had recognized the Revenue as per PCM and Revenue cannot change the method to POCM randomly and brought to tax the Revenue which was already offered for tax in earlier years or offered in subsequent AYs where the income tax returns have been filed. 13. Under identical circumstances, the Hon'ble Supreme Court in the case of CIT vs Excel Industries Ltd. [2013] reported in 358 ITR 295 (SC) and Radha Saomi Satsang vs CIT reported in [1992] 193 ITR 321 (SC) has held that the AO was duty bound to follow the p....
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....The buyer enters into a legally enforceable agreement at early construction stages; * Construction is carried out substantially on behalf of the buyer; * Revenue, cost, and outcome of the project can be reliably estimated. 12.5 In such cases, even a real estate developer is required to follow the Percentage of Completion Method (POCM) for revenue recognition, just like a contractor. The conditions presuppose a contractual environment consistent with a construction contract, which is absent here. Moreover, the appellant has rightly pointed out that the guidance note itself warns against forced application of POCM where the substance of transaction is sale of completed flats and not contractual construction services. The mere fact that the project crossed a certain completion percentage or booking value does not by itself warrant adoption of POCM unless the legal obligations and risk structure match that of a contractor, which is clearly not the case. 12.6 In light of the above, it is held that the appellant has correctly applied the Completed Contract Method in accordance with the prevailing accounting standards, judicial precedents, and business ....
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.... the Completed Contract Method in earlier years, without recording any adverse inference or suggesting any under-reporting of income, reinforces the credibility and appropriateness of the method in the context of the appellant's business model. The current assessment year does not present any deviation in project type, contractual framework, or revenue cycle which could warrant a different treatment. The Eden Garden project follows the same commercial and accounting structure as in earlier years, and the decision to apply POCM in this year appears arbitrary and without reference to change in facts or breach of statutory conditions. Therefore, in the absence of rejection of books under section 145(3), and in view of the consistently accepted accounting treatment under the Completed Contract Method, the sudden departure by the Assessing Officer in the present year violates the rule of consistency and lacks legal or factual justification. 12.9 The appellant has relied on several judicial pronouncements to support its contention that the PCM is a recognized and accepted method in the real estate sector and that any change in the accepted method should be grounded in specific s....
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...., based on the detailed discussion of business model, the consistent approach of the appellant in adopting project completion method and acceptance of the same by the department and judicial decision including jurisdictional High Court, the addition of Rs. 26,25,68,120/- done by the AO by changing the method of accounting lacks merit and hence the same is deleted. This ground of appeal is allowed. 14. As discussed herein above, we find that assessee has followed PCM for recognizing its revenue consistency since inception of the project and was accepted by the Revenue in the order passed u/s 143(3) of the Act. Further, the Jurisdictional High Court in the case of CIT vs Manish Build Well Pvt. Ltd. reported in [2012] 204 taxmann.com 106 has also held that PCM method is well accepted accounting method suitable for real estate developers and therefore, it cannot be altered. This view is further supported by the Hon'ble Calcutta High Court in the case of Salarpuria Simplex Dwelling LLP vs PCIT reported in [2022] 143 taxmann.com 35 (Calcutta) as relied upon by Ld. CIT(A). 15. In view of the above facts, we find no error in the order of Ld. CIT(A) in holding that the assessee has ri....