Project Completion Method Upheld: ITAT Deletes ₹3.56 Crore Addition for Real Estate Developer [Read Order]

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) deleted an addition of Rs. 3,56,16,215 made by the Assessing Officer (AO) held that the assessee correctly followed the Project Completion Method under Accounting Standard-9 (AS-9) for revenue recognition.

Vyapti Enterprise, (assessee) a partnership firm engaged in real estate development, filed its income tax return for AY 2018-19, declaring nil income. The firm was developing a housing project named "Vandemataram Fabula," comprising 200 residential and 21 commercial units on its own land in Charrodi, Ahmedabad.

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The assessee recognized revenue only upon execution of conveyance deeds and transfer of possession to buyers, as per AS-9 and the Guidance Note on Accounting for Real Estate Transactions (Revised 2012) issued by the Institute of Chartered Accountants of India (ICAI).

The AO applied the Percentage Completion Method (PCM) observing that the assessee had received Rs. 22,71,16,656 as advances (78% of the total sale consideration of Rs. 29,11,23,000) and incurred Rs. 42,89,00,000 (72% of the estimated project cost of Rs. 59,35,00,000, including land cost).

The AO computed an assessed income of Rs. 3,56,16,215. Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) upheld the addition citing Accounting Standard-7 (AS-7) and ICAI guidance.

Aggrieved by the CIT(A)’s order, the assessee appealed to the ITAT. The assessee’s counsel argued that the firm, as a developer and not a construction contractor, was not subject to AS-7 or Section 43CB of the Income Tax Act, which mandates PCM for construction contracts.

The counsel submitted that the assessee consistently followed AS-9, recognizing revenue only upon transfer of significant risks and rewards, at the time of sale deed execution and possession transfer.

The counsel cited judicial precedents, including the ITAT’s decision in DCIT vs. Aaryan Buildspace LLP and the Gujarat High Court’s ruling in Shivalik Buildwell Pvt. Ltd., supporting the Project Completion Method for developers.

The two-member bench comprising T.R. Senthil Kumar (Judicial Member) and Narendra Prasad Sinha (Accountant Member) observed that the assessee, as a developer owning the land, was not a contractor providing construction services.

The Tribunal observed that Section 43CB applies only to construction contracts under AS-7, whereas real estate developers are governed by AS-9, which allows revenue recognition upon transfer of ownership.

The bench found the AO’s application of PCM flawed, as the assessee’s method was consistent with ICAI’s Guidance Note and had been accepted by the Revenue in other years. It held that the addition of Rs. 3,56,16,215 was unjustified.

The bench cited CIT vs. Manish Build Well Pvt. Ltd. by the Delhi High Court which affirmed that the Project Completion Method is a recognized accounting practice for developers and does not justify selective application of PCM. The appeal of the assessee was allowed.

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