Criteria for following the Percentage of Completion Method by ignoring AS-7

IN THE INCOME TAX APPELLATE TRIBUNAL,
DELHI BENCH: ‘E’ NEW DELHI
BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER
AND
SHRI O.P. KANT, ACCOUNTANT MEMBER
[Through Video Conferencing]
ITA No.202/Del/2018
Assessment Year: 2012-13

DCIT, Circle – 16 (2)
New Delhi

vs

Maxworth Infrastructure P.
Ltd. 303, Tower -1, Baverly
Park, Plot No.2, The Jaypee
CGHS Ltd., Sector-22,
Dwarka, New Delhi
PAN No. AAGCM7827C

Appellant by Ms. Paramita M. Biswas,
CIT DR
Respondent by Sh. Gautam Jain, Advocate
Sh. Lalit Mohan, CA

Date of hearing 07.10.2021
Date of pronouncement 21.10.2021

ORDER

This appeal by the Revenue is directed against order dated 21/09/2017 passed by the Ld. Commissioner of Income-tax.

2. Briefly stated facts of the case are that in the previous year corresponding to the assessment year under consideration, the assessee company was engaged in the business of building and developing housing/commercial real estate projects. For the year under consideration, the assessee filed return of income on  30/09/2012 declaring loss of Rs.1,06,69,938/-. The return of income filed by the assessee was selected for scrutiny assessment and statutory notices under the Income-tax Act, 1961 (in short the Act) were issued and complied with. In the assessment completed under section 143(3) of the Act on 26/02/2015, the Assessing Officer rejected the method of accounting of profit adopted by the assessee and applied percentage of completion method (POCM) and made addition of Rs.10,00,65,850/-. On further appeal by the assessee, the Ld. CIT(A) deleted the addition holding that assessee has consistently recognised the revenue at the time of the execution of the sale deeds and which has been accepted by the Department not only in earlier years, but in subsequent years also. Aggrieved with the finding of the Ld. CIT(A), the Revenue is in appeal before the Tribunal raising the grounds as reproduced above.

3. It is submitted that in the case of real estate developer, contract revenue is not determined at the start of development of real estate project. As such, in the case of real estate developer, neither the outcome of a units/spaces can be estimated reliably nor the cost associated with the same can be estimated with reasonable certainty, hence contract revenue and contract costs associated with the construction contract cannot be recognized as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. It is submitted that assessee recognizes its income on the basis of consideration received in respect of the sales made in respect of area sold and computes its income in accordance with the provisions of section 145(1) of the Act. It is submitted that in the case of the appellant since it is selling the flats developed/constructed by it as such, in the case of the appellant revenue can be recognized only when the registered sale deed is executed as in the case of sale of flats all significant risks and rewards of ownership are transferred to the buyer and the appellant retains no effective control on the flats transferred to a degree usually associated with ownership, only when the sale deed is executed, as such, method of recognizing revenue by the appellant is perfectly valid and same does not require any interference, and hence approach of the learned AO in applying AS-7 is liable to be rejected.

4. In the result, the appeal of the revenue is dismissed.
Order pronounced in the open court on 21.10.2021.

Please find attached the enclosed file for the full judgement.