Section 43CB providing POCM method for determining profit from construction contract is mandatory

Hi-tech Estates & Promoters (P.) Ltd.

[2020] 117 taxmann.com 965 (Cuttack – Trib.)

Short Overview of the case:

Three Issues were involved in the case as under :

First Issue :

– Section 43CB of the Income-tax Act, 1961

 – Computation of income from construction and service contracts

 – Assessment year 2013-14

– Assessee company was engaged in construction of flats and residential units on land owned by it.

– Assessee company was consistently following revenue recognition method by adopting completed project method, wherein revenue was recognized at time of sale of flats /residential units by way of registered sale deed in favour of customers

 – For relevant year, assessment was completed by accepting method of accounting adopted by assessee

 – Subsequently, Commissioner passed a revisional order rejecting assessee’s method of accounting based on AS-7

– Commissioner also directed Assessing Officer for de novo assessment by applying percentage completion method as mandated by section 43CB

– Whether as per section 43CB, profits and gains of a construction company arising from construction contract or a contract for providing services shall be determined on basis of percentage completion method and same is mandatory for revenue recognition with effect from 01-04-2017 i. e. assessment year 2017-18 and, thus , said method was not mandatory and compulsory to be followed in assessment year in question

Cuttack ITAT held it as yes.

Second Issue: 

 Whether therefore, Commissioner could not revisit assessment order passed in case of assessee by pressing into service provisions of section 43CB

Cuttack ITAT held it as yes.

– Third Issue :

Whether in view of aforesaid, impugned revisional order was to be set aside

Cuttack ITAT held it as yes.

Conclusions of the case:

Provisions of section 43CB prescribing percentage completion method for determining profits and gains of a construction company are to be applied mandatorily with effect from 01-04-2017 i.e. assessment year 2017-18 onwards and, therefore, assessment completed in case of assessee, a construction company, on basis of project completion method in relevant assessment year could not be declared as invalid on aforesaid ground.