Taxation of the Builder vis a vis Guidance Note issued by ICAI: Whether cost of construction and also saleable project area needed to be taken into account while recognizing revenue under PCM

 

Question often arises as to the taxation of the income of the builder undertaking development activities of the scheme. The issue of taxation was there before Bangalore ITAT in the case as under:

Krishna E-Campus (P.) Ltd.

[2022] 141 , 385 (Bangalore – Trib.)

Let us have a short overview of the case:

The relevant sections for discussion before ITAT were section 145 of the Income-tax Act, 1961 and the issue was of the Method of accounting & System of accounting with regard to the Percentage completion method. The Assessment year 2015-16 was there before ITAT.

Assessee-company, engaged in developing property and constructing residential apartments and commercial complex, filed its return of income declaring loss.

Assessing Officer noted that assessee had not adopted PCM for recognition of revenue as per AS-9.

Assessee had submitted calculation of revenue recognition following percentage completion method (PCM) and had shown that percentage completion was only 20.03 per cent.

 Assessing Officer noticed that level of construction was more than 25 per cent of construction cost and more than 10 per cent of agreement value had been realized, and revenue would be recognizable from above project during relevant period as per AS-9 and, accordingly, income had been added back in Assessee’s hands

The question placed before ITAT was whether as per clause (5) of Guidance Note issued by ICAI, cost of construction and also saleable project area needs to be taken into account while recognizing revenue under PCM.

ITAT held it in affirmative and in favour of the department.

The next question was whether since saleable area for year under consideration as a percentage to total saleable area was much less than 25 per cent and Assessing Officer had considered revalued value of cost of land for purpose of arriving at total project instead of actual cost of land, issue was to be remitted back to Assessing Officer with a direction that percentage of cost and saleable area had to be recomputed in accordance with para 5.3 of ICAI Guidance Note on Real Estate Transactions? ITAT answered it in affirmative.