Bharat Manubhai Patel Vs ITO (ITAT Mumbai)
Developer Following Project Completion Method – Addition of Full Flat Sale Value Deleted; Income Taxable on Possession, not Registration
The ITAT Mumbai allowed the assessee’s appeal and deleted addition of ₹1.84 crore made by the AO in respect of sale of two flats, holding that income of a builder following project completion method is taxable on handing over possession and not merely on registration of agreement. The AO had added entire sale consideration u/s 143(3) on the ground that agreements for flats were registered during AY 2018-19 and therefore transfer u/s 2(47) had occurred.
The Tribunal noted that although agreements were registered during the year, possession of flats was given only in AY 2019-20 and the assessee had already offered profit in that subsequent year. Relying on Karnataka High Court decision in Varun Developers, ITAT held that project completion method adopted by a developer is valid and income arises on completion/possession, not on mere registration. It further held that the AO erred in taxing entire sale consideration instead of profit element and that reliance on s.2(47) was misplaced in the facts of the case. Accordingly, the addition of ₹1.84 crore sustained by CIT(A) was deleted and the appeal was allowed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The instant appeal of the assessee filed against the order of the NFAC, Delhi [for brevity ‘the ld. CIT(A)], order passed under section 250 of the Income Tax Act 1961 (for brevity ‘the Act’) for assessment year 2018-19, date of order 18.08.2025. The impugned order emanated from the order of the National e-Assessment Centre, Delhi (for brevity the “Ld. AO”), order passed under section 143(3) r.w.s. 143(3A) and 144 (3B) of the Act, date of order 06.04.2021.
2. The brief facts of the case are that the assessee is an individual engaged in business of builders and developers carrying on business under the name and style of M/s IRIS Enterprise. The return was filed and declaring total income amount to Rs. 31,85,2670. The assessee’s case was taken for scrutiny and the assessment was framed under section 143(3) r.w.s. 143(3A) and 143(3B) of the Act by making addition amount to Rs. 1,84,00,000/- with total income of the assessee. The assessee has undertaken the redevelopment project of self owned building known as Patel Chawla and Patel Southern by demolishing the old structure and restructuring a new building called “Element A and B wing”. During the assessment, the Ld. AO found that the assessee had made registration of agreement of sale of the two flats of his project bearing no.701A and 703A during the impugned assessment year. But the income was not declared related sales of flats in the alleged assessment year in the return of income. So total sale consideration for flat no. 701A amount to Rs. 1,24,00,000/- & for flat no. 703A amount to Rs. 59,00,000/- which comes total amount of Rs. 1,84,00,000/- was added back with total income of the assessee. The addition was confirmed by virtue of the section 2(47) of the Act related to transfer in relation to capital asset. The assessee stated that both the sales of the alleged flats are carried profit at the rate of 29.2% on Rs. 1,84,00,000/- which comes to Rs. 53,72,800/- was offered in the next assessment year. But without considering the same, the Ld., AO added back the entire sales proceed with the total income of the assessee. The aggrieved assessee filed an appeal before the Ld. CIT(A) and continued the same argument as made before the Ld.AO. But the Ld. CIT(A) without considering the same upheld the impugned assessment order. Being aggrieved, assessee filed an appeal before us.
3. The Ld AR argued and filed a paper book, containing page 1 to 101, which has been placed on record. The Ld. AR contended that though the registration of both the flats was executed during the impugned assessment year but the possession letters was issued in the next assessment year i.e. AY 2019-20 to the flat owners. Both the possession letters dated 10-10-2018 and 07-03-2019 are annexed in APB page 8 and 9. Further, the Ld. AR invited our attention in the financial statements, the balance sheet and profit and loss account for the period 31-03-2018, annexed in APB page 78 and 79 where the cost of unsold area is duly reflected in the closing stock.
4. Thereafter, Ld AR advanced his argument and stated that the fact was duly narrated before the Ld. AO and the Ld. CIT(A). Relevant observations of the CIT(A) in impugned appellate order paragraph no. 7.2.2 to 7.2.3 are reproduced as below.
“7.2.2 The documentary evidences filed by the appellant is verified and it is observed that the appellant has shown advance amount of Rs. 1,24,70,500/- and Rs. 59,00,000/- received from Shri Ashok Punamia and Manisha Parmar against the sale of flat no. 701A and 703A respectively in A.Y. 2018-19. Later in A.Y. 2019-20 the appellant has shown sale of flat to the tune of Rs. 2,72,00,000/- in P&L statement which includes sale of flat no. 701A and 703A for at Rs. 1,25,00,000/- and Rs. 59,00,000/- respectively. Ledger of purchaser of flat no. 701A and 703A for A.Y. 2019-20 reveals about sum received in A.Y. 2019-20 from both buyer which were mainly received against maintenance and other purpose. Further, as per the possession letter issued to the buyer of flat no. 701A and 703A, the possession of flats was given on 07.03.2019 and 10.10.2018 to both the buyers i.e. Shri Ashok Punamia and Manisha Parmar.
7.2.3 It is seen that during the assessment proceedings the appellant had requested to AO stating if any addition to be made on account of unaccounted sale of flat nos. 701A and 703A then it should be restricted to the profit embedded in the sale consideration of Rs. 1,84,00,000/@ 29.2% which comes at Rs. 53,72,800/-. The AO before making the addition of Rs. 1,84,00,000/- took a stand that plea of appellant is not acceptable as the appellant had to show the sale of flats either on the occupancy or at the registration whichever is earlier as per the provisions of Income tax act.”
5. The Ld. AR argued that similar issue is consider by the Hon’ble Karnataka High Court in the case of CIT vs Varun Developers reported in (2021) 126 com 235 (Kar) relevant paragraph is reproduced as below:
“6. We have considered the submissions made by learned counsel for the parties and have perused the record. The first three substantial questions of law are answered in favour of the assessee for the reasons assigned by learned Senior counsel for the assessee in the judgments referred to supra. So far as fourth substantial question of law is concerned, it is pertinent to note that under section 145(1) of the Act, the income chargeable under the head Profits and Gains of Business shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The general provision is subject to accounting standards that the Central Government may notify. The assessee is a builder and developer and not a construction contractor simplicitor. Accounting Standard 7, titled construction contracts is applicable only in case of contractors and does not apply to the case of developers and builders which is evident from opinion rendered by expert advisory committee of ICAL. It is pertinent to note that the assessee had offered the income for Assessment Year 2007-08 and no income from the project was offered for the Assessment Year 2007-08 on the basis of project completion method and that either method of accounting finally lead to the same results in terms of profits and therefore, revenue neutral,
In view of preceding analysis, the fourth substantial question of law is also answered against the revenue and in favour of the assessee.
In the result, the appeal fails and is hereby dismissed.”
6. The Ld. DR argued that the transfer of the property was executed during the impugned assessment year through a registered agreement. He contended that, by virtue of section 2(47) of the Act, the transfer of a capital asset is deemed to have taken place in the impugned assessment year. Accordingly, the assessee was liable to declare the income in the said assessment year. He, therefore, supported the orders passed by the revenue authorities.
7. We have heard the rival submissions and carefully considered the material available on record. The assessee is a developer engaged in the development of a project known as “Element Building, Wing A and B.” During the impugned assessment year, flat nos. 701A and 703A were registered through duly executed registered agreements for a total consideration of Rs.1,84,00,000/-. The assessee contended that it had offered the profit on the sale of the said flats at the rate of 29.2%, amounting to Rs.53,72,800/-, which was duly offered to tax in Assessment Year 2019-20. The assessee follows the project completion method of accounting, and we find that the decision of the Hon’ble Karnataka High Court in the case of Varun Developers (supra) is squarely applicable to the facts of the present case. Considering the ratio laid down therein, we hold that the assessee was not required to declare the net profit in the year of registration of the flats; rather, the income was liable to be offered to tax on completion of the project, i.e., on the date of handing over possession of the flats. On perusal of the record, it is evident that possession of the flats was handed over to the buyers on 07.03.2019 and 10.10.2018, which fall in Assessment Year 2019-20.
8. We further find that the Ld. AO erred in adding back the entire sale consideration of Rs.1,84,00,000/- to the total income of the assessee. The contention of the Ld. DR regarding the applicability of section 2(47) of the Act is misplaced in the present factual matrix. Considering the totality of the facts and circumstances of the case, we hold that the addition of Rs.1,84,00,000/- made by the Ld. AO and sustained by the Ld. CIT(A) is unsustainable and is hereby deleted.
9. In the result, the appeal of the assessee bearing ITA No.6587/Mum/2025 is allowed.
10. Order pronounced in the open court on 05th day of February 2026.
