Ahmedabad ITAT: AO Cannot Recompute POCM Profits Without Rejecting Books

ACIT Vs Sylvanus Builders and Developers Limited (ITAT Ahmedabad)

Ahmedabad ITAT: AO Cannot Recompute Project Profits Under POCM Without Rejecting Books; Completion Certificate Alone Does Not Mean 100% Project Completion

The Ahmedabad ITAT dismissed the Revenue’s appeals and held that the Assessing Officer cannot substitute the assessee’s consistently followed Percentage of Completion Method (POCM) with his own estimated computation of profits without rejecting the books of account under Section 145(3) or establishing suppression of revenue or inflation of expenditure. The Tribunal upheld the deletion of additions made for AYs 2020-21 and 2022-23.

The Assessing Officer alleged suppression of profits of ₹16.40 crore on the ground that the assessee, a real estate developer, had failed to recognise the entire project revenue after obtaining the Completion Certificate and handing over possession. According to the AO, the project should have been treated as 100% complete, warranting full recognition of revenue under POCM.

The Tribunal observed that the assessee had consistently followed POCM, which had been accepted by the Department in earlier years. It further held that a Completion Certificate issued by the local authority is not conclusive evidence that all contractual obligations of the developer stand completed, especially where substantial expenditure on amenities, infrastructure, finishing works and other commitments continues thereafter.

The Tribunal also noted that the Assessing Officer had neither pointed out any defect in the audited books of account nor rejected the books under Section 145(3). The addition was made merely by adopting an alternative computation of the percentage of completion. The reconciliation produced by the assessee demonstrated that the entire project revenue was ultimately recognised and offered to tax, and the alleged suppression arose only because the AO ignored post-completion expenditure, making it a mere timing difference in revenue recognition rather than suppression of income.

Holding that there was no evidence of suppressed receipts, inflated expenditure or defects in the books, the Tribunal ruled that the Assessing Officer was not justified in disturbing the assessee’s consistently followed method of accounting by an estimated recomputation of profits. Accordingly, it upheld the CIT(A)’s order deleting the additions and dismissed the Revenue’s appeals.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

These appeals have been filed by the Revenue against separate orders passed by Learned Commissioner of Income Tax (Appeals)-12, Ahmedabad [“CIT(A)” for short], both orders dated 24.02.2026, for the Assessment Years 2020-21 and 2022-23. Since the issues involved in both the appeals are common and identical, we extract the grounds of appeal raised in ITA No.1459/Ahd/2026 for Assessment Year 2020-21 for the purpose of adjudication. The decision rendered in the said appeal shall apply mutatis mutandis to the other appeal bearing ITA No. 1460/Ahd/2026 for Assessment Year 2022-23.

2. The Revenue has raised the following grounds of appeal:

“1) “On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in deleting the addition of Rs. 16,40,19,027/- made on account of suppression of profit by incorrectly applying the Percentage of Completion Method (POCM)

2) On the facts and in the circumstances of the case, the LA CIT(A) erred in holding that no incriminating material was found during the search under section 132 of the Income-tax Act, 1961, ignoring the fact that digital evidence in the form of Tally data files containing detailed financial transactions was seized and formed the basis for the recalculation of project-wise profit.

3) On the facts and in the circumstances of the case, the Learned CII(A) failed to appreciate the year-wise computation of suppression of gross profit derived from the assessee’s own Tally data, which clearly demonstrated that for the Financial Year 2019-20 (A.Y. 2020-21), the gross profit as per the Percentage of Completion Method ought to have been Rs. 22,42,57,822/-whereas the assessee had shown only Rs.6,02,38,795/-, resulting in a suppression of Rs. 16,40,19,027/- for the year under consideration.

4) On the facts and in the circumstances of the case, the Learned CIT(A) erred in law by holding that ICDS-III permits revision of estimates and that pending internal finishing work justified non-recognition of full revenue, without examining whether such revision was bona fide and supported by evidence, especially when the budget for pending work was artificially inflated to suppress the percentage of completion.”

3. The brief facts of the case are that the assessee is engaged in the business of real estate development and follows the Percentage of Completion Method (POCM) for recognition of revenue from its projects. For Assessment Year 2020-21, the assessee filed its return of income declaring total income of Rs.2,19,92,320/-. A search action u/s 132 of the Act was conducted in the Pacifica Group, including the assessee-company, on 20.03.2023. Subsequently, assessment proceedings were initiated u/s 147 of the Act. During the course of assessment proceedings, the Assessing Officer examined the revenue recognition adopted by the assessee in respect of its project “Aurum Villa” and observed that despite issuance of Completion Certificate and handing over of possession to buyers, the assessee had not recognized the entire project revenue. The Assessing Officer held that the assessee had incorrectly applied POCM by carrying forward estimated project costs and thereby deferring recognition of profits. By adopting a revised working based on the project data and estimated project cost, the Assessing Officer computed alleged suppression of profit of Rs.16,40,19,027/- and added the same to the income of the assessee.

4. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Ld. CIT(A) contending that the addition was based on assumptions without any evidence of suppression of sales or undisclosed income. Before the Ld. CIT(A) also the assessee reiterated that it had consistently followed POCM, that the Completion Certificate did not signify completion of all contractual obligations, and that substantial project expenditure continued to be incurred after issuance of the Completion Certificate.

5. The Ld. CIT(A), after considering the submissions and material on record, held that the Assessing Officer was not justified in treating the Completion Certificate as conclusive evidence of 100% completion of the project. The CIT(A) further observed that no defect was pointed out in the books of account, no rejection under section 145(3) was made and no evidence of suppression of revenue was brought on record. Accordingly, the addition of Rs.16,40,19,027/-was deleted by the Ld. CIT(A).

6. Aggrieved by the order of the Ld. CIT(A) deletion the addition, the Revenue is in appeal before the Tribunal.

7. Before us, the Ld. DR supported the order passed by the Assessing Officer and submitted that the assessee had not correctly applied the POCM in respect of the Aurum Villa project. The Ld. DR further submitted that since the project had obtained Completion Certificate and possession had been handed over to purchasers, the assessee was required to recognize the revenue to the extent of completion. The Ld. DR contended that the Assessing Officer had correctly recomputed the profit based on the assessee’s own project data and books of account. Accordingly, the Ld. DR submitted that the order of the Assessing Officer be restored and the appeal of the Revenue be allowed.

8. The Ld. AR, on the other hand, submitted that the impugned addition made by the Assessing Officer was based on an erroneous re-computation of revenue under POCM and was not supported by any incriminating material found during the course of search proceedings. The Ld. AR argued that the assessee had consistently followed POCM, which had been accepted by the Department in earlier years. The Assessing Officer had neither pointed out any defect in the audited books of account nor rejected the books under section 145(3) of the Act before making an estimated re-computation of profit. The Ld. AR further contended that the Assessing Officer had incorrectly assumed that issuance of Completion Certificate resulted in 100% completion of the project. It was further submitted that the Assessing Officer erred in adopting a fixed estimated project cost without considering revised estimates and actual subsequent project expenditure as required under ICDS-III. The addition was therefore only due to an incorrect timing adjustment and not due to any suppression of revenue. The Ld. AR also submitted that no evidence of undisclosed sales, unaccounted receipts, unexplained assets or bogus expenditure was found during the search. The alleged suppression was based only on an alternative working prepared by the Assessing Officer. Reliance was placed on the decisions of the Hon’ble Supreme Court and High Courts regarding consistency of accounting methods, rejection of books before estimation of income and revenue neutrality, and submitted that the order of the CIT(A) deleting the addition was justified.

8.1 The Ld. AR further submitted that pursuant to the directions of the Bench, a reconciliation was filed showing that the total revenue recognized by the assessee over the project period exceeded the revenue considered by the Department and that the alleged suppression of profit arose only because post-Completion Certificate expenditure was ignored while recomputing the project results. Accordingly, the Ld. AR submitted that the appeal of the Revenue deserves to be dismissed.

9. We have considered the rival submissions and perused the material available on record. The dispute relates to the addition made by the Assessing Officer by recomputing project profit under the POCM on the basis that, after issuance of the Completion Certificate, the assessee ought to have recognized 100% revenue of the project. It is observed that the assessee has consistently followed POCM for recognition of revenue, which has been accepted in earlier years. The Assessing Officer has not pointed out any defect in the books of account nor rejected the books under section 145(3) of the Act. The addition has been made merely by adopting an alternative working and revising the percentage of completion. Further, the Completion Certificate issued by the local authority cannot, by itself, be treated as conclusive evidence of completion of all contractual obligations of the developer. The assessee has demonstrated that substantial work relating to amenities, finishing, infrastructure and other project obligations continued even after issuance of the Completion Certificate. The corresponding expenditure incurred post completion has also not been disputed by the Revenue. The reconciliation statement submitted by the assessee as against the working done by the Department is as follows:-

9.1 The above reconciliation submitted by the assessee before us shows that the entire project revenue has ultimately been recognized and offered to tax. The difference pointed out by the Assessing Officer is only on account of timing of revenue recognition and not due to suppression of receipts or income.

9.2 Further, we have also gone through the details of area of flats sold, total value of the sale, revenue recognized, proportionate cost incurred for the sold area, profit earned, profit already considered in the earlier years, profit determined for the current year and the closing work-in-progress. The details demonstrates that against the aggregate project value of Rs.414.79 crores determined by the Revenue, the assessee has actually recognised aggregate value at Rs.418.62 crores. These amounts have been collated with the P&L accounts over the period of time. For the sake of ready reference, the details over the period of the project are reproduced below:-

This establishes that the entire project revenue has been duly recognized and offered to tax by the assessee. The Revenue has also alleged suppression of profits, closing the entire expenditure till the date of receipt of completion certificate disregarding the fact that after receipt of completion certificate the assessee has incurred expenditure of Rs.63.72 crores on account of common amenities, project obligation, infrastructure facilities, finishing works and other contractual commitments. After considering this expenditure, the assessee has offered profit of Rs.12.09 crores in the subsequent year. Hence, it can be held that the entire project revenue has been duly recognized and offered to tax by the assessee. In absence of any finding of suppression of revenue, inflation of expenditure or defect in the regularly maintained books of account, the Assessing Officer was not justified in substituting the assessee’s consistently followed method of accounting by an estimated computation. Accordingly, we find no infirmity in the order of the Ld. CIT(A) deleting the addition. The order of the Ld. CIT(A) is upheld and the grounds raised by the Revenue are dismissed.

10. In the result, the appeal filed by the Revenue in ITA No. 1459/Ahd/2026 for A.Y. 2020-21 is dismissed.

11. Since the facts and issues involved in ITA No. 1460/Ahd/2026 for A.Y. 2022-23 are identical to those adjudicated above, our findings therein shall apply mutatis mutandis. Accordingly, the appeal filed by the Revenue in ITA No. 1460/Ahd/2026 is also dismissed.

12. In the result, both the appeals filed by the Revenue are dismissed.

Order pronounced in the open Court on 06.08.2026.