DCIT Vs Aaryan Buildspace LLP (ITAT Ahmedabad)
ITAT Ahmedabad order on Applicability of section 43 CB vs AS-7, AS-9, recognizing revenue on transfer of ownership for real estate developers
Relevant Legal Provisions
Section 43CB of the Income-tax Act, 1961
- Introduced by Finance Act, 2018, effective from 01.04.2017 (retrospective).
- Applicable to profits and gains from construction contracts or contracts for providing services.
- Mandates revenue recognition on a Percentage Completion Method (PCM) basis as per ICDS (Income Computation and Disclosure Standards) notified under Section 145(2).
Section 43CB(1): “The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method, in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145.”
ICDS-III (Construction Contracts)
- Prescribes the PCM for recognition of revenue in construction contracts.
Accounting Standards (AS):
1.AS-7 (Construction Contracts):
- Applies to construction contractors.
- Revenue recognized based on PCM linked to project milestones.
2.AS-9 (Revenue Recognition):
- Applies to sale of goods, rendering of services, and real estate developers, where significant risks and rewards of ownership are transferred.
ICAI Guidance Note on Accounting for Real Estate Transactions (2012, Revised):
- Real estate developers should apply AS-9 for revenue recognition.
- Revenue recognized when substantial risks and rewards of ownership are transferred, usually upon registration of conveyance deed and handover of possession.
2. Brief facts:
- Assessee: Aaryan Buildspace LLP
- Business: Real estate development.
- Project: “ARYAN OPULENCE- development on own land.
- Method of Revenue Recognition:
- Followed AS-9 and ICAI Guidance Note.
- Recognized revenue upon execution of registered conveyance deed and transfer of possession.
- Assessment Year: 2018-19
- Returned Income: Rs. 1,92,62,080/-
- Scrutiny assessment conducted.
- AO held that:
- Assessee was engaged in a construction contract, and revenue should be recognized on PCM as per Section 43CB.
- Treated customer advances of Rs. 28.30 crores as revenue, increasing taxable income to Rs. 4,01,23,650/-.
- Addition made: Rs. 2,08,61,570/-
3. Issues Before the ITAT
- Whether Section 43CB applies to a real estate developer constructing and selling units on its own land?
- Whether the AO was correct in adopting PCM instead of AS-9 for revenue recognition?
- Whether the assessee’s revenue recognition method was consistent with law and ICAI guidance?
4. Assessee’s Arguments
- Assessee is a real estate developer, not a construction contractor.
- Owns the land and undertakes development at its own risk.
- Follows AS-9 and ICAI Guidance Note, recognizing revenue upon transfer of possession and registration of sale deed.
- Revenue authorities had accepted this method in earlier and subsequent years (principle of consistency).
- Advances from customers are not contract revenue but part of sale consideration.
5. AO’s Contentions
- Assessee engaged in construction activity, akin to a construction contract.
- Section 43CB mandates PCM for income recognition.
- Advances from customers should be treated as revenue under PCM, in line with ICDS-III.
6. Findings and Observations of ITAT
