ITAT Deletes ₹3.52 Crore POCM Profit Addition Against Real Estate Developer

ACIT Vs Pacifica Builders Pvt. Ltd. (ITAT Ahmedabad)

Section 145: Completion Certificate Alone Does Not Require 100% Project Revenue Recognition Under POCM

Background of the Dispute

These three Revenue appeals concerned the recognition of revenue by real estate developers following the Percentage of Completion Method (POCM).

The Tribunal treated Pacifica Builders Pvt. Ltd.’s appeal for assessment year 2020-21 as the lead matter. The company had declared income of ₹71,08,720. A search under section 132 was conducted in the Pacifica Group, including the assessee, on 20 March 2023.

During the subsequent assessment proceedings, the Assessing Officer examined revenue recognition for the assessee’s “Aurum Phase-I & II, Chennai” project.

He considered that the issuance of a completion certificate and delivery of possession to purchasers required recognition of the entire project revenue. According to him, carrying forward estimated project costs had resulted in deferral of profits.

By preparing a revised computation, the Assessing Officer made an addition of ₹3,52,12,602 towards alleged suppression of profit.

Assessee’s Explanation

The assessee contended that it had consistently followed POCM and that the Department had accepted this method in earlier years.

It explained that a completion certificate did not signify completion of every contractual obligation undertaken by the developer. Work concerning amenities, infrastructure, finishing and other project commitments continued after the certificate was issued, and substantial expenditure was incurred on those obligations.

The assessee argued that the Assessing Officer had adopted a fixed project-cost estimate without properly considering revised estimates and subsequent actual expenditure.

Its case was that the addition arose from an alternative allocation of project profits between years, rather than undisclosed sales or suppressed receipts.

The Commissioner (Appeals) accepted the explanation and deleted the addition, noting that the books had neither been rejected under section 145(3) nor shown to contain defects.

Revenue’s Arguments

The Revenue argued that the assessment followed a search and was based on Tally data and financial records seized during that operation.

According to the Department, the Assessing Officer’s recomputation used the assessee’s own project information and demonstrated incorrect application of POCM.

The Revenue also invoked ICDS-III and argued that the completion certificate, coupled with possession being handed over, justified recognition of revenue to the extent of completion. It disputed the proposition that pending internal work justified continued deferral.

The Tribunal therefore examined whether the revised computation established actual suppression or merely substituted the Assessing Officer’s estimate for the assessee’s accounting treatment.

Tribunal: Certificate Was Not Conclusive of All Obligations

The Tribunal accepted that the assessee had consistently followed POCM and that this treatment had been accepted in earlier years.

It further noted that the Assessing Officer had identified no defects in the books and had not rejected them under section 145(3).

A completion certificate issued by the local authority could not, by itself, conclusively establish that every contractual obligation of the developer had been completed.

The assessee had demonstrated that substantial work relating to amenities, finishing, infrastructure and other commitments continued after certification. The Revenue had not disputed the corresponding subsequent expenditure.

The Tribunal found that the addition resulted from an alternative working and revision of the percentage of completion, without a demonstrated finding of suppressed revenue or inflated expenditure.

Project Reconciliation Established Revenue Recognition

The reconciliation across the project period was significant.

Against the Department’s computed aggregate sale value of ₹345.44 crore, the assessee had recognised revenue of ₹349.70 crore up to assessment year 2025-26—₹4.26 crore more than the value adopted by the Department.

The Tribunal examined the details of area sold, sale value, revenue recognised, proportionate costs, profits considered in earlier years and closing work-in-progress. These figures were correlated with the profit and loss accounts over the relevant period.

The reconciliation established that the entire project revenue had ultimately been recognised and offered to tax.

The Tribunal also noted the absence of evidence of unrecorded cash or hidden assets. On the facts, it treated the difference as one concerning the timing of recognition rather than suppression of receipts or income.

Decision and Author’s Comments

The Tribunal upheld deletion of the ₹3,52,12,602 addition in the lead appeal. The same reasoning was applied to Pacifica India Projects Pvt. Ltd. for assessment years 2020-21 and 2022-23. All three Revenue appeals were dismissed.

The ruling distinguishes municipal certification from completion of all obligations relevant to project accounting. Remaining contractual work and associated costs require factual examination before a project is treated as fully complete.

Its strongest feature is the supporting reconciliation. Consistent accounting, substantiated subsequent expenditure and verification of revenue across the project period together defeated the allegation of suppression.

The decision does not authorise unrestricted deferral merely because some work remains, nor does eventual taxation alone settle the correct year of recognition. Here, the Tribunal accepted the accounting treatment on the combined evidence and found no basis for the Assessing Officer’s estimated substitution.

For developers, the practical lesson is to maintain reliable revised cost estimates, evidence of outstanding obligations and a project-wise reconciliation linking recognised revenue and costs with the accounts.

List of Cases Discussed

ACIT Vs Sylvanus Builders and Developers Limited (ITAT Ahmedabad): Cited in Revenue Ground No. 5 as a decision relied upon by the Commissioner (Appeals) concerning POCM and the recomputation of real estate project profits without rejecting the books of account. The Revenue sought to distinguish that case on the ground that the present proceedings followed a search. The judgment identifies the earlier matter as relating to AY 2015-16 in its ground of appeal; no appeal number or order date is supplied in the source.

FULL TEXT OF THE ORIGINAL JUDGMENT/ORDER

These three appeals have been filed by the Revenue against separate orders passed by the Commissioner of Income Tax (Appeals)-12, Ahmedabad (in short, referred to as the CIT(A)) all orders dated 10.04.2026 u/s. 250 of the Income Tax Act, 1961 (herein referred to as “the Act”) relating to Assessment Year 2020-21 in respect of ITA No.2335/Ahd/2026 and ITA Nos. 2336 & 2337/Ahd/2026 for A.Y. 2020-21 & 2022-23. Since, issues involved in all the appeals are common and identical, for sake of convenience, the consolidated order is passed. We extract the grounds of appeal in ITA No.2335/Ahd/2026 for the purpose of adjudication. The decision rendered in the said appeal shall apply mutatis mutandis to the other appeals in ITA Nos. 2336 & 2337/Ahd/2026.

2. The Revenue raised the following grounds of appeals:-

ITA No. 2335/Ahd/2026 A.Y. 2020-21

“1) “On the facts and in the circumstances of the case, the learned CIT (A) erred in law and on facts in deleting the entire addition of Rs.3,52, 12,602/- made by the Assessing Officer (AO) on account of suppression of profit by the assessee in respect of its project “Aurum Phase-I & II, Chennai” for the Assessment Year 2020-21.

2) On the facts and in the circumstances of the case, the learned CIT(A) failed to appreciate that the assessment was a post-search reassessment under section 147 of the Income Tax Act, 1961, based on incriminating digital evidence (Tally data files) seized during the search under section 132, which permitted fresh examination of the assessee’s income, distinguishing it from a normal scrutiny assessment.

3) On the facts and in the circumstances of the case, the learned CIT(A) grossly erred in holding that no incriminating material was found during the search, ignoring the fact that the AO’s recalculation of project-wise profit was directly based on the assessee’s own Tally data and financial records seized during the search operation, which clearly demonstrated suppression of profit year after year.

4) On the facts and in the circumstances of the case, the learned CIT(A) erred in ignoring the clear mandate of ICDS-III and established accounting principles, which require recognition of revenue upon substantial transfer of risks and rewards and delivery of possession, and wrongly held that pending internal finishing work allows deferring 100% revenue recognition.

5) On the facts and in the circumstances of the case, the learned CIT(A) placed misplaced reliance on the ITAT Ahmedabad order in the case of Sylvanus Builders and Developers Ltd. for AY 2015-16, which was a normal scrutiny assessment, without recognizing that the present case for AY 2020-21 is a post-search reassessment based on fresh seized material, which permits independent and fresh examination.

6) The Revenue craves leave to add/alter/armed and/on substitute any or all of the grounds of appeal.”

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 project. For the A.Y. 2020-21, the assessee filed its return of income declaring total income of Rs.71,08,720/-. A search action u/s 132 of the Act was conducted in the Pacifica Group, including the assessee company, on 20.03.2023. During the course of assessment proceeding, the Assessing Officer examined the Revenue recognition adopted by the assessee in respect of its projects 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 costs, the Assessing Officer computed alleged suppression of profit of Rs.3,52,12,602/- 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), the assessee also 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 also.

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 accounts, no rejection u/s 145(3) was made and no evidence of suppression of revenue was brought on record. Accordingly, the addition of Rs.3,52,12,602/- was deleted by CIT(A).

6. Aggrieved by the order of the Ld. CIT(A) deleting 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 project. The Ld. DR further submitted that since project had obtained Completion Certificate and possession had been handed over to the purchasers, the assessee was required to recognize the Revenue to the extent of completion. The Ld. DR contended that the Assessing Officer had correctly computed 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 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 consistently followed PCOM, which had been accepted by the Department in the earlier years. The Assessing Officer had neither pointed out any defects in the audited books of account nor rejected the books u/s 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 of accounts before estimation of income and revenue neutrality, and submitted that the order of the CIT(A) deleting the addition was justified.

9. The Ld. AR further submitted that the 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.

10. We have considered the rival submissions and perused the material available on record. The dispute relates to addition made by the AO 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. The assessee has consistently followed POCM for recognition of revenue which has been accepted in the earlier years is an admitted fact. Further, the Assessing Officer has not pointed out any defects in the books of accounts nor rejected the books of accounts u/s 145(3) of the Act. It is also evident that search in assessee’s case did not yield any evidence of unrecorded cash or hidden assets. All project income is accounted for through bank channels and eventually taxed over the projects duration. 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 developer assessee. The assessee has demonstrated that substantial work relating to amenities, finishing, infrastructure and other project obligation continued even after issuance of 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:

BEFORE THE HONOURABLE
INCOME TAX APPELLATE TRIBUNAL, BENCH – “C”, AHMEDABAD
ANNEXURE TO SUBMISSION ON FACTS

Name of the Appellant : Pacifica Builders Private Limited
Assessment Year : 2020-21

As against total value of sale of flats of Rs.345.44 Crores as per the Department computation statement, assessee actually recognized revenue of Rs.349.70 Crores upto A.Y. 2025-26. There is excess recognition of revenue by the assessee to the tune of Rs.4.26 Crores. The above reconciliation submitted by the assessee shows that the entire project revenue has ultimately been recognized and offered to tax. The difference pointed out by the AO is only on account of timing of revenue recognition and not due to suppression of receipts or income.

11. Further, we have gone through the details of areas of flat sold, total value of the sale, revenue recognized, proportionate costs incurred for the sold area, profit earned, profit already considered in the earlier years, profit for the year and the closing work in progress. The details demonstrated that against the aggregate project value of 345.44 Crores determined by the Revenue, the assessee has actually recognized the aggregate value of Rs.349.70 Crores. These amounts have been collated with P&L account over the period of time. 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 profit, closing the entire expenditure till the date of receipt of Completion Certificate disregarding the fact that after receipt of Completion Certificate, the assessee had incurred substantial expenditure on account of common amenities, project obligation, infrastructure facilities, finishing work and other contractual commitments. Hence, it can be held that the entire project revenue has been duly recognized and offered to tax by the assessee. In the absence of any finding of suppression of revenue, inflation of expenditure or defect in the regularly maintained books of accounts, the AO was not justified in substituting the assessee’s consistently followed method of accounting by an estimated computation. Accordingly, we find no infirmity with the order of the Ld. CIT(A) deleting the addition. The order of the Ld. CIT(A) is upheld and grounds raised by the Revenue are dismissed.

12. In the result, the appeal for A.Y. 2020-21 in ITA No.2335/Ahd/2026 is dismissed.

ITA No. 2336/Ahd/2026 A.Y. 2020-21 & ITA No. 2337/Ahd/2026 A.Y. 2022-23

13. The decision rendered in the said appeal ITA No.2335/Ahd/2026 shall apply to the other appeals bearing no. ITA Nos. 2336 & 2337/Ahd/2026 for A.Y. 2020-21 & 2022-23 in respect of other assessee also.

14. In the combined result, all the appeals are dismissed.

Order pronounced in the open court on 13-10-2026