Ambrosia Realty Vs ITO (ITAT Ahmedabad)
Project Completion Method Accepted- Addition on Suppression of Profit Deleted- ITAT Ahmedabad; Ahmedabad ITAT considered dispute regarding revenue recognition method in real estate transactions.
Assessee, a partnership firm engaged in real estate development, was executing project “Earth Ambrosia”. It followed Project Completion Method (PCM) & disclosed profit of ₹1.08 crore. AO, however, held that revenue recognition ought to be on Percentage Completion Method (POCM) basis as per ICAI’s 2012 Guidance Note, working out revenue of ₹3.32 crore. The difference of ₹2.24 crore was added as suppressed profit. CIT(A) confirmed the addition.
Assessee’s Stand:
- PCM was consistently followed & had been accepted in earlier scrutiny assessment.
- As per AS-9 (Revenue Recognition), income should be recognized only when significant risks & rewards of ownership are transferred – in this case, on execution of sale deed or handing over of possession.
- Guidance Note itself clarifies that PCM is correct where risks & rewards are not transferred at booking stage.
- Buyers could cancel bookings at any time without penalty & consideration was negotiable, hence no transfer of risks & rewards initially.
- Revenue already offered in subsequent years; applying POCM in impugned year would result in double taxation.
Tribunal examined ICAI’s Guidance Note in detail & observed:
- Real estate revenue recognition is governed by AS-9 unless project is in substance a construction contract, in which case AS-7 & POCM apply.
- Transfer of risks & rewards is to be determined by terms of agreement, not merely by existence of booking contracts.
- POCM applies only when project outcome can be reasonably estimated and when agreement indicates transfer of risks & rewards at inception.
- In present case, Revenue failed to show that agreements transferred risks & rewards at booking stage. AO simply relied on parameters like 25% cost incurred, 25% project area sold & 10% collection received – which merely indicate certainty but not transfer of risks.
- Hence, PCM followed by Assessee was valid & justified.
Tribunal held that addition of ₹2.24 crore was unsustainable & directed deletion of the same.Tribunal allowed appeal of Assessee, holding that PCM was the correct method of revenue recognition for the project as risks & rewards were transferred only at the stage of sale deed/possession & addition on basis of POCM was unjustified
