Devipriya Enterprises Vs ITO (ITAT Pune)
Pune ITAT: Lift Cost of Real-Estate Project Cannot Be Disallowed as Prior-Period Expense Under Percentage Completion Method
The Pune ITAT allowed the appeal of a real-estate developer and deleted an addition of ₹72,69,058 towards lift expenses, holding that where the assessee follows the percentage completion method, expenditure forming part of the project cost is accumulated in work-in-progress (WIP) and cannot be disallowed merely because some supplier invoices pertain to an earlier financial year.
The assessee was developing the “Vasudha Etasha” project at Kothrud, Pune, construction of which commenced in FY 2012-13 and was completed in April 2017. Under its accounting method, construction expenditure was accumulated as WIP and profit was recognised based upon the percentage completion of the project.
The lifts were supplied and installed by Schindler India Pvt. Ltd. Although certain bills were raised in December 2016 and January 2017, the assessee explained that final technical approval and completion of the work order occurred only in April 2017, and the final payment of ₹7,89,667 was made on 8 April 2017. The lift expenditure was therefore booked in FY 2017-18 as part of construction cost/WIP.
The AO nevertheless treated the entire ₹72.69 lakh lift expenditure as prior-period expenditure and disallowed it. The CIT(A) confirmed the addition.
The Tribunal noted that the assessee’s Tax Audit Report itself confirmed adoption of the percentage completion method, which was therefore an undisputed fact. Under the applicable Guidance Note on Accounting for Real Estate Transactions, project cost includes land/development-right costs, borrowing costs and, importantly, construction and development costs directly related or attributable to the project.
The ITAT held that lift expenditure unquestionably formed part of the project cost. Since the assessee followed the percentage completion method, such expenditure became part of the WIP, and the final payment for the lift was also made during FY 2017-18. Therefore, the AO could not disallow the expenditure merely by characterising it as a prior-period item.
Accordingly, the Tribunal directed the AO to delete the entire addition of ₹72,69,058, and the assessee’s appeal was allowed.
Key takeaway: In the case of a real-estate developer following the percentage completion method, direct construction expenditure forming part of project cost/WIP cannot ordinarily be disallowed as a “prior-period expense” merely because the underlying invoice bears an earlier date. The accounting and tax treatment must consider when the project cost crystallised and how it is absorbed into WIP under the recognised method of accounting.
FULL TEXT OF THE ORDER OF ITAT PUNE
This is an appeal filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals), NFAC, Delhi [Ld.CIT(A)], passed u/s. 250 of the Income Tax Act, 1961 (‘the Act’) for AY 2018-19 on 16.09.2025, emanating from the Assessment Order u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act, dated 01.03.2021.
Submission of Ld. AR :
2. The Ld. AR filed paper book containing 92 pages. The relevant paragraphs of the written submissions filed by the Ld. AR are reproduced here as under :
“1. Ours is a real estate developer firm and in the year under scrutiny, the firm was progressing the construction work of its project Vasudha Etasha at Kothrud, Pune. From the earlier information it can be seen that the construction work of this project was commenced in F.Y.2012- 13 and was completed in April.2017.
2. As stated earlier the firm has been following percentage completion method to recognize its profit from this construction project and according to the said method the firm has been offering estimated amount of profit as its income as per the annual progress of the construction work and booking of flats/units of this project.
3. As per this method of accounting all construction expenses which forms the part of the building under construction are yearly accumulated and treated as the work in progress forming part of its assets or current assets, appearing in the balance sheet of the firm.
4. The firm ordered the supply and installation of lifts for this project to M/s. Schindler India P.ltd.. According to the order placed since Aug.2016 the firm has been paying advances to the company as per the terms of the work order. All these advances have been accumulated and grouped under the head advances to contractors as “Current Assets” in the books of the firm. Although the bills are raised by the company in Dec. 2016 and Jan.2017, the final approvals by our technical team, site engineers/consultants has taken place on 8th April.2017. The necessary completion certificate specifically required for the lifts by government regulation was also received on 05.03.2017 and 21.03.2017.
As per the work order issued the final payment of the balance amount of Rs.7,89,667/- was also paid to the company on 8th Apr.2017 signifying the completion of the work order. As such though the bills are dt Dec.2016 and Jan.2017 the execution of the work order in all respect was completed in April.2017 and accordingly all these bills have been booked by us in the financial year 2017-18 as construction expenses forming part of our work in progress / stock of the firm.
(c) Sec.43CB of the Income tax act 1961 has laid down that for any construction or service contract where “percentage completion method” is followed by the assessee to determine the income, then he is supposed to follow “Income Computation and Disclosure Standard” notified under Sec. 145 (2). According to this standards the assessee is to accumulate all expenses relating to the project and estimate accrued profits at the end of the financial year based on expenditure incurred on the project. The profit so estimated is added to and forms part of the closing value of the work in progress of that year and thus it is finally matched against the value of final project revenue, in our case, the sale price of the flats sold under this project. If we understand this mechanism prescribed under the Income Computation and Disclosure Standards then, in our opinion the principle of “Prior Period Expenses not allowable” will not be applicable to that expenditure which is forming part of the project or the asset constructed but only to those expenses like indirect expenses which are incurred specifically for a particular financial year or the benefit of which accrues to the assessee for a particular year in which it is incurred.”
2.1 The Ld. AR submitted that the assessee was following percentage completion method and therefore the Assessing Officer (AO) cannot disallow the impugned expenditure incurred on lift, treating it as prior period expenditure.
2.2 The Ld. AR filed copy of Guidance Note on Accounting for Real Estate Transactions.
Submission of Ld. DR:
3. The Ld. Departmental Representative (DR) relied on the order of the AO and the Ld. CIT(A).
Findings and Analysis:
4. We have heard both the parties and perused the records. The assessee is a partnership firm, engaged in the business of real estate development. The assessee filed return of income on 15.10.2018. The AO noted that that the assessee had claimed lift expenses of Rs.72,69,058/- during the year. The AO noted that some of the bills pertain to earlier years. Therefore, the AO made addition of Rs.72,69,058/- assessed the total income at Rs.5,83,61,738/-. Aggrieved by the assessment order, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) upheld the addition. Aggrieved by the order of the Ld. CIT(A), the assessee is now in appeal before this Tribunal.
5. In this case, the assessee was following percentage completion method. The assessee filed a copy of Tax Audit Report in the paper book which is at page Nos. 20 to 37. In the Tax Audit Report, it is mentioned that the assessee is following percentage completion method (page No. 22 of the paper book). Thus, it is undisputed fact that the assessee is following percentage completion method. As per the Guidance Note on Accounting for Real Estate Transactions for the purpose of percentage completion method project cost includes as under:
“2.2 Project Costs – Project costs in relation to a project ordinarily comprise:
(a) Cost of land and cost of development rights -All costs related to the acquisition of land, development rights in the land or property including cost of land, cost of development rights, rehabilitation costs, registration charges, stamp duty, brokerage costs and incidental expenses.
(b) Borrowing Costs In accordance with Accounting Standard (AS) 16, Borrowing Costs which are incurred directly in relation to a project or which are apportioned to a project.
(c) Construction and development costs These would include costs that relate directly to the specific project and costs that may be attributable to project activity in general and can be allocated to the project.”
6. Thus, the lift expenses admittedly have to be included as project cost. It is also fact that the final payment for the lift was made during FY 2017-18 relevant to AY 2018-19. The assessee is following percentage completion method, it means the expenditure forms part of the WIP. Therefore, there cannot be any disallowance as made by the AO as prior period expenses. Accordingly, we direct the AO to delete the addition of Rs.72,69,058/-.
7. In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 14th August, 2026
