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
