2025 (3) TMI 528 - AT - Income Tax

Revenue recognition method - application of section 43CB - As submitted real estate developers are required to follow Accounting Standard-9 (AS-9) Revenue Recognition which prescribes revenue recognition upon the transfer of significant risks and rewards of ownership Whether the assessee a real estate developer was required to follow the Percentage Completion Method u/s 43CB or could recognize revenue based on AS-9 and the ICAI Guidance Note? HELD THAT - The assessee follows AS-9 as it recognizes revenue only when conveyance deeds are executed and possession is handed over to buyers. The Institute of Chartered Accountants of India (ICAI) has also clarified in its Guidance Note on Accounting for Real Estate Transactions (2012 Revised) that real estate developers should follow AS-9 not AS-7. AO s attempt to apply Section 43CB of the Act which mirrors AS-7 is fundamentally flawed. The assessee s method of revenue recognition is consistent with ICAI s AS-9 and the Guidance Note both of which allow revenue recognition only upon sale deed execution and possession transfer. DR s contention that the assessee is a contractor is misplaced as it fails to recognize the fundamental distinction between a contractor executing a construction project for a client and a real estate developer constructing and selling units on its own land. The assessee is not providing a service to a third party under a contractual obligation but is developing a project at its own risk and selling completed units to buyers. In contrast a contractor undertakes construction for another party based on predetermined specifications. DR s assertion that Section 43CB of the Act does not differentiate between a real estate developer and a contractor is incorrect. The assessee s business model does not involve entering into construction contracts but rather the sale of completed units. The fact that the agreement specifies stage-wise payments does not convert the nature of the transaction into a construction contract. Advances received from customers are not contract revenue but part of the consideration for the ultimate sale of property. DR s contention that the judicial precedents relied upon by the CIT(A) relate to periods before the introduction of Section 43CB of the Act and are therefore not applicable is flawed. The principle that real estate developers must recognize revenue upon the transfer of ownership and not on a percentage completion basis has been established through long-standing jurisprudence which remains applicable even after the introduction of Section 43CB of the Act. The principle of consistency must be followed. The Revenue had accepted the same method in earlier and subsequent assessment years and there is no material change in facts warranting a deviation. Decided against revenue.

Summary

ISSUES PRESENTED and CONSIDERED

The primary legal issue considered in this judgment is whether the assessee, a real estate developer, is required to recognize revenue using the Percentage Completion Method ("PCM") under Section 43CB of the Income Tax Act, 1961, or whether it can continue to recognize revenue based on Accounting Standard-9 ("AS-9") and the ICAI Guidance Note on Real Estate Transactions.

ISSUE-WISE DETAILED ANALYSIS

1. Applicability of Section 43CB of the Income Tax Act

Relevant legal framework and precedents: Section 43CB of the Income Tax Act, introduced by the Finance Act, 2018, mandates that profits and gains from a "construction contract" or "contract for services" must be determined on the basis of the PCM in accordance with the Income Computation and Disclosure Standards (ICDS). The section is applicable to construction contracts and contracts for providing services.

Court's interpretation and reasoning: The Tribunal reasoned that Section 43CB applies explicitly to construction contracts where a contractor undertakes construction work for a third party under a contractual obligation. The provision is aligned with AS-7 (Construction Contracts), which governs accounting for construction contracts. In contrast, AS-9 (Revenue Recognition) applies to real estate developers, requiring revenue recognition upon the transfer of significant risks and rewards of ownership.

Key evidence and findings: The assessee develops residential units on its own land and sells completed units to buyers through sale deeds, distinguishing itself from a construction contractor. The Tribunal noted that the legislative intent behind Section 43CB is to regulate income recognition for contractors, not developers executing projects on their own account.

Application of law to facts: The Tribunal found that the assessee is not a contractor executing projects for clients but a developer selling self-constructed properties. Therefore, Section 43CB does not apply to the assessee's revenue recognition.

Treatment of competing arguments: The Departmental Representative (DR) argued that the assessee should be considered a contractor due to stage-wise payment agreements, but the Tribunal rejected this, emphasizing the distinction between contractors and developers.

Conclusions: The Tribunal concluded that Section 43CB does not apply to the assessee, and the method of revenue recognition under AS-9 is appropriate.

2. Consistency in Revenue Recognition Method

Relevant legal framework and precedents: The principle of consistency in accounting methods is well-established in tax jurisprudence. Judicial precedents affirm that once a revenue recognition method is accepted by the tax authorities, it should not be arbitrarily changed in subsequent years.

Court's interpretation and reasoning: The Tribunal emphasized that the assessee's method of revenue recognition had been accepted in previous assessment years, and there was no material change in facts or circumstances to justify a deviation.

Key evidence and findings: The assessee consistently followed AS-9 for revenue recognition, and the department accepted this method in earlier assessments for AYs 2015-16, 2017-18, and 2019-20. The Tribunal noted that the same AO did not object to the method in AY 2021-22.

Application of law to facts: The Tribunal applied the principle of consistency, finding no justification for the AO's change in the revenue recognition method.

Treatment of competing arguments: The DR's argument that the judicial precedents relied upon by the CIT(A) were not applicable post-Section 43CB was rejected, as the established principles remain relevant.

Conclusions: The Tribunal upheld the CIT(A)'s decision, finding no reason to deviate from the accepted revenue recognition method.

SIGNIFICANT HOLDINGS

The Tribunal held that Section 43CB of the Income Tax Act does not apply to real estate developers like the assessee, who construct and sell units on their own land. The Tribunal emphasized the distinction between construction contractors and real estate developers, with the latter not falling under the ambit of Section 43CB.

Verbatim quotes of crucial legal reasoning: "The AO's reliance on Section 43CB of the Act is misplaced because this provision is applicable only to construction contracts and contracts for providing services, whereas the assessee is a real estate developer engaged in constructing and selling residential units on its own land."

The Tribunal established that the principle of consistency in revenue recognition methods must be adhered to, especially when the method has been accepted in previous years without any material change in circumstances.

Final determinations on each issue: The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the addition made by the AO. The assessee's method of revenue recognition under AS-9 was deemed appropriate, and Section 43CB was found inapplicable to the assessee's business model.