ITAT Dismisses IT Additions Against Real Estate Developer Under PoCM Method

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has set aside additions and enhancements made against a real estate developer, ruling that both the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] acted without a proper legal foundation in computing income from the company’s real estate project.

The matter pertained to Assessment Years 2013-14 and 2014-15. The AO made two significant sets of additions: first, an amount of ₹50.38 lakh was treated as undisclosed income based on diary entries seized from the residence of Rakesh Kumar Yadav, a director in the assessee company and other entities. Additionally, large additions running into several crores were made by applying an ad-hoc 20 percent revenue recognition rate on advances received from customers, purportedly under the Percentage of Completion Method (PoCM). The CIT(A), while deleting some of the additions, went on to enhance the income of the assessee substantially, including an enhancement of ₹26.69 Crore for AY 2013-14 and ₹39.76 lakh for AY 2014-15.

The assessee, represented by Shri Rajat Jain and Shri Akshat Jain, argued that the seized documents did not pertain to its project “Golf View-II” but to “Golf View-I” being developed by Antariksh Developers. The assessee further submitted that revenue recognition under PoCM was carried out strictly in line with Accounting Standard-9 and the Guidance Note issued by ICAI. They contended that revenue had first been recognized in AY 2013-14 after mandatory conditions such as environmental clearance and 25 percent completion of construction were met. It was also argued that the enhancements made by the CIT(A) violated Section 251(2) of the Income Tax Act, which requires the issuance of a show-cause notice before any enhancement of income.

The Tribunal found merit in the assessee’s submissions. On the issue of undisclosed income, it held that the seized diary was discovered at the residence of a director and not at the assessee’s premises. In the absence of corroborative material linking the entries to Colourful Estates, the statutory presumptions under Sections 132(4A) and 292C could apply only against the person from whose possession the documents were found. Accordingly, the addition of ₹50.38 lakh was deleted.

On the issue of revenue recognition, the Tribunal held that the AO’s method of estimating 20 percent of customer advances as income was arbitrary and without basis. It observed that the assessee had already recognized revenue in accordance with PoCM from AY 2013-14 onwards and that the exercise was revenue-neutral over the life of the project. Further, the enhancements made by the CIT(A) were found to be unlawful since they were carried out without issuing a show-cause notice, a clear violation of Section 251(2).

The Tribunal also highlighted the contradictory approach of the CIT(A), who accepted the assessee’s PoCM working for AY 2014-15 but rejected it for AY 2013-14. It stressed that such inconsistency was untenable, particularly when the Assessing Officer himself had not disputed the PoCM workings in remand proceedings.

Concluding its analysis, the ITAT quashed both the additions made by the AO and the enhancements carried out by the CIT(A), granting complete relief to Colourful Estates Pvt. Ltd. for both assessment years. The appeals were accordingly allowed.