ITAT Mumbai Upholds POCM Accounting for Real Estate Projects

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has ruled that revenue recognition under the Percentage of Completion Method (POCM) must follow the ICAI Guidance Note on Real Estate Accounting. The decision comes in the context of an appeal from an assessment order under Section 143(3) of the Income Tax Act for Assessment Year (AY) 2017-18, where the Assessing Officer (AO) had initially added ₹229.29 crore to the assessee's revenue. The addition was based on the AO’s recalculation of the project completion percentages under POCM.

The case involved the development of a residential complex in Binnypet, Bengaluru, under a Development Agreement dated 28 March 2011 between the assessee, Relationship Properties Pvt. Ltd., and the landowners, ETA Star Info Park, ETA Karnataka Estates Ltd., and ETA Constructions (India) Ltd. According to the agreement, the assessee was entitled to 69% of the net revenue, while the landowners were to receive 31%. The developer had also advanced ₹212 crore as a refundable deposit, adjustable against the landowners’ revenue share.

For AY 2017-18, the assessee computed the percentage of completion at 48.56% for Phase 1 and 19.52% for Phase 2A, excluding land and development right costs as per ICAI guidelines. Consequently, the company recognized revenue only for Phase 1 and declared a loss of ₹11.6 crore. However, the AO rejected this computation, holding that land cost should be included in the total project cost for determining the percentage of completion. Treating the advance of ₹212 crore as a sunk cost, the AO recomputed the completion percentages at 66.39% and 39.59% for Phases 1 and 2A, respectively, and enhanced the assessee’s income, determining the total taxable income at ₹217.68 crore.

On appeal, the National Faceless Appeal Centre (NFAC) directed the AO to submit a remand report. After re-examination, the AO conceded computational discrepancies and reduced the addition to ₹47.26 crore but continued to uphold the inclusion of land cost in the total project cost. The CIT(A) accepted the revised figures and partly allowed the appeal, prompting the assessee to move the Tribunal.

Before the Tribunal, the assessee contended that it had followed the ICAI Guidance Note on Accounting for Real Estate Transactions (Revised 2012) in letter and spirit. Under this framework, the 25% threshold of work completion for revenue recognition is to be computed only on construction and development costs, excluding land and development rights. Once that threshold is crossed, land cost is then included in the total project cost for determining revenue recognition for that phase. Since Phase 2A had achieved only 19.52% of construction completion, the assessee rightly deferred its revenue recognition for that phase to subsequent years. It also pointed out that the revenue from this phase was duly offered to tax in AY 2018-19, and sustaining the addition would result in double taxation of the same income.

The Tribunal, after a detailed examination, agreed with the assessee’s interpretation. It cited paragraphs 2.2, 5.3, and 5.4 of the ICAI Guidance Note to clarify that land and development rights costs are indeed direct project costs but are excluded when computing the initial 25% threshold for triggering revenue recognition under POCM. The Tribunal held that since there was no deviation in accounting practices, no evidence of tax evasion, and the relevant income was already taxed in the succeeding year, the addition sustained by lower authorities had no merit. It also cited judicial precedents, including Radhasoami Satsang v. CIT (1992) and Bharat Sanchar Nigam Ltd. v. Union of India (2006), reaffirming that consistent accounting treatment cannot be disturbed without a change in facts or law.

In conclusion, the two-member bench of Beena Pillai (Judicial Member) and Arun Khodpia (Accountant Member) directed the deletion of the entire ₹47.26 crore addition, holding that the assessee’s POCM-based revenue recognition was in line with ICAI’s prescribed accounting standards.