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Judgment
PER MANISH AGARWAL, A.M.
The present appeal is filed by Revenue against the order dated 26.06.2025 passed by Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld. CIT(A)”] in Appeal No. NFAC/2017-18/10038420 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 29.07.2019 passed u/s 143(3) of the Act pertaining to Assessment Year 2018-19.
Brief facts of the case are that the assessee is engaged in the real estate business and during the year under appeal was developing a residential project namely Eden Garden at Rewari project. The assessee has followed Project Completion Method (“PCM”) to recognize its revenue wherein sales was recorded as and when units constructed were sold and physical possession was handed over to the buyer. Meaning thereby when the significant risk and rewards of the ownership transferred to the buyer, the sale has been recognized. By following the said method, the return of income was filed on 31.10.2018, declaring total income of INR 2,28,75,410/-. The case was selected for complete scrutiny and the AO observed that the assessee should have followed the guidance notes issued by Institute of Chartered Accountant of India (“ICAI”) for accounting of real estate transaction as revised in the year 2012 according to which the Revenue on such type of real estate project has to be recognized on Percentage of Completion Method (“POCM”). Accordingly, the AO observed that the assessee has received total advance of INR 67,25,65,661/- from the customer in respect of Eden Garden Project and has almost constructed upto 89% therefore, to the extent of advance received, the revenue needs to be recognized. Thereafter, the AO has taken the total agreed value at INR 67,30,39,528/- of the total area to be sold and recognized the revenue @ 89% of the completed area at INR 59,90,05,180/- and worked out the profit of INR 26,25,68,180/- for which the addition was made. Besides this, AO observed that the assessee has claimed advertisement expenses of INR 9,30,359/- on which TDS was not made therefore, 30% of such expenses were disallowed u/s 40(a)(ia) of the Act which comes to INR 2,79,107/-. Further, the conveyance expenses claimed at INR 3,05,931/- was disallowed for want of necessary bills and vouchers and delayed payment of employee’s contribution towards PF & ESI of INR 64,831/- was also disallowed. Accordingly, total income of the assessee was computed at INR 28,60,93,399/-.
Against the said order, the assessee preferred appeal before Ld. CIT(A) who vide impugned order dated 26.06.2025 has partly allowed the appeal of the assessee wherein Ld. CIT(A) has held that in the case of the assessee, the PCM method adopted by the assessee was accepted in preceding AYs where upto the preceding assessment year, assessee has recognized total Revenue of INR 28,98,38,115/- from the sale of 68 units and for the first time, in the year under appeal, the revenue has changed the method of revenue recognition from PCM to POCM. Ld. CIT(A) followed the order of Hon’ble Supreme Court in the case of Radha Saomi Satsang vs CIT reported in [1992] 193 ITR 321 (SC) has held that as a principal of consistently at middle stage of the project revenue recognized by the assessee, cannot be changed and deleted the addition of INR 26,25,68,120/-made as per PCOM method. Further, disallowance of INR 3,05,931/- made out of conveyance expenses was deleted and further disallowance of INR 2,79,107/-made u/s 40(a)(ia) of the Act was also deleted. However, disallowance of INR 64831/- made u/s 36(1)(va) of the Act towards delayed payment of employee’s contribution of PF & ESI was sustained.
Aggrieved by the said order, the assessee is in revenue before the Tribunal by taking various Grounds of appeal mentioned in the appeal memo.
Ground of appeal Nos. 1 to 3 are with respect to the deletion of addition of INR 26,25,68,120/- made by AO by applying POCM as against PCM method followed by assessee regularly.
Before us, Ld. CIT DR for the Revenue vehemently supported the order of AO and submits that in the instinct case, the assessee was engaged in the business of real estate where POCM method is prescribed for Revenue recognition. Since in the year under appeal, almost 89% of the project got completed and assessee has booked almost 100% units to be constructed and received major portion of the sale proceeds as advance, therefore, the assessee should have disclosed the income based on POCM advised by the Institute of Chartered Accountant. Ld. CIT DR thus, submits that the AO has correctly computed the profits of the project on the sale of 89% of the area at INR 26,25,68,120/- which deserves to be upheld. She prayed accordingly.
On the other hand, Ld.AR vehemently supported the order of Ld. CIT(A) and submits that assessee had regularly recognized its revenue in terms of Accounting Standard-9 prescribed and followed the PCM since inception. Ld.AR submits that same method was followed by the assessee in preceding AYs where the income was recognized based on the units finally sold and all the significant risk and rewards were transferred to the buyers after registration of Sale Deed. Ld. AR submits that in preceding AYs, sales to the extent of INR 28,98,38,115/-from 68 units was recognized and due taxes were paid which have been accepted by the revenue. For this, Ld.AR placed on record the copy of the assessment order for AY 2017-18 where the profits of INR 1,73,36,750/- was declared by the assessee from the sale of part of the units recognized as per PCM and were accepted by the Revenue in terms of the order passed u/s 143(3) dated 29.07.2019. Ld. AR further submits that the assessee has followed the accepted method of accounting and recognized its revenue as per PCM and therefore, as per the principal of consistency, the same should be accepted. For this, reliance is placed on the following judgments:-
CIT vs Excel Industries Ltd. [2013] 358 ITR 295 (SC);
Radha Saomi Satsang vs CIT [1992] 193 ITR 321 (SC); and
CIT vs Neo Poly Pack Pvt. Ltd. (Delhi) 245 ITR 492.
Ld.AR further submits that the AO has not invoked the provisions of section 145(3) of the Act and wrongly applied the guidance note issued by the Institute of Chartered Accountants of India (“ICAI”) which is not mandatory and is a guidance note only. Ld. AR drew our attention to section 145 of the Act wherein sub-section (2), provides that Central Government may notify the income computation disclosure standards to be followed however, till date, no specific accounting standard or income computation method is prescribed for the real estate project. The assessee has followed Two disclosure standards as provided under section 145(2) of the Act. Ld.AR further submits that Draft Income Computation and Disclosure Standard (ICDS) for Real Estate Transaction issued by CBDT in May, 2017, is yet to be notified and therefore, the income recognized by the assessee as per PCM should be upheld. For this, he placed reliance on following judicial pronouncements:-
[i] Paras Buildtech India Pvt.Ltd. vsCIT (ITA No.602/2015);
[ii] CIT, Central-I vs Manish Build Well Pvt.Ltd. [2011] [11] TMI 35;
[iii] Pr.CIT vs Santha Buildtech Pvt.Ltd. [2017] [14] TMI 826;
[iv] Pr.CIT vs Friend land Developers [2017] [14] TMI 1153;
[v] DCIT vs Unique Builders& Developers [ITA No.464 & Others].
He thus, requested for the confirmation of the order of Ld. CIT(A).
Heard the contentions of both the parties at length and perused the material on record. Admittedly, assessee is a real estate developer and was engaged in the construction of a residential project namely “Eden Garden” project at Rewari, Haryana where total three 3 blocks of residential units spread over 7.02 Acre of land was in progress. The said project was commenced on 14.08.2007 and completed on 08.05.2017 in terms of the completion certificate issued by the Directorate of Town and Country planning Unit. As per the Agreement to Sale, the company hold the full authority of every such flats unless corresponding Sale Deed was registered and physical position was handed over to the buyer. Till then, the advances received was kept as liability which could be refunded to the buyers in case of unwillingness to take the possession after the execution of Sale Deed. The total units constructed year-wise and the revenue recognized, was submitted before Ld. CIT(A) and reproduced at page 44 of the appellate order which are as under:-
“A total of 314 units/flats were developed in the above categories, out of which-
1.Conveyance deed of 68 units was registered prior to 31.03.2017, and corresponding sale revenue of Rs. 28,98,38,115/- was duly recognized in the books of accounts of preceding years.
2.Conveyance deed of 56 units was registered during the year under consideration (i.e. FY 2017-18) and therefore, corresponding sale revenue of Rs. 23,01, 13,394/- was duly offered to tax in the return of income filed by the assessee company for the impugned assessment year.
3.43 units remained un-booked/unsold as on 31.03.2018, and hence there did not arise any question of revenue recognition in respect of them.
4.For balance 147 units, total agreed sale consideration amounted to Rs. 67,30,39,528/-, out of which Rs. 67,25,65,661/- had been received in advance. Out of such advances, Rs. 61,70,69,193/- had been received prior to FY 2017-18 and balance Rs. 5,54,96,468/- only had been received during the year under consideration (i.e. FY 2017-18). Out of such 147 units:
* Booking of 7 units was cancelled and therefore, advance of Rs. 5,44,10,763/-was refunded in subsequent years.
* Conveyance deed of 31 units was registered in FY 2018-19, and therefore, corresponding sales revenue of Rs. 14,12,65,297/- was recognized in AY 2019-20.
* Conveyance deed of 26 units was registered in FY 2019-20, and therefore, corresponding sales revenue of Rs. 10,51,88,850/- was recognized in AY 2020-21.
* Conveyance deed of 21 units was registered in FY 2020-21, and therefore, corresponding sales revenue of Rs. 6,43,31,897/- was recognized in AY 2021-22. Conveyance deed of 11 units has been registered in FY 2021-22, and therefore, corresponding sales revenue of Rs. 7,25,23, 169/- will be recognized in AY 2022-23.
* Conveyance deed of 17 units has been registered in FY 2022-23, and therefore, corresponding sales revenue of Rs. 8,37,94,275/- will be recognized in AY 2023-24.
* Conveyance deed of 25 units has been registered in FY 2023-24 (UPTO 31/12/2023), and therefore, corresponding sales revenue of Rs. 10,54,20,617/- will be recognized in AY 2024-25.
* Conveyance deed of balance 9 units is yet to be registered and therefore, corresponding sales revenue of Rs. 3,92,33,394/- is required to be recognized based on the date of registry and handing over of possession.”
It can be observed from the above that out of the total unit constructed, 314 units, the assessee has already recognized the Revenue of 68 units sold upto 31.03.2017 where total sale revenue of INR 28,98,38,115/- was recognized and offered for tax. It is relevant to state here that in immediately preceding year i.e. AY 2017-18 case of the assessee was selected for scrutiny and the income declared at INR 1,73,36,750/- on the basis of PCM has been accepted by the Revenue without raising any doubts about the method of revenue recognition.
It is further observed that during the year under appeal, the assessee has recognized the Revenue of 56 units at INR 23,01,13,394/- i.e. units for which the Convenance Deeds were executed and physical possession were handed over to the respective buyers. The remaining units were sold in subsequent AYs where the year-wise revenue was recognized and due taxes were paid which could be seen from the observations of Ld. CIT(A)’s order as reproduced herein above.
All these facts clearly suggests that the assessee since beginning of the project, had recognized the Revenue as per PCM and Revenue cannot change the method to POCM randomly and brought to tax the Revenue which was already offered for tax in earlier years or offered in subsequent AYs where the income tax returns have been filed.
Under identical circumstances, the Hon’ble Supreme Court in the case of CIT vs Excel Industries Ltd. [2013] reported in 358 ITR 295 (SC) and Radha Saomi Satsang vs CIT reported in [1992] 193 ITR 321 (SC) has held that the AO was duty bound to follow the principal of consistency. Had there been no consistency, there would be a situation like the instant case where income has been assessed on multiple occasions by applying different method of revenue recognition as per the sweet will of the AO. This was never be the intention of legislature. Ld. CIT(A) appreciated these facts and deleted the additions by observing in para 12.3 to 12.11 of the order as under:-
12.3“I have considered the grounds of appeal, the assessment framed and detailed and comprehensive submission made by the appellant. Upon careful consideration, I am of the considered view that the A.O reasoning overlooks the core guidance of the ICAI note which mandates that the applicability of POCM for builder is contingent on fact that the “economic substance of the transaction” aligns with that of a construction contract. The Guidance Note distinguishes between a “contractor” and a “builder” and clarifies that POCM is applicable only where the developer essentially acts as a contractor—i.e., when construction is carried out on behalf of customers who bear substantial risks, provide specifications, or otherwise direct the work.
12.4In the present case, the “Eden Garden Project” is entirely conceptualized, financed, executed, and marketed by the appellant in its own right. There is no element of third-party construction or performance obligation arising from binding contracts akin to a contractor-client relationship. The buyers did not bear construction risk, nor did they exercise control over design or delivery. The sales were not structured as construction contracts with performance obligations, but rather as sale of immovable property upon completion. Furthermore, the appellant has highlighted that several advances were returned in later years due to cancellations and sale agreements were not enforceable as conveyance deeds were not executed. These facts underscore that no binding sales had been concluded in substance or law. Therefore, the project retained substantial risks with the developer and revenue could not be recognized unless and until the transfer of title and possession materialized. The ICAI Guidance Note makes it clear (para 3.3 and 3.4) that builders may be treated “like contractors” if the economic substance of their agreements with buyers resembles a construction contract. This generally happens when:
•The buyer enters into a legally enforceable agreement at early construction stages;
•Construction is carried out substantially on behalf of the buyer;
•Revenue, cost, and outcome of the project can be reliably estimated.
12.5In such cases, even a real estate developer is required to follow the Percentage of Completion Method (POCM) for revenue recognition, just like a contractor. The conditions presuppose a contractual environment consistent with a construction contract, which is absent here. Moreover, the appellant has rightly pointed out that the guidance note itself warns against forced application of POCM where the substance of transaction is sale of completed flats and not contractual construction services. The mere fact that the project crossed a certain completion percentage or booking value does not by itself warrant adoption of POCM unless the legal obligations and risk structure match that of a contractor, which is clearly not the case.
12.6In light of the above, it is held that the appellant has correctly applied the Completed Contract Method in accordance with the prevailing accounting standards, judicial precedents, and business realities. The method reflects true income in the year in which sale is legally concluded. The AO’s approach of deeming income by forcibly applying POCM without establishing that the appellant functioned as a contractor in substance is not tenable and runs contrary to the ICAI’s guidance, CBDT’s clarification (Circular No. 10/2017), and consistent application of the above method in previous years by the appellant.
12.7It is well documented that the appellant has consistently followed the Completed Contract Method (CCM) for revenue recognition in respect of its real estate projects. This method has been consistently disclosed in the tax audit reports and audited financial statements in earlier years. As evident from the appellant’s submissions that this accounting treatment has been accepted by the Department in prior assessments, including in scrutiny proceedings. No objections were raised by the Assessing Officer in earlier years, despite the presence of similar factual situations involving project development, receipt of advances, and partial construction. The sudden departure from this settled position, in the absence of any material change in business model, accounting policy, or statutory framework, is unjustified and contrary to the principle of consistency as laid down by the Hon’ble Supreme Court in Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC), where it was held that a consistent view accepted by the Revenue in earlier years should not be disturbed in the absence of new facts or compelling reasons.
12.8In the present case, it is also significant to note that the Assessing Officer has not invoked the provisions of section 145(3) of the Income Tax Act, 1961, nor has he recorded any finding to the effect that the books of account maintained by the appellant were incomplete, incorrect, or unreliable. There is no observation in the assessment order or the remand report which suggests that the method of accounting adopted by the appellant was not capable of deducing correct profits. Hence, in the absence of any rejection of books or reason for departure from accepted method of accounting, the invocation of an alternate method of revenue recognition namely, the Percentage of Completion Method (POCM) is not sanctioned either under the I.T Act or under the ICAI Guidelines or by Judicial precedent. Hence, the Department’s acceptance of the Completed Contract Method in earlier years, without recording any adverse inference or suggesting any under-reporting of income, reinforces the credibility and appropriateness of the method in the context of the appellant’s business model. The current assessment year does not present any deviation in project type, contractual framework, or revenue cycle which could warrant a different treatment. The Eden Garden project follows the same commercial and accounting structure as in earlier years, and the decision to apply POCM in this year appears arbitrary and without reference to change in facts or breach of statutory conditions. Therefore, in the absence of rejection of books under section 145(3), and in view of the consistently accepted accounting treatment under the Completed Contract Method, the sudden departure by the Assessing Officer in the present year violates the rule of consistency and lacks legal or factual justification.
12.9The appellant has relied on several judicial pronouncements to support its contention that the PCM is a recognized and accepted method in the real estate sector and that any change in the accepted method should be grounded in specific statutory or factual deviations. The case of CIT v. Manish Buildwell (P) Ltd. [2012] 204 Taxman 106 (Delhi)is particularly relevant. The Hon'ble Delhi High Court has upheld the adoption of the project completion method, noting that it is a well-accepted accounting method, particularly suitable for real estate developers and that it was consistently accepted in previous years. The Court also emphasized that a mere change in approach by the AO, without finding the existing method as misleading or incorrect, cannot be the basis for alteration. Further, in Salarpuria Simplex Dwelling LLP v. PCIT [2022] 143 taxmann.com 35 (Calcutta), the Calcutta High Court reiterated that where the project completion method had been consistently followed and accepted, it was not open to the AO to unilaterally apply the POCM, especially when AS-7 itself recognizes both methods as acceptable. Similarly, in Punjab Information & Communication Technology Corporation Ltd. [2023] 152 taxmann.com 518 (P&H), the Hon'ble High Court applied the principle of consistency, observing that unless the AO establishes that the accepted method would result in distortion of true profits or deferment of tax, there is no justification to impose a change. In Awadhesh Builders v. ITO [2010] 37 SOT 122 (Mumbai), the ITAT ruled in favor of the project completion method being appropriate for a developer and criticized the adoption of POCM merely to increase tax revenues for one year. The Tribunal held that unless the books are rejected under section 145(3) and a specific defect is found, the AO cannot impose a new method of revenue recognition. Additionally, in Trident Construction v. DCIT [2021] 127 taxmann.com 360 (Mumbai - Trib.), the Hon’ble Tribunal has noted that revenue can be recognized only upon fulfilment of conditions such as transfer of possession or execution of sale deed, which squarely aligns with the principles under PCM.
12.10These rulings cumulatively reinforce the appellant's position that the Project Completion Method is a recognized and valid method of accounting. The AO has not invoked section 145(3), nor identified any defect in the appellant's books of accounts. Further, the appellant has demonstrated that there were no registered sale deeds, no delivery of possession and even refund of advances in several cases during the relevant year.
12.11Hence, based on the detailed discussion of business model, the consistent approach of the appellant in adopting project completion method and acceptance of the same by the department and judicial decision including jurisdictional High Court, the addition of Rs. 26,25,68,120/- done by the AO by changing the method of accounting lacks merit and hence the same is deleted. This ground of appeal is allowed.
As discussed herein above, we find that assessee has followed PCM for recognizing its revenue consistency since inception of the project and was accepted by the Revenue in the order passed u/s 143(3) of the Act. Further, the Jurisdictional High Court in the case of CIT vs Manish Build Well Pvt. Ltd. reported in [2012] 204 taxmann.com 106 has also held that PCM method is well accepted accounting method suitable for real estate developers and therefore, it cannot be altered. This view is further supported by the Hon’ble Calcutta High Court in the case of Salarpuria Simplex Dwelling LLP vs PCIT reported in [2022] 143 taxmann.com 35 (Calcutta) as relied upon by Ld. CIT(A).
In view of the above facts, we find no error in the order of Ld. CIT(A) in holding that the assessee has rightly computed his income based on PCM method which is recognized and accepted method of accounting and further by substituting the revenue recognition to POCM, the AO has taxed the income twice which has already been declared by the assessee as per PCM and therefore, such action of the AO is not acceptable. Before us the revenue has failed to controvert this proposition. Under these circumstances, we decline to interfere in the order of Ld. CIT(A) deleting the addition made by AO and the same is hereby sustained. Grounds of appeal Nos. 1 to 3 raised by the Revenue are dismissed.
Ground of appeal No. 4 of the revenue is with regard to the deletion of disallowance of INR 2,79,107/- made u/s 40(a)(ia) of the Act.
Heard the contentions of both the parties at length and perused the material on record. It is observed that Ld. CIT(A) has deleted the disallowance by observing that the payments were made to different parties wherein each payment was of less than INR 30,000/- i.e. the maximum amount prescribed u/s 194C upto which no tax is required to be deducted. Ld. CIT(A) further observed that wherever the provision of TDS is applicable, the recipients have included the said payment in their return and computed due taxes thereon therefore, Ld. CIT(A) by placing reliance on the judgment of Hon’ble Delhi High Court in the case of CIT vs Ansal Landmark Township (P.) Ltd. reported in 377 ITR 635 (Del.) has deleted the disallowance. We find no error in the order of Ld. CIT(A) which is hereby, upheld. The Ground of appeal No.4 raised by the Revenue is thus dismissed.
Ground of appeal No. 5 is with respect to the deletion of disallowance of convenience expenses INR 3,05,931/- made by the AO.
Heard the contentions of both the parties at length and perused the material on record. It is observed that the AO has disallowed the entire expenses claimed under the head “conveyance expenses” ignoring the fact that the same was incurred during the normal course of business by the employees and for the furtherance of business while performing his duties. The AO has not pointed out any amount spent for non-business purposes and on assumptions and presumptions has made the disallowance. Ld. CIT(A) after considering the additional evidences filed in the shape of vouchers etc. and after verifying the same, has deleted the disallowance made by observing that the expenses were incurred for the purpose of business and similar expenses were claimed in previous year on similar patterns which were allowed. Considering the entirety of facts and the circumstances, we find no error in the order of Ld. CIT(A) in deleting the disallowances so made. Accordingly, the same is hereby upheld. Ground of appeal No.5 raised by the Revenue is thus, dismissed.
In the result, appeal filed by the Revenue is dismissed.