Real estate developers are not subject to Section 43CB of the Income Tax Act; they should recognize revenue based on Accounting Standard-9 upon transfer of ownership.

आदेश/ORDER

PER MAKARAND V. MAHADEOKAR, AM:

The present appeal has been filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-11, Ahmedabad [hereinafter referred to as "CIT(A)"] dated 08.05.2021 for the Assessment Year (AY) 2018- 19, wherein the CIT(A) deleted the addition of Rs.2,08,61,570/- made by the Assessing Officer [hereinafter referred to as "AO"] under Section 43CB of the Income Tax Act, 1961 [hereinafter referred to as "the Act"] by applying the Percentage Completion Method ("PCM") for revenue recognition.

Facts of the Case:

2. The assessee, Aaryan Buildspace LLP, engaged in the business of real estate development, filed its return of income for AY 2018-19, declaring a total income of Rs.1,92,62,080/-. The case was selected for scrutiny, and notices under Section 143(2) and Section 142(1) of the Act were issued. The assessee was developing a real estate project named "ARYAN OPULENCE" on its own land and followed Accounting Standard-9 ("AS-9") and the ICAI Guidance Note on Real Estate Transactions (2012, Revised) to recognize revenue on execution of conveyance deeds and possession transfer. During the relevant year, 27 units were sold, and revenue was recognized accordingly. The AO, in his assessment order dated 24.04.2021, held that since the assessee was engaged in a "construction contract", its income should have been computed under Section 43CB of the Act, which mandates revenue recognition on a Percentage Completion Method (PCM) basis. The AO treated the customer advances of Rs.28,30,86,301/- crore as revenue and computed the total taxable income at Rs.4,01,23,650/-, making an addition of Rs.2,08,61,570/-.

3. The assessee preferred an appeal before CIT(A), who deleted the addition, holding that:

• The assessee is a real estate developer, not a construction contractor, and hence, Section 43CB of the Act does not apply.

• The assessee followed AS-9 and the ICAI Guidance Note, which provide that revenue is recognized only when significant risks and rewards are transferred through a registered sale deed and possession handover.

• The AO incorrectly applied PCM, which is applicable only to construction contractors and not to real estate developers.

• The method of accounting followed by the assessee had been accepted in previous years (A.Y. 2015-16, 2017-18) and could not be arbitrarily changed.

4. Aggrieved by the order of CIT(A), the Revenue filed an appeal before us with the following ground of appeal:

a) In the facts and on the circumstances of the case and in law, the Id. CIT(A)has erred in deleting the addition of Rs.2,08,61,570/-, in view of provision of section 43CB of the Income Tax Act.

5. During the course of hearing before us, the Departmental Representative (DR) contended that the assessee had entered into an agreement of sale specifying stage-wise payments, which made it a "construction contractor" rather than a real estate developer. The DR further contended that section 43CB of the Act does not distinguish between different classes of contractors and hence applies to both construction contractors and real estate developers acting as contractors. The DR also stated that since advances were received and substantial work was completed, PCM should be applied, and the AO was justified in making the addition. The DR argued that the judicial precedents relied on by the CIT(A) were for assessment years before the introduction of Section 43CB of the Act and, therefore, not applicable.

6. The Authorized Representative (AR), representing the assessee, contended that the addition made by the AO was erroneous and legally unsustainable. The AR emphasized that the assessee is engaged in the business of real estate development and constructs residential flats on its own land, thereby distinguishing itself from a construction contractor providing services to third parties. It was submitted that the assessee retains ownership of the land and develops housing projects independently, selling completed un