In the case of M/s. A.N. Buildwell Pvt. Ltd Vs. DCIT, the ITAT Delhi bench comprising Amit Shukla (JM) and SH. O.P. Kant (AM) was held that if the significant risk and reward are transferred to the buyer, the amount received from the buyer to the extent of the stage of completion of the project has accrued to the Assessee- Builder and it should be subject to tax in terms of section 5 of the Income Tax Act.
During the year under consideration, Assessee Company engaged in construction and development of a technology Park namely “SPIRE EDGE” in Haryana. The assessee had booked sale of a certain level of the portion and received the advance from 187 customers on booking of commercial units.
When assessee filed his return by declaring NIL income, the same was questioned by AO and later certain expenses which are met for marketing the property claimed as revenue in nature by the assessee were disallowed.
Aggrieved assessee carried the matter before first appellate wherein partly allowed the appeal of the assessee.
Nevertheless, both the revenue and assessee filed an appeal before the Tribunal and the bench observed that assessee itself has followed percentage completion method for recognizing the revenue.
The bench reminded the ICAI has revised the Guidance Note on Accounting for Real Estate Transaction wherein it is provided that Percentage Completion Method (PCM) is applied when the outcome of a real estate project can be estimated reliably and when all the conditions mentioned are satisfied.
The Tribunal bench observed that the AO is required to examine whether there is any restriction imposed on the buyer to sell their property to the third party and also to examine is there any regulatory risk was transferred by the assessee.
The bench said that “In the present case, the assessee is following Mercantile system of accounting therefore, the assessee was required to disclose the profit which accrued corresponding to the part of the work of the project executed by the assessee. The Assessing Officer was required to examine the agreement to sell for units and record whether any specified area of the plot of land was allocated to the customers and significant risk relating to the said plot like price risk, any regulatory risk (related to state government or any local authority) was transferred by the assessee. He was also required to examine whether there was any restriction on the buyer to sell or transfer his interest in the property to a third person till complete sale consideration is paid. In our opinion, if the significant risk and reward are transferred to the buyer, the amounts received from the buyer to the extent of the stage of completion of the project has accrued to the assessee and it should be subject to tax in terms of section 5 of the Act. Before us, the percentage of work completed by the assessee on the project is not available and, thus, we are unable to compute the revenue recognized from the project.”
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