How Mumbai Builders Report Profits: The Percentage Completion Method Explained – With a Real Case Study

In Mumbai’s fast-paced real estate market, where projects often take years to complete and buyers book flats long before possession, builders don’t wait until the building is fully ready to show profits in their accounts. Instead, most follow a standard accounting rule called the Percentage Completion Method (also known as POCM). This method allows builders to recognise (record) a portion of sales revenue and matching costs every year based on how much of the project is actually complete and sold.

A recent decision by the Income Tax Appellate Tribunal (ITAT) Mumbai highlights why this method matters and how strictly it must be followed. In the case involving Supreme Mega Construction LLP (developer of the Supreme Elenor project in Khar West), the tax department tried to add ₹6.33 crore to the builder’s income, claiming excess costs were claimed. The Tribunal fully rejected this and upheld the builder’s approach as correct under ICAI guidelines.

What is the Percentage Completion Method?

Real estate projects in India, especially in cities like Mumbai, are long-term (often 3–7 years or more). Buyers pay in installments as construction progresses, and agreements for sale are signed early.

Under the Percentage Completion Method (recommended by the Institute of Chartered Accountants of India – ICAI in its Guidance Note on Accounting for Real Estate Transactions, revised 2012):

Revenue (from sales) and costs are recognised proportionately each year.
Builders calculate the percentage of completion based on costs incurred so far versus total estimated project costs (or other reliable measures like physical progress).
Only the portion linked to sold area (usually in square feet) is booked as revenue and cost in that year’s Profit & Loss account.
Unsold portion stays as work-in-progress (inventory) in the balance sheet.
Key rule: Marketing, general admin, and selling expenses are not part of project/construction costs — they are expensed directly in the P&L.

This method matches income with the effort put in each year, giving a fair picture of performance instead of showing zero profit until the project ends (which could be misleading).

ICAI’s Guidance Note makes this mandatory when the project resembles a construction contract — meaning long duration, reliable cost estimates, and sale of incomplete units.

The Supreme Elenor Case: A Practical Example

Supreme Mega Construction LLP was developing Supreme Elenor — a project with 75 residential flats and total saleable area of 61,346 sq. ft.

In AY 2022-23 (FY 2021-22):

Agreements for 36 flats (29,479 sq. ft. — about 48% of total area) were executed.
Total cost incurred till date: ₹64.77 crore (including opening work-in-progress from earlier years + current construction expenses).
Cost allocated to sold flats: ₹31.12 crore (proportionate to area sold, debited to trading account).
Remaining cost: ₹33.65 crore carried forward as closing work-in-progress.

The builder followed ICAI rules precisely — allocating based on sq. ft. sold (not number of flats, since flats vary in size), excluding indirect/marketing expenses from construction costs, and including prior-year costs.

The Assessing Officer (tax department) disagreed and added ₹6.33 crore back to income, wrongly assuming:

The builder claimed ₹37.42 crore as cost (by incorrectly adding indirect + marketing expenses).
Allocation should be based on number of flats (36/75), not area.
Opening work-in-progress could be ignored.
Marketing/admin costs should be part of construction cost.

Why the ITAT Ruled in Favour of the Builder

On 19 January 2026, ITAT Mumbai Bench “B” (Members: Shri Om Prakash Kant, Accountant Member, and Shri Sandeep Singh Karhail, Judicial Member) dismissed the Revenue’s appeal (ITA No. 1891/MUM/2025) and deleted the addition.

Key reasons:

The builder never claimed excess — audited books clearly showed only ₹31.12 crore as cost of sold area.
Allocation must be by area (sq. ft.), not flat count — flats aren’t uniform in size.
Opening WIP (past costs) is integral and must be included.
Indirect expenses (₹1.74 crore) and marketing/selling costs (₹6.11 crore) are not construction costs per ICAI Guidance Note — they go straight to P&L.
The method was consistent, followed ICAI Guidance Note, and matched precedents like Trident Estates Pvt. Ltd. (Mumbai ITAT).

The Tribunal called the AO’s approach factually wrong and inconsistent with standard accounting principles.

Why This Matters for Homebuyers and Other Builders in Mumbai

For buyers: When a builder follows POCM correctly, their financials are more transparent — showing real progress and profits yearly rather than hiding everything until completion.
For builders: It protects against arbitrary tax additions during scrutiny. Many Mumbai projects face similar disputes; sticking to ICAI rules (area-based allocation, excluding non-construction costs) avoids big demands.
Tax angle: Since no specific Income Tax rule overrides, profits as per ICAI-compliant books form the basis for taxable income.

This order reinforces that Mumbai’s real estate sector can rely on the Percentage Completion Method — as long as it’s applied properly — without fear of sudden large tax hits.

Parties in the Case