Builders Cannot Exclude Land Cost While Reporting Project Revenue, Rules Tribunal
In a key ruling affecting real estate developers, the Income Tax Appellate Tribunal (ITAT) Mumbai has upheld a tax addition of ₹47.26 crore against Relationship Properties Pvt Ltd, holding that land cost and development rights must be included while calculating revenue under the Percentage of Completion Method (POCM).
The decision came in ITA No. 2067/Mum/2024, involving Assessment Year 2017–18, where the developer disputed the tax department’s method of computing project completion.
Background: Real Estate Revenue Calculation Under Scrutiny
Relationship Properties Pvt Ltd was involved in a Bangalore residential project where:
- Landowners were entitled to 31%
- Developer (assessee) had 69% development rights
The developer argued that because land did not belong to them, the cost of land should not be included in project cost for calculating percentage completion.
Excluding land cost reduced the completion percentage, resulting in lower revenue recognition for that year.
Initially, the Assessing Officer had proposed a massive addition of ₹229.29 crore, later reduced to ₹47.26 crore after recalculations in a remand report.
Assessee’s Stand: “Land Isn’t Ours, So It Shouldn’t Count”
The company claimed:
- Only construction cost should be counted
- Land cost should be excluded since land is owned by landowners
- Following ICAI Guidance Note, it said only direct construction cost is relevant
- Recognising more revenue in AY 2017–18 would lead to double taxation, as income was already declared in AY 2018–19
Tax Department’s View: ICAI Guidance Note Supports Us
The Revenue argued:
- Land/Development Rights are integral to the project and must be included
- ICAI’s Real Estate Guidance Note clearly states land cost is part of project cost
- After adjustments, the correct completion percentages were:
- Phase 1: 66.39%
- Phase 2A: 39.59%
- Therefore, revenue must be recognised proportionately
CIT(A) agreed, upholding the revised addition.
Tribunal’s Decision: Land Cost Cannot Be Split From Project Cost
The ITAT observed that:
- POCM is a legally regulated accounting method
- Land is an essential component of any real estate development
- Excluding land artificially suppresses completion percentage
- ICAI Guidance Note explicitly lists land cost as part of project cost
Given these facts, the Tribunal held that the assessee’s exclusion of land cost was incorrect and upheld the ₹47.26 crore addition.
Impact: Real Estate Developers Must Recheck POCM Calculations
This ruling reinforces that:
- Builders must include land or development rights in POCM calculations
- Revenue recognition cannot be deferred by excluding land value
- Tax planning must align strictly with the ICAI Real Estate Guidance Note
The decision is expected to influence several ongoing assessments, especially joint development agreements where landowners and developers share revenue.
