Section 43CB & ICDS-III is applicable to contractors not to real estate developers

Section 43CB read with ICDS-III is applicable to contractors and not real estate developers – ITAT

In a recent judgment, ITAT Chennai has held that provisions of Section 43CB read with ICDS-III were applicable to contractors and not real estate developers and therefore the assessee being a developer was under no obligation to apply percentage completion method. 

ABCAUS Case Law Citation:
5001 (2026) (01) abcaus.in ITAT

In the instant case, the Revenue had challenged the order passed by the CIT(A) in deleting the addition made by the AO by re-computing the income of the assessee from the real-estate project by applying the percentage completion method.

The assessee was a real estate builder. The AO, in the course of assessment, noted that, as per Section 43CB of the Act, which was applicable in the relevant AY, the assessee was statutorily required to disclose income from its projects under the percentage completion method, which it had not done so.

In terms of the provisions of Section 43CB, the AO held that, as the assessee had completed more than 25% of the project, the profits from the project was required to be computed and offered under the percentage completion method.

Accordingly, the AO worked out profit relatable to the project for the relevant AY and added the same to the total income. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A) who was please to delete the impugned addition.

The Tribunal observed that it was not in dispute that the assessee-firm since inception of its business had been consistently and regularly following project completion method of accounting, which had not been rebutted by the Revenue.

It was however the Revenue’s case that, there was a change in position of law in the relevant AY by introduction of Section 43CB along with ICDS-III and therefore the assessee henceforth was required to follow percentage completion method in respect of the real estate projects undertaken by it.

The Tribunal also observed that the assessee had rightly pointed out that, the Revenue had totally ignored the transitional provisions mentioned in ICDS III.

The Tribunal further noted that the projects in question were commenced much prior to 1st April 2016 and therefore having regard to the transitional provisions which state that for the projects, which commenced on or before 31.03.2016 but not completed by the said date, the revenue shall be recognized based on the method regularly followed by the person prior to the previous year beginning from the 1st day of April 2016.

The Tribunal opined that in view of the transitional provisions, the AO was unjustified in changing and applying the percentage completion method. It upheld that CIT(A)’s findings deleting the impugned addition by holding that, the assessee was legally allowed to follow its regular method i.e. project completion method, in respect of projects which had commenced prior to 1st April 2016.

The Tribunal also found force in the alternate plea taken by the assessee that Section 43CB read with ICDS-III as notified u/s 145 of the Act is applicable only to construction contracts and not joint development agreements.

It was explained that, the assessee was a real estate developer and not a contractor and therefore Section 43CB had no application to their case. In this regard, he invited attention to the Circular No. 10/2017 dated 23.03.2017 issued by the CBDT clarifying various issues surrounding applicability of ICDS. In their Answer to Question No. 12, it was clarified that, at present, there is no specific ICDS notified for real estate developers and in that view of the matter, ICDS-III is not applicable to them. He further submitted that, the non-applicability of ICDS III in case of real-estate developers is also substantiated by the fact that, the CBDT has issued “draft” ICDS on determination of income from real estate transactions which is pending to be notified. According to him therefore, the intention of the CBDT to issue separate ICDS for real-estate transactions, makes it clear that it is neither its purpose nor objective to apply Section 43CB read with ICDS-III on real estate developers.

The Tribunal in view of the above submission found sufficient force in the assessee’s alternate plea as well, that the provisions of Section 43CB read with ICDS-III were applicable to contractors and not developers and therefore the assessee being a developer was under no obligation to apply percentage completion method.

As a result, the Tribunal upheld t the order of the CIT(A) deleting the addition and all the grounds raised by Revenue were dismissed.

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