Under POCM, selling/Admin costs allowable despite no revenue declared – ITAT

Under percentage completion method, selling/Admin costs are allowable despite no revenue declared as per guidance note of ICAI.

In a recent judgment, ITAT Delhi has held that under percentage completion method, selling costs like advertisement, business promotion and commission expenses are allowable despite that assessee had not declared any Revenue following guidance note issued by the ICAI.

ABCAUS Case Law Citation:
4954 (2025) (12) abcaus.in ITAT

In the instant case, the Revenue had challenged the order passed by the CIT(A) deleting the disallowance in respect of selling expenditure despite that assessee had not recognized the revenue on the basis of ‘Percentage Completion Method’ (POCM) during the year under consideration

The assessee was a real estate developer. The Assessing Officer observed that during the relevant Assessment Year the assessee company had made any sales of plots/ constructed properties, hence the expenses on advertisement, business promotion, commission and interest cannot be allowed as a business expenditure and expenses form part of cost of project.

Therefore, the AO disallowed the said expenses and added to the total income of the assessee.

Before the Tribunal, the Revenue submitted that assessee had declared loss during the year by claiming various expenditures even though it had not declared any revenue. The assessee was following percentage completion method of accounting. Therefore, when they had not declared any revenue, there was no corresponding expenditure that should have been declared.

It was contended that matching principle was not adopted by the assessee. The expenses like advertisement, business promotion, commission and interest expenditures were relating to the project under consideration. The assessee should have capitalized the same or charged to the project Work-in-progress (WIP). 

The assessee contended that the expenditure incurred on advertisement, business promotion, and commission is administrative in nature. Such expenses are not attributable to the cost of the project and, therefore, cannot form part of the project cost.

It was also submitted that the CIT(A) rightly relied upon the Guidance Note on Accounting for Real Estate Transactions issued by the Institute of Chartered Accountants of India (ICAI) , in holding that these expenses were allowable.

It was pointed out that CIT (A) had relied upon the several judicial precedents wherein the Hon’ble Courts have categorically held that selling costs shall not form part of the cost of the project.

The Tribunal observed that assessee was following the method of percentage completion method and obligated to follow the mandatory accounting policies and guidance note published by the ICAI.

The Tribunal further observed that the assessee was following the same. As per which, the assessee had to declare and recognize the revenue unless it reaches 25% of the estimated project cost or revenue, in this case, the assessee had not reached the mandatory level, hence not recognized the revenue in this impugned year.

The Tribunal noted that AO had disallowed the expenses on the basis that assessee had not declared any revenue this year. However, as per the para 2.4 of the guidance note issued by the ICAI, the assessee should not consider part of construction costs and development cost relating to selling costs. Accordingly, the assessee had treated the same as time cost and claimed the same as expenditure.

The Tribunal held that the CIT(A) had rightly concluded the issue under consideration and allowed the same in favour of the assessee. 

Accordingly, the Tribunal dismissed the ground of appeal of the Revenue.

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