Section 43CB Not Applicable to Real Estate Developers Selling Self-Constructed Properties | ITAT

Case Details: Deputy Commissioner of Income-tax vs. Aaryan Buildspace LLP - [2025] 172 taxmann.com 806 (Ahmedabad-Trib.)

Judiciary and Counsel Details

• Ms. Suchitra Kamble, Judicial Member & Makarand V. Mahadeokar, Accountant member
• Dhiren Shah & Karan Shah, ARs for the Appellant.
• Kavan Limbasiya, Sr. DR for the Respondent.

Facts of the Case

The assessee, Aaryan Buildspace LLP, was engaged in the business of real estate development. It filed its return of income for the relevant assessment year in accordance with Accounting Standard-9 (“AS-9”) and the ICAI Guidance Note on Real Estate Transactions (2012, Revised) to recognize revenue on execution of conveyance deeds and possession transfers.

The case was selected for scrutiny, and notices under Section 143(2) and Section 142(1) of the Act were issued. The assessee was developing a real estate project on its own land. During the relevant year, 27 units were sold, and revenue was recognised accordingly.

The Assessing Officer (AO) held that since the assessee was engaged in a “construction contract”, its income should have been computed under Section 43CB, which mandates revenue recognition on a Percentage Completion Method (PCM) basis. On appeal, CIT(A) deleted the additions. Aggrieved by the order, the AO filed the instant appeal before the Tribunal.

ITAT Held

The Tribunal held that the AO’s reliance on Section 43CB is misplaced because this provision applies only to construction contracts and contracts for providing services, whereas the assessee is a real estate developer engaged in constructing and selling residential units on its own land.

The legislative intent behind Section 43CB of the Act and its placement within the framework of the Act clarify that it governs income recognition for contractors undertaking construction projects for clients, not for developers executing real estate projects on their own account.

Section 43CB was introduced through the Finance Act 2018, with a retrospective application from 01.04.2017 to regulate the computation of income from construction contracts and contracts for providing services. The section explicitly mandates that profits and gains from a “construction contract” or “contract for services” must be determined based on the PCM in accordance with the Income Computation and Disclosure Standards (ICDS).

The phrase “construction contract” is critical to understanding the section’s applicability, as it indicates that the provision applies only to contractors executing projects on behalf of a third party where a contractual obligation exists. In accounting and legal parlance, a construction contract refers to an agreement where a contractor undertakes to execute construction work for a specified price under a contract with a customer. These contracts can include fixed-price contracts, cost-plus contracts, and time-and-material contracts, but they inherently require the contractor to perform work for another party.

Since the assessee does not provide construction services to any third party under a contract, it does not fall within the ambit of Section 43CB of the Act, which is specifically designed to regulate the revenue recognition of contractors executing construction projects for clients rather than developers selling self-constructed properties.

List of Cases Reviewed

• ITO v. Shivalik Buildwell (P) Ltd. [ITA No. 1698/Ahd/2009, dated 5-8-2011](para 5.6)
• Shivalik Buildwell (P) Ltd. [2013] 40 taxmann.com 219 (para 8.6)
• Unity Construction v. ITO [ITA No. 1577/Ahd/2008, dated 28-7-2011](para 8.6)
• Dy. CIT v. Maxworth Infrastructure (P.) Ltd. [ITA No. 202/Del/2018, dated 21-10-2021] (para 8.6) followed.