ICDS-III(Revised) came into force with effect from 1st day of April, 2016, and is accordingly applicable to the assessment year 2017-18 and subsequent assessment years.
Section 43CB was inserted by the Finance Act, 2018 w.e.f. 1-4-2017(assessment year 2017-18) which provides that profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with the Income Computation and Disclosure Standards.
For prior assessment years (including assessment year under consideration in the instant case i.e. assessment year 2014-15), this section was not in existence and applicable and percentage completion method and completed contract method were both acceptable methods for accounting of construction contract. Percentage completion method has been made compulsory by subsequent insertion of section 43CB of the Act, which is not applicable to the impugned assessment year i.e. AY 2014-15. The percentage of completion method of accounting cannot be thrust upon the assessee by the Assessing Officer for assessment years prior to AY 2017-18. [Trident Estate (P.) Ltd. v. ITO [2021] 127 taxmann.com 360/190 ITD 364 (Mum. – Trib.)] In this regard, transitional provisions in Para 22 of this ICDS are relevant. Contract revenue and contract costs associated with the construction contract, which commenced on or after 1st day of April, 2016 shall be recognised in accordance with the provisions of this standard. [Para 22.1 of ICDS-III (Revised)] Contract revenue and contract costs associated with the construction contract, which commenced on or before the 31st day of March, 2016 but not completed by the said date, shall be recognised based on the method regularly followed by the person prior to the previous year beginning on the 1st day of April, 2016. [Para 22.2 of ICDS-III (Revised)]
This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of account. In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent.
This Income Computation and Disclosure Standard should be applied in determination of income for a construction contract of a contractor. [Para 1 of ICDS-III (Revised)]
Section 43CB as well as ICDS-III(Revised) require a contractor to offer incomes from construction contracts to tax in accordance with the “percentage of completion method”(POCM).
ICDS-III(Revised) would apply to construction contracts executed by an assessee as contractor and not to contracts/projects executed by him on his own account. Therefore, it is not compulsory for assessee to follow percentage of completion method mandated by ICDS-III(Revised) for construction contracts executed by him on his own account. For projects executed on his own account, he is well within his rights to adopt completed contract method for income-tax purposes. Where assessee was executing Slum Rehabilitation project sanctioned by Slum Rehabilitation Authority whereunder he was obligated to construct and provide free of cost tenement of size of 225 sq. ft. to all slum dwellers and in consideration was to receive TDR/or right to construct over and above the normal permissible limit and such additional area was allowed to be sold in the open market, assessee was executing construction project on his own account and not as a contractor. In case of construction projects which are executed on own account and not as a contractor, which is the position in the instant case, income from the project will accrue only when the project is complete and area is sold and, therefore, completed contract method will be proper method to compute income in such cases. In case of projects such as these, assessee will be well within his rights to offer income from such projects to tax on completed contract method basis. If, however, assessee adopts percentage completion method for income-tax purpose, losses only proportionate to work completed during year can be allowed and not entire anticipated loss [Shivshahi Punarvasan Prakalp Ltd. v. ITO [2011] 15 taxmann.com 352/[2012] 135 ITD 51 (Mum. – Trib.)]
FAQ No. 12 of CBDT’s Circular No. 10/2017 dated 23-3-2017 clarifies as under :
Question 12 : Since there is no specific scope exclusion for real estate developers and Build-Operate-Transfer (BOT) projects from ICDS-IV on Revenue Recognition, please clarify whether ICDS-III and ICDS-IV should be applied by real estate developers and BOT operators. Also, whether ICDS is applicable for leases.
Answer: At present there is no specific ICDS notified for real estate developers, BOT projects and leases. Therefore, relevant provisions of the Act and ICDS shall apply to these transactions as may be applicable.
The Guidance Note on Accounting for Real Estate Transactions (Revised 2012) issued by ICAI offers guidance on revenue recognition by real estate developers. The term ‘real estate’ refers to land as well as buildings and rights in relation thereto. Enterprises who undertake such activity are generally referred to by different terms such as ‘real estate developers’, ‘builders’ or ‘property developers’. The Guidance Note applies to all transactions in real estate. An illustrative list of real estate transactions to which the Guidance Note applies are as under:
(a) Sale of plots of land (including long term sale type leases) without any development.
(b) Sale of plots of land (including long term sale type leases) with development in the form of common facilities like laying of roads, drainage lines and water pipelines, electrical lines, sewage tanks, water storage tanks, sports facilities, gymnasium, club house, landscaping etc.
(c) Development and sale of residential and commercial units, row houses, independent houses, with or without an undivided share in land.
(d) Acquisition, utilisation and transfer of development rights (TDRs).
(e) Redevelopment of existing buildings and structures.
(f) Joint development agreements (JDAs) for any of the above activities.
The Guidance Note recommends that whether AS7(ICDS-III) or AS9(ICDS-IV) will apply to real estate transaction will depend on economic substance of the transaction as under:
[See Para 3.36 for details]
In such a case, ICDS-III (Revised) will not apply. In I.T.O. v. Nadia Construction Pvt. Ltd [ITAT Kolkata decision in I.T.A No. 2232/Kol/2016, dated 19-3-2019], it was held that where the assessee-company was only land-owner and had handed over possession of the land to developer and was to receive back 32% of constructed area within 60 months of giving possession, assessee-company was justified in treating as liabilities the advances received through developers from buyers of flats from its 32% share and not recognising any revenue/sales merely on entering into of agreement to sell with buyers (even if registered agreement to sell) and recognising sales/revenue/income only on execution of sale deed/possession in favour of its buyers on receiving its 32% share after due demarcation.
ICDS-III(Revised) has no application where company is not working as a contractor instead, working in the capacity of an executing agency for which it is receiving development fees at a fixed percentage of development expenditure incurred.
Case Study 2.4.1: A Company say, P Ltd. is engaged in the business of executing infrastructure projects and is presently working in the capacity of executing agency for one of the infrastructural project of the government. As per the Memorandum of Understanding (MoU) between the government and P Ltd., the entire project cost will be funded by the government. Further, the ownership of interest for the project assets and liabilities will vest with the government. Towards the services rendered, P Ltd. will receive development fees at a certain fixed percentage of the development expenditure incurred. For executing the above project, P Ltd. has engaged the services of various contractors who will be using their own material, men and machineries for the project work.
While accounting the above transaction, P Ltd. has provided the liability in its books towards the work executed till financial year end on the basis of bills received. In addition, P Ltd. has also provided the liability for work executed till financial year end for which the bills have not been raised, on the basis of estimated value worked by the expert. Whether the treatment by P. Ltd. is in accordance with AS/ICDS?
Answer: No, the accounting treatment adopted by P Ltd. is not correct. As per para 49(a) and 49(b) of Framework for the Preparation and Presentation of Financial Statements, asset is defined as a resource controlled by the entity as a result of past events from which future economic benefits are expected to flow to the entity. Further, liability is termed as present obligation arising as a result of past event, the settlement of which is expected to result in outflow of resources from the entity.
In the instant case, it is seen that the company is not working as a contractor. Instead, the company appears to be working in the capacity of an executing agency for which it is receiving development fees at a fixed percentage of development expenditure incurred. The entire funding of the project is done by the government. Moreover, all the risks and rewards including the ownership of project assets and liabilities vests with the government and not with P Ltd. All the assets and liabilities related to the project are of government only. Therefore, the liability for the corresponding asset, whether billed or un-billed should not be recognized in the books of P Ltd. [EAC opinion Query 2, Volume 32 Opinion finalized on 4 April 2012]
Case Study 2.4.2: A Company say, C Ltd. is engaged in the business of designing and developing infrastructure projects. C Ltd. has adopted such a business model that designing, construction and supervision of projects are outsourced to third parties. C Ltd. is entrusted with an infrastructural project – construction and development of national highway by the government department. The whole project is financed by the government and the funds are released to C Ltd. on yearly basis. C Ltd. spends such an amount on regularly basis and generate the assets (capital- work -in -progress) which will be owned by the government in its name. No further economic benefits are entrusted to C Ltd. except the commission being received at a defined rate on the expenditure incurred against the project execution.
On behalf of the government, C Ltd. recognized the capital-work-in-progress and the funds received in its books of account. Whether C Ltd. is correct in recognizing the above items in its own books of account?
Answer: No, the treatment adopted by C Ltd. is not correct. As per para 49(a) of Framework for the Preparation and Presentation of Financial Statements, an asset is defined as a resource controlled by the entity as a result of past events from which the future economic benefits are expected to arise to the entity.
In the instant case, neither the project assets are funded by C Ltd. nor are these owned by it. Also, no future economic benefits are expected to flow to the entity, except the commission being received against the project execution. The funds being received by C Ltd. from the government department
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