In exercise of powers conferred in section 145(2) of Income-tax Act, 1961, Central Government had notified Income Computation and Disclosure Standards (‘ICDS’) vide Notification No. 87/2016 dated 29th September 2016.
The notified standards provided inter-alia, for recognition of revenue from construction contracts, sale of goods and provision of services.
However, as stated in Circular No. 10/2017 dated 23rd March 2017, there was no specific standard providing for recognition of revenue in respect of real-estate transactions.
The Finance Minister had constituted a committee to suggest the areas in respect of which further ICDS may be notified. The Committee suggested notification of ICDS in respect of Real Estate Transactions and submitted the draft of the same.
CBDT had placed the draft ICDS in respect of real estate transactions in public domain on 11th May 2017 for comments from stakeholders. The highlights of the draft standards are as under:
Scope of Standard:
As per the draft, the proposed standards will apply to determine income from transactions involving sale of plots of land with or without development of common facilities, development and sale of residential and commercial units, acquisition, utilization and transfer development rights, redevelopment of existing buildings and joint development agreements.
Recognition of income from real-estate transactions:
The draft provides that where the “economic substance of the project is similar to a construction project”, project revenue and cost shall be recognized by reference to the stage of completion of the project.
Further, in a case where the economic substance of the project is not akin to a construction project, the project income will be recognized in accordance with income from sale of goods as provided in ICDS-IV.
Economic substance similar to a construction project:
The draft recognizes following indicators to provide that the economic substance of the project is similar to a construction contract:
- The duration of the project is beyond 12 months;
- Project involves activities such as land development, structural engineering, architectural design or activities of similar nature;
- The individual units of the project are interdependent upon completion of common activities;
- The construction or development activities form a significant proportion of the project activity.
Application of percentage completion method:
The draft provides that revenue in respect of project shall be recognized under the percentage of completion method when:-
- The expenditure incurred on construction and development costs exceeds 25% of total estimated construction and development cost of the project;
- 25% or more of the saleable project area is secured by contracts or agreements with buyers; and
- 10 % or more of the total revenue as per the agreements of sale are realised in respect of each of the contracts and it is reasonably certain that the parties to such contracts will comply with the payment terms as defined in the contracts.
Income from transferable development rights:
The draft provides that revenue from development rights will be recognized when the title to the development rights is transferred to the buyer and it is reasonable to expect that revenue will be ultimately collected.
The draft also provides that where the development rights are acquired by way of direct purchase or on construction of built-up area, cost of acquisition of development right will be the cost of purchase or amount spent on development of built-up area respectively.
Further, where the development rights have been acquired by giving up rights over existing structures or open land, the development rights will be recorded at fair value of the development rights so acquired.
It has also been provided that the cost of development rights will be added to the project cost.
Transactions with multiple elements:
The draft recognizes that a person may contract with a buyer to deliver goods or services in addition to the construction or development of real estate.
The draft provides that in such cases, the gross consideration will be split into separate identifiable components and the consideration will be allocated to each component on the basis of fair market value of each component.
It is further provided that the revenue in respect of each of the components shall be in accordance with the notified ICDS for the respective component.