Clarification for income tax

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

17 May 2014 If 8th floor building is ready and we have shown as Work in Progress in our books as we Business Commencement Certificate is not received. if any client approach to us for lease / outright purchase for 2 floora. Please guide us with ref to tax portion and should we show it as income or net off from Asset please guide

Querist : Anonymous

Querist : Anonymous (Querist)

25 May 2014 IF 8TH FLOOR BUILDING IS READY AND WE HAVE SHOWN AS WORK IN PROGRESS IN OUR BOOKS AS WE HAVE NOT RECD BCC ITS EXPECTED WITHING 2 MONTHS OF ANY CLIENT APPROACH TO US FOR RENT / PURCHASE FOR 2 FLOORS. HOW DOES IT WILL HELP US SAVE TAX AND WHAT IS BENEFICIAL SELLING OF 2 FLOORS OR TO GIVE ON RENT PLEASE SUGGEST

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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19 July 2024 When dealing with income tax implications related to real estate transactions, especially when part of a building is ready but not fully completed or certified for business use, there are specific considerations to keep in mind:

### 1. Treatment of Work in Progress (WIP):

- **Definition:** Work in Progress refers to assets that are not yet completed or ready for their intended use but are actively being worked on.
- **Accounting Treatment:** Typically, WIP is shown on the asset side of the balance sheet until the project is completed and ready for use.

### 2. Tax Treatment:

- **Income Recognition:** Under Income Tax laws in many jurisdictions, income is recognized when it is earned, irrespective of whether cash has been received or not. If a client approaches you for lease or outright purchase of part of the building, this can constitute income even if the entire building is not yet completed.

- **Business Commencement Certificate (BCC):** While the BCC is important for statutory purposes and may affect certain tax deductions or incentives, it does not necessarily delay the recognition of income if you have completed floors that are available for use.

### 3. Options for Reporting:

- **Income Recognition:** If a client approaches you for lease or purchase, and you agree to the terms, the rental or sale proceeds should generally be recognized as income in the period when the transaction occurs, regardless of whether the entire building is completed or not.

- **Netting Off from Asset:** Income should not be netted off against the WIP asset. WIP represents the costs incurred in constructing the building, whereas income from lease or sale represents revenue earned from the business activity of real estate development or leasing.

### 4. Practical Steps:

- **Documentation:** Maintain detailed records of the transaction, including lease agreements or sale contracts, correspondence with clients, and evidence of the completion status of the floors being leased or sold.

- **Tax Compliance:** Ensure compliance with local tax regulations regarding the timing and method of income recognition. Consult with a tax advisor or chartered accountant to understand specific rules applicable in your jurisdiction.

### Conclusion:

If a client approaches you for leasing or outright purchase of two floors in your partially completed building, you should generally recognize the income from this transaction in accordance with the principles of income recognition under Income Tax laws. The fact that the entire building or specific floors are still classified as WIP does not preclude you from recognizing the revenue generated from leasing or selling those floors. Proper documentation and professional advice will help ensure compliance and accurate reporting of income for tax purposes.

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