tax audit limit u/s 44 AB for builder

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Querist : Anonymous

Querist : Anonymous (Querist)

25 July 2011 In case of builder , if builder follows completed contract method & doesn't show any sale but received advance from customers of Rs 2 crs & he has spent 1 cr on expenditure then he is liable to get his accounts audited u/s 44 AB

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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25 July 2011 The point of recognition of revenue will be the deciding factor.

The builder is following the completed contract method, and he is selling the property after completion of the construction. The person who has given booking advance may take his advance back from the builder, or on customer's choice, the unit may be changed by the builder.

If the units constructed could not be sold
, they remains with the builder only. As such we can say that the construction work is carried on by the builder is in his own account.

Here receiving of advance does not mean the revenue has to be recognised just like as done in construction contracts.

Being not a contractual activity, the builder can recognise his revenue as per AS-9.

As such profit can only be shown and taxed in the year of sale or transfer of the property to the buyer.

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CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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25 July 2011 As far as question of Gross Receipts or Turnover is concerned,

in case of the builders, in the above circumstances "turnover" word will apply and as there is no turnover, tax audit is not required U/s 44AB.

Even after , he is advised to get his accounts audited from the IT point of view, so as to establish the expenditure incurred by him as genuine and perfect.

Querist : Anonymous

Querist : Anonymous (Querist)

25 July 2011 Thanks sir,

but builder has done agreement to sale with the customers & against that he has taken booking money as advance ,& showing the work in progress ,

in this whether the Tax audit is applicable?

Querist : Anonymous

Querist : Anonymous (Querist)

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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26 July 2025 Under **Section 44AB** of the Income Tax Act, a **tax audit is applicable** if:

* **Turnover/gross receipts exceed ₹1 crore** (for businesses), or
* **₹10 crore** if **cash receipts/payments do not exceed 5%** of total receipts/payments (from AY 2021–22 onwards).

Now let’s evaluate the **builder’s case** in detail:

---

### 📌 **Facts Given:**

1. Builder follows the **completed contract method**.
2. Has **received advances** of ₹2 crores.
3. Has entered into **agreements to sell** with customers.
4. No **revenue recognition** yet (since completion is pending).
5. Builder shows **Work in Progress (WIP)** in books.
6. Incurred **₹1 crore in expenses**.

---

### ✅ **Key Considerations:**

#### 1. **What is considered "Turnover" or "Gross Receipts" for Builders?**

* **Advance from customers** (booking money), **without transfer of ownership or possession**, is **not turnover** under AS-9 or ICDS.
* **Agreements to sell** alone (without possession transfer) do **not amount to sales** under income tax or accounting standards.

#### 2. **Work-in-Progress (WIP):**

* WIP is a **balance sheet item**, not part of **profit and loss turnover**.
* Recognition of revenue occurs only when construction is completed and possession is handed over.

#### 3. **Completed Contract Method:**

* Revenue is recognized only **on project completion or delivery**.
* Until then, **advances received** do **not form part of turnover**.

---

### ⚖️ **Tax Audit Applicability u/s 44AB:**

| **Condition** | **Amount** | **Tax Audit Triggered?** |
| ----------------------- | ----------------------------------------- | ------------------------ |
| Turnover/Gross Receipts | ₹0 (no completed sale) | ❌ No |
| Advance from Customers | ₹2 crores (not turnover) | ❌ No |
| Expenditure Incurred | ₹1 crore (not relevant directly for 44AB) | ❌ No |

🟩 **Conclusion:**

* In the absence of **revenue recognition**, **no tax audit is required under Section 44AB**.
* However, from a **practical and precautionary standpoint**, it is advisable to **maintain audited accounts**, especially given the scale of operations and quantum of expenses (₹1 crore+), **to substantiate the genuineness of expenditures** and **WIP** during future scrutiny.

---

### 📢 **Note:**

If:

* The builder **transfers possession**, or
* Recognizes any **sale revenue** (even part of the project),

...then that recognized revenue will be **counted as turnover**, and **44AB will apply** if the threshold is breached.

Let me know if you want a sample tax treatment note or auditor’s opinion draft for this scenario.

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