Applicability of AS-7

The applicability of Accounting Standard (AS) 7, "Construction Contracts," to a builder developing a building without a specifically negotiated contract with a customer (often referred to as developing on one's own account) has been a subject of significant professional discussion and judicial interpretation.

Key Points of Applicability

• Target of the Standard: Revised AS 7 (issued in 2002) is technically intended for "contractors"—entities that enter into contracts to build assets for a customer.

• The "Own Account" Distinction: When a builder develops a project on their own land as a commercial venture (without a specific customer contract at the outset), they are generally not acting as a "contractor" in the strict sense envisioned by AS 7.

• Judicial View: Various Income Tax Appellate Tribunals (ITAT) and courts have observed that since the revised AS 7 does not explicitly include enterprises undertaking construction on their own account (unlike the original 1985 version), it is not automatically applicable to such builders. These entities have often been permitted to follow the Project Completion Method (PCM), provided they do so consistently.

• Guidance Note by ICAI: While AS 7 may not directly apply to the "own account" development itself, the ICAI issued a Guidance Note on Accounting for Real Estate Transactions (2012). This guidance note bridges the gap by stating that for real estate projects that have the "economic substance of a construction contract," the Percentage of Completion Method (POCM) should be applied, utilizing principles similar to those in AS 7.

Summary

If you are a builder developing a property without a specific customer contract:

1. Strictly speaking: AS 7 (as revised) applies to contractors, not necessarily to developers working on their own account.

2. Accounting Practice: However, you are generally expected to follow the ICAI Guidance Note on Real Estate Transactions, which mandates the use of the Percentage of Completion Method (POCM) if the project’s economic substance resembles a construction contract (i.e., you are performing significant acts and transferring risks/rewards).

3. Consistency: Regardless of the method chosen, the most critical requirement from an accounting and tax perspective is that the method must be followed consistently year after year to ensure revenue is not artificially deferred or advanced.

Summary: AS 7 (Revised) is primarily designed for construction contractors. For builders developing projects on their own account, while AS 7 may not directly apply, they are generally guided by the ICAI’s Guidance Note on Real Estate Transactions, which often requires the use of the Percentage of Completion Method (POCM) if the project's substance mirrors a construction contract. Always ensure your chosen accounting method is applied consistently.