Dear Professional Friends,
Require your valuable and expert opinion on below mentioned query:
A private limited company is into real estate business. It either purchases whole property or enter into collaboration agreement, whereby it receives 1 or 2 floors as the case may be. In both the cases the company first demolish the entire property and then start fresh construction and builds a new residential building as per the norms.
In case a flat is sold on booking or during construction or even after construction is finish, generally the company enters into a agreement to sell. On receiving full and final sale consideration, sale deed is executed and physical possession is handed over on the same day.
The company books profit in the year when the sale deed is executed and not in the year when agreement to sell is made. In a scrutiny case, DCIT was of view that Agreement to Sell is sufficient to consider that risk and reward is transferred and hence AS-7 read with As-9 should be followed by the company and accordingly percentage completion method is applicable and hence rejected books of accounts.
Require your opinion on the same.
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Query with regard to as-7
The answer to your query depends on the terms & conditions of agreements entered into by the company with the buyers. As per para 3.3 of the revised guidance note on accounting of real estate transactions issued by ICAI, "agreement for sale is also considered to have the effect of transferring all significant risks and rewards of ownership to the buyer provided the agreement is legally enforceable and subject to the satisfaction of conditions which signify transferring of significant risks and rewards even though the legal title is not transferred or the possession of the real estate is not given to the buyer".
Method followed by your company is correct. DCIT do not know difference between Agreenment of Sale & Sale Deed. Agreement to sale can be cancelled but sale deed can not be cancelled. Member can cancel agreement of sale. So agreement to sale can not be considered as Sale. Teach DCIT about difference in agreement to sale & sale agreement.
Thanks a lot both of you for your instant expert reply
I feel you will have to follow percentage completion method for recognising the revenue and profits. It should be based on estimated gross profits. This method i
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