The CBDT has issued draft “Income Computation and Disclosure Standard XI (ICDS 11) on Real Estate Transactions” for comments/ suggestions from stakeholders. The scope of this ICDS shall be to determine income from all type of real estate transactions, i.e. relating to land as well as buildings and rights in relation thereto, including:
a) Sale of plots of land (including long term sale type leases) without any developments.
b) Sale of plots of land (including long term sale type leases) with development in the form of common facilities.
c) Development and sale of residential and commercial units, row houses, independent houses, with or without an undivided share in land.
d) Acquisition, utilization and transfer of development rights.
e) Redevelopment of existing buildings and structures.
f) Joint development agreements for any of the above activities.
Significant changes/ differences in draft ICDS vis-à-vis Guidance Note on Real Estate Transactions issued by the ICAI
The draft ICDS on Real Estate Transactions is based on Guidance Note on Accounting for Real Estate Transactions issued by the ICAI. While recommending the ICDS, the Committee suggested the following significant changes in the Guidance Note:
(i) Definition of project – As per the Guidance Note, the set of units which are connected by a common set of amenities will constitute a single project. To bring certainty in this matter, the Committee recommends use of term ‘Basic facilities’ in place of common amenities. This would ensure restricting the definition of the term Project to the smallest possible group of units. Accordingly, the revenue will be required to be recognised on such smallest group of units without linking the same to peripheral common amenities like club-house, entertainment, sports, gymnasiums, health club, restaurants etc,.
(ii) Definition of project cost – The Guidance Note contains illustrative list of items to be included, allocated or excluded in the project cost. Consistent with the framework of ICDS, the illustrations have been excluded in the standard while retaining the main principle that costs that cannot be attributed to any project activity or allocated to project shall be excluded from project cost. This is also consistent with ICDS III relating to Construction Contracts.
(iii) Real estate projects – As per the Guidance Note, the revenue in respect of real estate projects is required to be recognised based on principles of either AS 9 or AS 7 depending on the economic substance of the project. The Guidance Note further provides that in cases where economic substance of the project is in the nature of construction contract, the revenue is required to be recognised as per percentage of completion method (POCM) in accordance of AS 7. The proposed ICDS retains the same principles for recognition of revenue and cost without usage of illustrative language of the Guidance Note to provide simplicity and certainty.
(iv) Application of POCM for Real estate projects – The Guidance Note in para 5.3 contains four conditions to be satisfied for recognition of revenue including the condition of obtaining all critical approvals. Since the recognition of revenue under other conditions is deferred upto incurrence of 25% of construction and development cost (which does not include land cost), the condition in respect of obtaining critical approval is not found by the Committee to be very relevant for recognition of revenue under ICDS in view of the newly enacted ‘The Real Estate (Regulation and Development) Act, 2016’ (RERA). All other conditions have been retained in the proposed ICDS.
Further, the Guidance note permits all methods for determination of stage of completion like cost incurred, survey of work done, technical estimation, etc,. The Guidance Note however puts a cap on recognition of revenue based on stage of completion determined with reference to project cost incurred. In order to make it consistent with the provisions of ICDS III relating to Construction contract, the proposed ICDS does not provide for capping the recognition of revenue based on stage of completion determined with reference to project cost incurred
(v) Transferable Development Rights (TDRs) – In case of acquisition of TDRs, the Guidance Note provides that where development rights are acquired by way of giving up of rights over existing structures or open land, the development rights shall be recorded at the fair market value or net book value. To bring certainty and consistency with other ICDSs, the Committee recommends that in this situation, the development rights shall be recorded at the fair value of the development rights so acquired.
CBDT’s Request to Stakeholders for comments on Draft ICDS relating to “Real Estate Transactions”
Section 145(2) of the Income-tax Act, 1961 (“the Act‟) provides that the Central Government may notify Income Computation and Disclosure Standards (ICDS) for any class of assessees or for any class of income.
Accordingly, Central Government notified 10 ICDS vide Notification No. S.O. 3079 (E) dated 29th September, 2016. These ICDS inter-alia contains provisions relating to valuation of inventory; construction contracts; Effects in changes of foreign exchange rates, borrowing costs etc.
These ICDS are applicable from assessment year 2017-18 (previous year 2016-17) in respect of specified assessees for computation of income under the head “Profits and gains of business or profession” or “Income from other sources”.
The Finance Minister had constituted a committee comprising of experts from accounting field; departmental officers and representatives from Institute of Chartered Accountants of India (ICAI) to suggest the areas in respect of which further ICDS may be notified under the Act.
The Committee suggested notification of ICDS in respect of Real Estate Transactions and submitted the draft of the same. The draft ICDS submitted by the committee is based on the Guidance Note issued on Real Estate Transactions issued by ICAI. For the purposes of providing uniformity and certainty and harmonising the same with provisions of the Act, the committee suggested certain changes in draft ICDS.
The stakeholders are requested to submit their comments on draft ICDS on Real Estate Transactions by 26 May, 2017 to Director TPL-III by e-mail at email@example.com