2009 (9) TMI 619 - AT - Income Tax

AS-7 Construction Contract - Method of accounting - The Hon ble Supreme Court in the case of CIT vs. Hyundai Heavy Industries Co. Ltd. (2007 -TMI - 6562 - SUPREME Court) had held that percentage of completion method prescribed in AS-7 was appropriate for construction contract spread over several years hence method of accounting followed by the assessee was correct - The mobilization advance received by the assessee then it is merely in the nature of advance till rendering of services when the same is being adjusted from the running bills by the payer hence the whole mobilization advance cannot be treated as income though the payer deducted tax at source; as such the payer is bound to deduct tax at the stage of payment or credit in the account of payee whichever is earlier - Revenue s appeal stands dismissed.

Summary

Issues:
- Addition of Rs. 7,74,14,352 based on TDS certificates
- Application of AS-7 for revenue recognition in long-term contract
- Treatment of mobilization advance as income
- Compliance with accounting standards and legal provisions

Addition of Rs. 7,74,14,352 based on TDS certificates:
The appeal by the Revenue contested the deletion of the addition made by the AO regarding a variance in receipts shown in TDS certificates. The AO had added Rs. 7,74,14,352 to the income shown by the non-resident company due to differences in certificates furnished. However, the CIT(A) deleted the addition after considering submissions and analyzing factual aspects, including the application of AS-7 for revenue recognition.

Application of AS-7 for revenue recognition in long-term contract:
The CIT(A) considered the provisions of AS-7, which require recognizing revenue only to the extent of work completed. The appellant had adopted the percentage completion method for a long-term contract, treating the balance amount of advance as pending adjustment against future work. The CIT(A) highlighted that the advance received for a contract cannot be treated as income until services are rendered, citing relevant judicial decisions to support this view.

Treatment of mobilization advance as income:
The Tribunal examined the method of accounting adopted by the company, emphasizing that the mobilization advance retained the character of liability until services were rendered. The Tribunal agreed with the assessee that the accrual of income is independent of receipt and depends on the terms of the contract and accounting method. The mobilization advance was deemed as income only when adjusted against running bills, not at the time of receipt, aligning with the principles of accrual and matching concept.

Compliance with accounting standards and legal provisions:
The Tribunal upheld the CIT(A)'s decision, noting that the revenue recognition method followed by the company was in line with AS-7 guidelines issued by ICAI. The Tribunal emphasized that income accrual is not solely based on receipt but on the legal right to receive income, especially in mercantile accounting. The order highlighted that the mobilization advance should not be treated as income until services are rendered, even if tax was deducted at the source during payment. The decision supported the principles of accounting and legal provisions, ultimately dismissing the Revenue's appeal.