2016 (12) TMI 1842 - HC - Income Tax

Revenue recognition - interest on the mobilization amount claimed by the assessee - hybrid method of accounting adopted over the years the interest amount had to be treated as income - HELD THAT - The entire matter is contentious in the sense that the third party - RPCL - which was awarded the contract claimed that it had performed it in accordance with the agreement with the parties. The assessee however felt otherwise and terminated the contract. There could be several likely outcomes in these proceedings many of them possibility impinging upon the rights of the assessee to receive advance amount itself along with interest either in whole or in part. In these circumstances the ITAT s conclusions that there was no crystallized right to receive any particular amount or amounts cannot be faulted.

Summary

Issues: Recognition of revenue on interest from mobilization amount under the hybrid method of accounting.

Analysis:
1. The main issue in this case pertains to the recognition of revenue by the assessee on the interest accrued from the mobilization amount. The revenue contended that the recognition of revenue by the assessee was improper and that the interest amount should be treated as income due to the hybrid method of accounting adopted by the assessee over the years.

2. The facts of the case revolve around a contract awarded by the assessee to a company, where a mobilization advance was paid. The dispute arose when the company claimed to have completed the contract, but the assessee disputed this claim and terminated the contract, leading to arbitration. The Assessing Officer and the CIT(A) held that the interest amount had accrued and should be reflected as income. However, the ITAT disagreed, stating that the entitlement had not crystallized due to the contentious nature of the matter, despite the hybrid method of accounting used by the assessee.

3. The revenue argued that the ITAT's reasoning was flawed, asserting that the assessee's rights to receive the amount from the company had accrued, necessitating the proper recognition of revenue. The revenue further contended that the arbitrability of the dispute was not in question, as the mobilization advance was given by the assessee, entitling it to the interest.

4. The court noted the contentious nature of the matter, with conflicting claims between the parties involved in the contract. Given the uncertainty surrounding the outcome of the proceedings and the various potential implications for the assessee's rights to receive the advance amount and interest, the ITAT's conclusion that no crystallized right existed to receive any specific amount was upheld. Consequently, the court dismissed the appeal, stating that no question of law arose in the case.