2024 (6) TMI 1136 - AT - Income Tax

Change in Accounting Policy - understatement of profit - determination of recognized method of accounting - change from the percentage of completion method (POCM) to the project completion method (PCM) for revenue recognition - HELD THAT - We observed that assessee is consistently following the method of Revenue recognition by following percentage completion method till previous Financial Year i.e., 2016-17 and during the current Financial Year 2017-18, the assessee preferred to change the Revenue recognition method to Project Completion Method. The assessee has indicated the change of method in its note forming part of financial statement at Note No.27 During the year, assessee has disclosed income from other sources i.e., rental income, interest income and other incomes during the year and declared a net loss of Rs. 1.43 Lacs and disclosed the justification and the financial impact in its notes to financial statement. AO proceeded to make the addition the financial impact declared by the assessee due to change of method of accounting as profit for the current financial year. In our considered view by making above financial impact as addition along with other disallowances/additions, the percentage of profit determined by the Assessing Officer is quite abnormal way above the industry average. We are of the considered view that assessee should submit the financial impact in the financial years 2016-17, 2017-18 respectively and also impact in computation of taxable income declared under Income Tax Act before the AO. Accordingly, the AO is directed to verify the above impact in the financial statements and may verify the declared financial impact in both financial years as well as Income Tax computation, we direct him to verify the profit declared by the assessee in the earlier years as per old method of accounting and because of change of method of accounting, there may be under statement or over statement of declared profit, this under or over statement of profit in the earlier years has to be acknowledged as an impact on such change of profit and ultimately the correct profit alone has to be charged to tax. Merely because a understatement of profit during the current year due to change of method of accounting does not mean that the assessee has understated the profit and AO cannot proceed to make any adjustment based on such financial impact. It is only a declaration on such impact for selection of different method of accounting. This approach is approved method as per the accepted standard of accounting by ICAI and IAS. Therefore, the selection of method of accounting is the right of the respective assessee. AO cannot put any restriction on such selection of method and only thing is that it has to be verified whether the assessee has followed the new method of accounting and follows consistently, the impact declared by the assessee is as per the convention. If these details are proper, the AO cannot insist on to follow the old method of accounting. Therefore, with the above direction, we are remitting this issue back to the file of AO and also direct him to give proper opportunity of being heard to the assessee. Accordingly, the grounds raised by the assessee is allowed for statistical purpose.

Issues Involved:
1. Change in Accounting Policy
2. Addition of Rs. 9,47,14,870/- to Income
3. Validity of Assessment by NFAC
4. Levy of Interest under Section 234A and 234B

Issue-wise Detailed Analysis:

1. Change in Accounting Policy:
The primary issue revolves around the change in the accounting policy by the assessee from the percentage of completion method (POCM) to the project completion method (PCM) for revenue recognition. The assessee argued that this change was in line with the Indian Accounting Standard (IND AS) 115, which was adopted following guidelines issued by the Institute of Chartered Accountants of India (ICAI). The assessee contended that the change was bona fide and necessary to reflect the true financial position, as the previous method resulted in recognizing revenue prematurely.

The Assessing Officer (AO) and the Learned Commissioner of Income Tax (Appeals) [Ld. CIT(A)] questioned the change, suspecting it was intended to understate profits. The AO noted that had the earlier method been followed, the profit would have increased by Rs. 9,47,14,870/-. The Ld. CIT(A) upheld the AO's decision, citing a lack of cogent reasons for the change and the absence of a comprehensive impact analysis on previous years' financials.

2. Addition of Rs. 9,47,14,870/- to Income:
The AO added Rs. 9,47,14,870/- to the assessee's income, arguing that the change in the accounting method led to an understatement of profit. The assessee contended that no income had accrued as the project was incomplete, and the change in method was to correct an earlier incorrect practice. The Tribunal observed that the assessee had disclosed the change in accounting policy in the financial statements but had not adequately demonstrated the financial impact of this change. The Tribunal directed the AO to verify the financial impact of the change in accounting policy on both the current and previous years and to ensure that the correct profit is taxed.

3. Validity of Assessment by NFAC:
The assessee challenged the validity of the assessment conducted by the National Faceless Assessment Centre (NFAC), arguing that it was not in accordance with the provisions of Section 144B of the Income Tax Act and that no meaningful opportunity of being heard was provided. However, these grounds were not pressed by the assessee during the hearing, and the Tribunal did not address them in detail.

4. Levy of Interest under Section 234A and 234B:
The assessee disputed the levy of interest under Section 234A, arguing that the return of income was filed on time. The Tribunal noted that the levy of interest is consequential and depends on the final determination of taxable income. Since the issue of income determination was remitted back to the AO, the Tribunal directed the AO to reassess the interest liability as per law based on the revised income.

Conclusion:
The Tribunal remitted the issue of the change in accounting policy and the resultant addition of Rs. 9,47,14,870/- back to the AO for a thorough verification of the financial impact on both the current and previous years. The AO was directed to provide the assessee with a proper opportunity to present its case. The issue of interest under Section 234A was also remitted back for reassessment based on the revised taxable income. The appeal was partly allowed for statistical purposes.

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