2023 (6) TMI 355 - HC - Income Tax

Revenue recognition - assessee used the percentage completion method for recognising revenue - Inclusion of operation and maintenance expenditure be added to the costs of contract - whether the operation and maintenance expenditure should be added to the costs of contract, while recognising revenue? - HELD THAT - Assessee has adopted the percentage completion method, as per Accounting Standard 7, framed by the Institute of Chartered Accountants of India (ICAI). As is evident from a perusal of the impugned order, the rationale for not including operation and maintenance expenditure given by the Tribunal was, that these expenses were incurred after the construction activity is completed. We find no difficulty in accepting this rationale. Having regard to the aforesaid, we are of the view that no substantial question of law arises for our consideration.

Summary

Issues involved: Condonation of delay in re-filing the appeal, inclusion of operation and maintenance expenditure in recognizing revenue under the percentage completion method.

Condonation of Delay: An application was filed seeking condonation of a 263-day delay in re-filing the appeal. The delay was condoned by the court based on reasons provided in the application. The application was disposed of.

Appeal against Tribunal's Order: The appeal was directed against the Income Tax Appellate Tribunal's order concerning Assessment Year 2010-2011. The central issue was whether operation and maintenance expenditure should be added to the costs of the contract for recognizing revenue.

Tribunal's Finding: The Tribunal found that operation and maintenance costs cannot be included in determining the percentage of completion method for revenue recognition. The Tribunal highlighted that the O&M phase is separate from the construction activity, involving post-construction activities like water supply and monitoring connections. The Tribunal also noted that the O&M phase was accounted for separately and taxed in the year of receipts. The Tribunal's decision was based on Accounting Standards 7 and 9.

Percentage Completion Method: The respondent/assessee used the percentage completion method as per Accounting Standard 7 by ICAI. The Tribunal's rationale for excluding O&M expenditure was that these costs were incurred after the completion of construction activities, which was accepted by the court.

Conclusion: The court found no substantial question of law arising from the Tribunal's decision and closed the appeal accordingly.