2023 (11) TMI 752 - AT - Income Tax

Accrual of income - Recognition of income - AO made the additions as Short Contract Revenue accounted based on the applications filed u/s 197 - Final Projections while making application u/s 197 - assessee is a foreign company incorporated in Singapore - Allegation of deviation from the accounting standard - HELD THAT - We find that in the application made u/s 197, the assessee has merely projected the contract revenue and these estimations could not be taken to be the turnover of the assessee disregarding the actual revenue earned by the assessee. No defect in books of accounts has been pointed out by Ld. AO. The deviation in estimation and actual revenue stood explained by the fact that the duration of the project got extended to financial year 2020-21 which is much beyond the agreed original contract period. The revenue projections submitted in the course of Sec. 197 proceedings are merely based on the estimated work completion whereas the revenue shown in financial statements is based on actual work certified by contractor on the basis of survey of work performed. Therefore, the financial results were to be accepted. Assessee was unable to complete the project it had estimated and accordingly, it has recognized revenue only for the portion of the work that has been completed and certified. The same, in our considered opinion, is correct methodology. Also aggregate contract revenue has been offered to tax over the life of the contract period starting from financial years 2012-13 to 2022-23 which is evidenced by the details of invoices as placed on record. The same supports the argument of Ld. AR that there is no leakage of contract revenue and taxing more amounts in this year would result into bringing to tax contract revenues much more than the fixed price contract value to be received by the assessee over the life of contract. The same could not be held to be justified, in any manner. Thus we would hold that the impugned additions are unsustainable - Decided in favour of assessee.

Issues involved:
The issues involved in the judgment are related to the assessment for Assessment Year 2018-19, specifically concerning the addition of alleged short Contract Revenue, application of Accounting Standard 7, and the methodology of recognizing revenue in a fixed price contract.

Analysis of the Judgment:

Issue 1: Limitation and Jurisdiction
The appellant did not press for this ground during the hearing, indicating that it was not pursued further.

Issue 2: Addition of Contract Revenue
The main substantive ground of appeal was related to the addition of Rs. 14,41,72,414 made by the Assessing Officer in respect of alleged short Contract Revenue. The appellant argued that the addition was based on estimated revenue declared in an earlier application under Section 197 of the Act. The appellant contended that the revenue recognition was in accordance with Accounting Standard 7 and had been accepted by the Revenue in previous years. The Tribunal found that the appellant followed the percentage of completion method to recognize revenue and that the addition of alleged contract revenue was not justified as it would result in double taxation.

Issue 3: Compliance with Accounting Standards
The Tribunal examined the application of Accounting Standard 7 by the appellant in recognizing contract revenue and costs. It was observed that the appellant's methodology was consistent with the standard, and the deviation in revenue estimation was explained by the project's extended duration. The Tribunal concluded that the addition made by the Assessing Officer was unsustainable as there was no leakage of contract revenue and taxing more amounts would be unjustified.

Conclusion:
The Tribunal held that the impugned additions were unsustainable and allowed the corresponding grounds raised by the appellant. The appeal was partly allowed, and the stay application was dismissed as infructuous.

This summary provides a detailed analysis of the judgment, addressing each issue involved and the Tribunal's findings on the same.

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