ITAT Deletes Rs. 4.30 Cr Addition on Change in Revenue Recognition Method; Holds Issue Is Mere Timing Difference

ITAT Deletes Rs. 4.30 Cr Addition on Change in Revenue Recognition Method; Holds Issue Is Mere Timing Difference

M/s. Halcrow Group Ltd., a UK-based company providing engineering and infrastructure consultancy services, filed its return for AY 2013-14, declaring a loss of Rs. 4.84 crore. During the year, it executed the Kishanganga Hydro Electric Project for NHPC Ltd. The assessee followed the percentage of completion method under the mercantile system but retrospectively changed the basis for determining the stage of completion to align with AS-7 issued by ICAI.

This change resulted in a reversal of Rs. 5.58 crore relating to earlier years, which was accepted by the Assessing Officer as a prior period item. However, the AO treated the profits amounting to Rs. 4.30 crore as under-reported income and made an addition, which was affirmed by the DRP, leading to the appeal before the Tribunal.

Core Issue: Whether an addition can be made for profit impact arising from a retrospective change in revenue recognition method under the percentage of completion method when it results only in a timing difference with no revenue loss.

ITAT’s Order: The ITAT deleted the addition of Rs. 4.30 crore. The Tribunal held that once the reversal of Rs. 5.58 crore relating to earlier years was accepted as a prior period item, no separate or consequential addition could be sustained on the same account.

It was noted that the change in determining the stage of completion was made to bring the accounting practice in line with AS-7 and was properly disclosed in the audited financial statements. The Tribunal held that the adjustment merely resulted in a timing difference in recognition of income and caused no prejudice to the Revenue, particularly since the applicable tax rates were identical across the relevant years.

Relying on the Supreme Court’s decision in CIT v. Excel Industries Ltd. (358 ITR 295), the Tribunal observed that where the dispute is purely academic and revenue-neutral, such additions are unwarranted. Therefore, the addition was deleted.

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