In a recent ruling, the Ahmedabad bench of the Income Tax Appellate Tribunal ( ITAT ) emphasized the principle of consistency in revenue recognition methodologies across fiscal years unless modified in the initial year.
The ITAT bench observed that “once a method of recognizing the revenue adopted by the assessee and accepted by the revenue in the earlier and later years, the same cannot be disturbed for the intervening year i.e. the year in dispute until and unless initial year is made subject to the modification.”
The case involved a private limited company engaged in real estate development, which declared a loss of Rs. (-)25,20,658/- for the relevant year. Upon examination, the Principal Commissioner of Income Tax ( PCIT ) identified discrepancies in the assessment conducted under Section 143(3) of the Income Tax Act, 1961 suggesting that it was prejudicial to revenue interests.
The PCIT noted that the company had reported the sale of property to Mr. Suraj Singh for Rs. 62,50,000/-, with a TDS deduction of only Rs. 62,500/- under Section 194IA. However, the PCIT found that a portion of this sum, Rs. 25,44,000/-, had been declared as income in the preceding fiscal year, resulting in an incorrect claim of TDS credit for the current assessment year.
The counsels for the assessee, Mr. Biren Shah & Mr. G.M. Thakor, submitted that the revenue recognition method had been consistently accepted by tax authorities for the assessment years 2014-15 and 2015-16. They contended that since the entire project was completed in subsequent years without modification by the revenue, there was no error prejudicial to revenue interests warranting revision under Section 263 of the Income Tax Act.
The bench noted that the PCIT acknowledged the validity of TDS claims based on revenue recognition in previous years. Therefore, the absence of TDS credit benefits in earlier years did not disadvantage the revenue, as the claiming of TDS credit was essentially tax-neutral.
Additionally, the bench highlighted that the PCIT’s assertion of error regarding an unsecured loan received by the assessee was not contested during the hearing, as the Assessing Officer did not make any additions concerning this matter in the subsequent order.
Consequently, the two-member bench, comprising Madmitha Roy ( Judicial member ) and Waseem Ahemed ( Accountant member ), concluded that there was no error in the Assessing Officer’s order prejudicial to revenue interests. They ruled that the PCIT’s order was unsustainable, and consequently, partially allowed the grounds of appeal presented by the assessee.
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