Relief to Johnson Lifts: ITAT Deletes Addition on Advance AMC Charges, Upholds Income Computation Method u/s 43CB [Read Order]

The Chennai Bench of the Income Tax Appellate Tribunal ( ITAT ) has granted relief to Johnson Lifts Pvt. Ltd. by deleting a ₹4.26 crore tax addition related to advance receipts from Annual Maintenance Contracts (AMC).

The Tribunal ruled that the company’s practice of recognizing AMC income proportionately over the contract period is legally valid under Section 43CB of the Income Tax Act, 1961, which dictates revenue recognition for service contracts.

During the Assessment Year 2022-23, the Assessing Officer added ₹4,26,66,144 to the company's income, arguing that the entire AMC amount should be taxed in the year the contracts were signed.

The Commissioner of Income Tax (Appeals) upheld the decision of the AO. The appellate commissioner noted previous Madras High Court judgment against the company for the Assessment Year 2009-10.

Johnson Lifts, a manufacturer and maintainer of elevators and escalators, countered that its maintenance contracts typically span one to two years. Under the mercantile system of accounting, the company recognized revenue based on the services rendered during that specific period, treating unearned portions as advance income to be taxed in subsequent years.

The company argued this method goes with the Income Computation and Disclosure Standard (ICDS) IV and Section 43CB, introduced by the Finance Act 2018 with retrospective effect from April 1, 2017.

Because AMC services require an indeterminate number of maintenance visits over a fixed period, the company asserted that the straight-line method of revenue recognition over the contract's duration was statutorily necessary.

The bench of Manu Kumar Giri (Judicial member) and S.R. Raghunatha (Accountant member) agreed with the assessee, noting that the Section 43CB requires profits from service contracts involving an indeterminate number of acts over a specific period to be computed using the straight-line method.

The ITAT observed that the lower tax authorities had mechanically applied the older Madras High Court decision without accounting for the subsequent introduction of Section 43CB.

“Each assessment year constitutes a separate unit of assessment and the rights and liabilities of the parties must necessarily be determined in accordance with the law as it stands during that assessment year. Where the legislature has introduced a specific provision governing the field, adjudicatory authorities are duty-bound to apply the same, even if the earlier assessment years were decided under a different legal regime or in the absence of such provision” said the bench.

Accordingly, the bench concluded that taxing the entirety of the AMC receipts upfront was legally incorrect.

The appeal was allowed, directing the Assessing Officer to delete the addition.

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