The assessee, M/s Halcrow Group Ltd, a company incorporated in the United Kingdom, is engaged in providing planning, design, and management services for infrastructure projects worldwide. For the Assessment Year 2013-14, the assessee filed its return declaring a loss. During the relevant year, it was executing a single ongoing project in India relating to planning, design, and engineering services for the Kishanganga Hydro Electric Project in Jammu & Kashmir.

Historically, the assessee recognized revenue under the Percentage of Completion Method, determining the stage of completion based on staff cost incurred as a proportion of estimated staff cost. During the year under consideration, the assessee revised this approach and began determining the stage of completion based on total cost incurred as a percentage of total estimated contract cost, in order to achieve full compliance with Accounting Standard-7 (AS-7) issued by the Institute of Chartered Accountants of India.

Consequent to this change, revenue pertaining to earlier years amounting to ₹5.58 crore was reversed and disclosed as a prior period item. This revision resulted in a reduction of profits for the year by ₹4.30 crore, which was duly disclosed in the notes to accounts. The Assessing Officer, however, treated this reduction as under-reported profit and made an addition of ₹4.30 crore.

The Tribunal observed that the change in the method of identifying the stage of completion was bona fide, duly disclosed, and made to align accounting practices with AS-7. It was further noted that the reversal of earlier years’ revenue had already been allowed as a deduction and, therefore, making an additional adjustment on the same transaction was unwarranted.

Importantly, the Tribunal held that the adjustment represented only a timing difference in revenue recognition, with no loss to the revenue, especially since the tax rate remained the same across the relevant years. Relying on the Supreme Court decision in CIT v. Excel Industries Ltd (358 ITR 295), the Tribunal reiterated that where an issue is revenue-neutral and taxability is merely deferred, no addition is justified.

Accordingly, the ITAT directed deletion of the addition of ₹4.30 crore, holding that taxation cannot be imposed merely due to a change in accounting methodology when such change does not result in tax evasion or loss to the exchequer.

SOURCE LINK

https://itat.gov.in/public/files/upload/1768197425-Vg8bBv-1-TO.pdf

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