2023 (8) TMI 1509 - AT - Income Tax

Revenue deferral practice upheld as assessee consistently deferred both receipts and corresponding expenses maintaining matching principle

ITAT Mumbai upheld CIT(A)'s deletion of addition regarding unearned revenue on sale transactions. The assessee company consistently followed the ... Unearned revenue on the transaction of sale - assessee company did not provide complete details to the DRP - correct method of revenue recognition and principle of matching cost - CIT(A) deleted addition - HELD THAT:- As assessee is consistently following this practice of accounting and upheld the same by Ld. CIT (A) and Coordinate Benches. On the issue of violation of principle of Matching, it is noticed that assessee himself has offered the income before the Ld. CIT (A)’s order, but the same with a rider that royalty and other charges payable to Red Hat USA should also be allowed, because the same has been deferred by the assessee in the same ratio, in which receipts are being deferred. In that situation, the preposition which emerges is revenue neutral and no action is required. In the given situation we are not inclined to interfere in the order of Ld. CIT (A). Resultantly, all the grounds raised by revenue are dismissed. Issues:1. Correctness of deletion of addition made on account of unearned revenue2. Application of Accounting Standard-9 in the case of a distributor3. Justification for deleting additions on unearned revenue for a reseller4. Recognition of revenue by a reseller following the proportionate completion method5. Eligibility of a reseller to follow proportionate completion method as per Accounting Standard-96. Set-aside of CIT (A) order and restoration of Assessing Officer's orderAnalysis:Issue 1:The appeal by the revenue challenged the deletion of an addition made on account of unearned revenue by the National Faceless Appeal Centre. The revenue contended that the assessee did not provide complete details and approached the CIT (A) with unclean hands. The CIT (A) justified the deletion, leading to the appeal before the Tribunal.Issue 2:The dispute revolved around the application of Accounting Standard-9 in the case of a distributor making sales to end customers. The revenue questioned the CIT (A)'s decision not to apply AS-9, emphasizing the nature of the assessee as a distributor and the type of sales made.Issue 3:Regarding the deletion of additions on unearned revenue for a reseller, the revenue challenged the CIT (A)'s decision. The Tribunal analyzed the nature of the assessee as a reseller not providing support services and the implications on revenue recognition.Issue 4:The correctness of upholding the recognition of revenue by the assessee company for sale following the proportionate completion method was contested. The Tribunal examined the applicability of the method considering the assessee's role as a reseller of subscription services.Issue 5:The eligibility of the assessee, a reseller of subscription services not providing support services, to follow the proportionate completion method as per Accounting Standard-9 was questioned. The Tribunal assessed the compliance with AS-9 and the specific circumstances of the case.Issue 6:The appeal sought to set aside the CIT (A) order and restore the Assessing Officer's decision. The Tribunal reviewed the orders, submissions, and contentions of both parties, ultimately dismissing the revenue's appeal based on consistent practices and compliance with revenue recognition methods.This comprehensive analysis outlines the key issues raised in the judgment, including challenges to revenue recognition, application of accounting standards, and the role of the assessee as a distributor and reseller in revenue recognition methods.