Assessee has right to select accounting method for revenue recognition if consistently followed per ICAI standards

ITAT Delhi ruled on assessee's change from percentage of completion method (POCM) to project completion method (PCM) for revenue recognition. AO added financial impact of accounting method change as current year profit, resulting in abnormally high profit margins. ITAT held that selection of accounting method is assessee's right, provided it's consistently followed per ICAI/IAS standards. AO cannot restrict method selection or treat accounting impact as profit understatement. Matter remitted to AO for verification of proper implementation and consistency, with directions to provide adequate hearing opportunity.

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Issues Involved:
1. Change in Accounting Policy
2. Addition of Rs. 9,47,14,870/- to Income
3. Validity of Assessment by NFAC
4. Levy of Interest under Section 234A and 234B

Issue-wise Detailed Analysis:

1. Change in Accounting Policy:
The primary issue revolves around the change in the accounting policy by the assessee from the percentage of completion method (POCM) to the project completion method (PCM) for revenue recognition. The assessee argued that this change was in line with the Indian Accounting Standard (IND AS) 115, which was adopted following guidelines issued by the Institute of Chartered Accountants of India (ICAI). The assessee contended that the change was bona fide and necessary to reflect the true financial position, as the previous method resulted in recognizing revenue prematurely.

The Assessing Officer (AO) and the Learned Commissioner of Income Tax (Appeals) [Ld. CIT(A)] questioned the change, suspecting it was intended to understate profits. The AO noted that had the earlier method been followed, the profit would have increased by Rs. 9,47,14,870/-. The Ld. CIT(A) upheld the AO's decision, citing a lack of cogent reasons for the change and the absence of a comprehensive impact analysis on previous years' financials.

2. Addition of Rs. 9,47,14,870/- to Income:
The AO added Rs. 9,47,14,870/- to the assessee's income, arguing that the change in the accounting method led to an understatement of profit. The assessee contended that no income had accrued as the project was incomplete, and the change in method was to correct an earlier incorrect practice. The Tribunal observed that the assessee had disclosed the change in accounting policy in the financial statements but had not adequately demonstrated the financial impact of this change. The Tribunal directed the AO to verify the financial impact of the change in accounting policy on both the current and previous years and to ensure that the correct profit is taxed.

3. Validity of Assessment by NFAC:
The assessee challenged the validity of the assessment conducted by the National Faceless Assessment Centre (NFAC), arguing that it was not in accordance with the provisions of Section 144B of the Income Tax Act and that no meaningful opportunity of being heard was provided. However, these grounds were not pressed by the assessee during the hearing, and the Tribunal did not address them in detail.

4. Levy of Interest under Section 234A and 234B:
The assessee disputed the levy of interest under Section 234A, arguing that the return of income was filed on time. The Tribunal noted that the levy of interest is consequential and depends on the final determination of taxable income. Since the issue of income determination was remitted back to the AO, the Tribunal directed the AO to reassess the interest liability as per law based on the revised income.

Conclusion:
The Tribunal remitted the issue of the change in accounting policy and the resultant addition of Rs. 9,47,14,870/- back to the AO for a thorough verification of the financial impact on both the current and previous years. The AO was directed to provide the assessee with a proper opportunity to present its case. The issue of interest under Section 234A was also remitted back for reassessment based on the revised taxable income. The appeal was partly allowed for statistical purposes.

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