Stage-of-completion revenue recognition change for projects treated as timing difference; tax addition deleted as no exchequer loss

Whether change in accounting method altering stage-of-completion revenue recognition gives rise to taxable underreporting: Tribunal applied accounting and tax principles, noting the change resulted in reversal of previously recognized revenue which was claimed and allowed as a prior-period deduction by the AO and not disturbed on appeal; this is a timing difference with no net tax impact as tax rates remained unchanged and no loss to the exchequer arose. Outcome: addition disallowing profit impact was unwarranted and deleted. Tribunal relied on principle in Excel Industries (SC) regarding timing differences.

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Issues: (i) Whether the addition of Rs. 4,30,05,774/- representing the impact on profit due to a retrospective change in method of accounting for recognition of revenue should be sustained; (ii) (excluded) other grounds either not pressed, consequential or procedural were not substantively decided.

Analysis: The assessee changed the method of determining stage of completion from staff-cost-based measure to total-cost-based measure to comply with Accounting Standard (AS) 7 and reversed earlier years' revenue as a prior period item. The Assessing Officer made an addition of Rs. 4,30,05,774/- representing the profit impact of that change despite allowing the reversal of prior-year revenue. The Tribunal examined whether recognising the prior period reversal (allowed by the AO) and the consequent timing difference produced any tax loss to the revenue, noting the tax rate parity and absence of any deprivation of tax in subsequent years. Applying the principle that mere timing differences which do not result in a loss to the exchequer and where revenue has not been deprived are not to be subjected to separate taxation, and having regard to the precedent relied upon, the Tribunal concluded that making a separate addition for the profit impact was not warranted.

Conclusion: The addition of Rs. 4,30,05,774/- is deleted and the grounds challenging that addition are allowed in favour of the assessee.

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