Revenue recognition for service contracts: AMC income must be recognised on a straight-line basis, reversing assessment additions.

Recognition of AMC receipts for AY 2022-23 must follow the statutory contract revenue recognition framework: contracts involving an indeterminate number of service acts are to use the straight line method while short-duration contracts may use project completion; applicable accounting pronouncements under ICDS govern revenue recognition. The contractual cancellation and proportionate refund clause and the post 2017 statutory amendment apply to the year in question, making prior-year decisions inapposite. Consequently AMC revenue is to be recognised over the contract period on a straight line basis and the assessment addition must be deleted.

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Issues: Whether receipts under Annual Maintenance Contracts (AMC) for Assessment Year 2022-23 should be recognised and taxed upfront in the year of receipt or recognised over the period of the contract on a straight-line basis in view of Section 43CB of the Income-tax Act, 1961 and applicable ICDS.

Analysis: Section 43CB prescribes that profits and gains from a contract for providing services involving an indeterminate number of acts over a specific period of time shall be determined on the basis of the straight line method and that contracts of specified shorter duration are to be handled by the project completion method; ICDS notified under section 145 prescribes revenue recognition for such contracts. The AMC here involves rendering maintenance services over a defined tenure with an indeterminate number of service acts and contains clauses permitting cancellation and proportionate refund; the provision was inserted with effect from 01.04.2017 and therefore governs AY 2022-23. Earlier decisions under a different legal regime or for prior assessment years do not override the statutory mandate applicable for the relevant assessment year. The authorities below relied on prior judicial decisions in the assessee's own case without applying Section 43CB and ICDS to the facts of the impugned year; that approach failed to apply the statutory framework operative for AY 2022-23.

Conclusion: The recognition of AMC revenue over the period of the contract on a straight-line basis is legally correct for Assessment Year 2022-23 and the addition made by the Assessing Officer is to be deleted; the assessee's appeal is allowed.

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