Section 43CB Mandates Straight-Line Revenue Recognition for Time-Bound Service Contracts.

ORDER

S.R. Raghunatha, Accountant Member.- The present appeal is filed by the assessee against the order dated 08.10.2025 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as “ld.CIT(A)”), dismissing the appeal filed by the assessee against the assessment order dated 20.03.2024 passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”), pertaining to Assessment Year (A.Y.) 2022-23.

2. The assessee is a company and filed its return of income on 29.11.2022 admitting an income of Rs.1,72,22,53,940/-. The assessee’s case was selected for scrutiny under CASS and accordingly statutory notices u/s.143(2) and 142(1) of the Act were issued upon the appellant who had responded to the same from time to time. Thereafter, the Assessing Officer passed the assessment order dated 20.03.2024 u/s.143(3) of the Act wherein he added a sum of Rs.4,26,66,144/- being the charges received by the assessee towards Annual Maintenance Contract (AMC). Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the ld.CIT(A) and assailed the assessment order on various grounds. Subsequently, the ld.CIT(A) passed an order dated 08.10.2025 confirming the addition of the Assessing Officer. Aggrieved by the order of the ld.CIT(A), the assessee has preferred the present appeal.

3. The brief facts leading to the present appeal emanating from the records are that the assessee is a company engaged in manufacture, supply, erection, maintenance of elevators and escalators. For the year under consideration, the assessee’s case was selected for scrutiny under CASS and notices were issued upon the assessee asking to furnish information for various issues. Among the many issues scrutinised, the Assessing Officer accepted the assessee’ explanations and did not propose any variation. However, for the issue pertaining to AMC, the Assessing Officer added a sum of Rs.4,26,66,144/-. Before the Assessing Officer, the assessee submitted that assessee enters into an AMC with its customers for maintenance spanning anywhere from 1 year to 2 years. The assessee, based on the mercantile system followed by it, submitted that revenue from AMCs is recognised to the extent attributable for the period of AMC performed and that remaining amount was recognised in the subsequent year and offered to tax. It also submitted that this issue has already been decided in its favour by the Tribunal, in its own case. The same was reiterated by the assessee during the Video Conference (VC) conducted on 08.03.2024. During the VC, the assessee further went on to submit that as per ICDS-IV (Income Computation and Disclosure Standards) guidelines for revenue recognition, revenue from service contracts, which do not exceed a duration of 90 days should be recognised either upon the completion or substantial completion of delivery of service under such contracts. However, the Assessing Officer did not accept the same while citing that the AMC with one of its clients (which was submitted during the proceedings for assessment year 2009-10) did not provide for any clause for the client to terminate the contract nor was there any clause for refund of the charges incurred for AMC for unutilised period of the contract. The Assessing Officer also relied on the decision of the Hon’ble Madras High Court in CIT v. G.S.R. Krishnamurthy (Madras) to conclude that the entire AMC receipts ought to be offered to tax in the year in which the contract was entered into. In doing so, the Assessing Officer added a sum of Rs.4,26,66,144/-.

4. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the ld.CIT(A) vide Form 35 dated 18.04.2024. During the appellate proceedings, while reiterating its earlier submissions, the assessee also contended that the decision taken in GSR Krishnamurthy (supra) relied by the Assessing Officer is distinguishable to the assessee’ case since in the case cited by the Assessing Officer, the issue was related to lease rental for distribution rights of a film, where the entire amount payable for five years was received upfront and there was no obligation on the lessor to refund any part of the amount under any circumstances. The Hon’ble High Court held that the entire amount was taxable in the year of receipt. The ratio of that decision is clearly distinguishable and inapplicable to the present case, as the lessor in that case was not required to render any further services after leasing the film, whereas in the present case, the Assessee is obligated to provide maintenance services continuously throughout the tenure of the AMC. The assessee further went on to submit that for the Assessment Year 2009-10, the Hon’ble Jurisdictional High Court, Madras, in assessee’s own case, decided identical issue pertaining AMC in favour of the department [TCA No.54 of 2015] and that a Special Leave Petition against the decision is pending before the Hon’ble Supreme Court. The ld.CIT(A), followed the decision of the Hon’ble Madras High Court in the Assessee’s own case (supra), wherein it was held that the entire advance receipts under the AMC should be offered to tax in the year of entering into the contract and confirmed the addition made by the Assessing Officer vide order dated 08.10.2025.

5. Before us, the ld.AR for the assessee argued that the Assessing Officer had not considered the fact that the assessee follows an accounting method which recognises revenue only when it accrues and that there is a clause which allows the assessee’ clients to terminate AMC and get refund. The Assessee offered the receipts from AMC on a straight-line basis spread over the period of the contract. Hence the fees relating to period spilling over into next year is shown as advances and not offered as income. They also contended that the decision of the Hon’ble Madras High Court in assessee’s own case (supra) is distinguishable since the Hon’ble High Court misinterpreted the provisions of Accounting Standard-9. AS-9, which clearly provides that income from rendering of services should be recognised over the period of the contract (para 7). However, in paragraph 88 of the judgment, the Hon’ble High Court held that where there is no uncertainty regarding the amount of consideration to be derived from rendering services, income should be recognised at the time of receipt, relying on para 12 of AS-9. This interpretation is erroneous, as AS-9 provides that income should not be recognised only where there is uncertainty regarding ultimate collection of consideration. The Hon’ble High Court, therefore, interpreted AS-9 in a manner directly contrary to its express provisions and ignored the mandate of the standard. It was further submitted that the Hon’ble Madras High Court in CIT v. Coral Electronics (P.) Ltd. (Madras) had categorically held that AMC income should be offered to tax over the period of the contract. In the assessee’s own case for AY 2009-10, the Hon’ble High Court (in para 96 of the decision) declined to apply Coral Electronics on the ground that, in that case, the contract contained a clause for cancellation and refund of charges for the unexpired period, whereas the assessee’s contracts for that year did not contain such a clause. For the year under appeal, however, the AMC agreements do contain an explicit provision for cancellation and proportionate refund. Consequently, the very basis on which Coral Electronics was distinguished no longer survives and the ratio of that judgment squarely applies to the facts of the present year. Accordingly, the method of accounting consistently followed by the Assessee by spreading the AMC receipts over the period of the contract deserves to be accepted. Further, in the assessee’s own case for AY 2009-10, the Hon’ble Madras High Court also relied upon the provisions of service tax law to hold that the entire income accrued at the time of raising the invoice (para 110) and thus concluded that the AMC charges were taxable in the year of receipt. The taxing point under the Service tax laws cannot be imported to Income Tax as under Income Tax accrual of income depends on revenue recognition as per AS-9. Further while doing so, the Hon’ble High Court did not consider the consequential and settled principle that if the entire income is brought to tax upfront, the estimated expenditure expected to be incurred in relation to such income must also be allowed as a deduction, as laid down in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC), Rotork Controls India (P.) Ltd. v. CIT (SC) and Bharat Earth Movers Ltd. Further, appropriate credit ought to be given for income already offered to tax in subsequent years. The ld.AR for assessee also submitted that the ld.CIT(A) did not apply Section 43CB of the Act in the present case. The said section is an insertion by the Finance Act, 2018 with retrospective effect from 01.04.2017 to give statutory authority to ICDS IV, in view of some court decisions not accepting ICDS. In the assessee’s case, the AMC involves rendering of maintenance services through an indeterminate number of acts, as the number of service calls during the contract period is uncertain and cannot be predetermined. At the same time, the services are rendered over a clearly defined period, namely the tenure of the AMC. Accordingly, in terms of the statutory mandate of section 43CB of the Act, which is applicable to the assessment year under appeal, recognition of AMC revenue over the period of the contract on a straight-line basis is legally correct. And so, the ld.AR for assessee submitted that, the decision of the Hon’ble Madras High Court in the Assessee’s own case for AY 2009-10 is not applicable to the present assessment year, in view of the subsequent statutory intervention by way of section 43CB. The ld.AR for assessee, filed a paperbook in support of their arguments containing, section 43CB of the Act, explanatory notes to the provisions of Finance Act of 2018, ICDS IV relating to revenue recognition, AMC contract from 2020-21 to 2022-23, cancellation form and AMC for 2009-10.

6. Per contra, the ld.DR argued that the ld.CIT(A) was right in confirming the addition of the Assessing Officer and that the Hon’ble High Court of Madras has decided the same in assessee’s own case, in favour of the Revenue and against the assessee. Therefore, the ld.DR prayed for the order of the ld.CIT(A) to be sustained.

7. We have heard rival submissions, gone through the orders of the authorities below and perused the paper book filed before us. It is an admitted fact that the assessee filed its return and subsequently its case was selected under CASS. Thereafter, the Assessing Officer passed the assessment order u/s.143(3) of the Act wherein he added a sum of Rs.4,26,66,144/- on account of charges received towards AMC. The ld.CIT(A) sustained the order of the Assessing Officer by relying on the decision of the Jurisdictional High Court in the assessee’s own case (supra).

8. It seems appropriate to first delve into Section 43CB of the Act since the ld.AR for the assessee argues that the said provisions is applicable in this instant case. The Income-tax Act has undergone a significant amendment by insertion of section 43CB by the Finance Act, 2018 with retrospective effect from 01.04.2017 to give statutory authority to ICDS IV, in view of some court decisions not accepting ICDS. Section 43CB reads as under:

43CB. (1) The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with the income computation and disclosure standards (ICDS) notified under sub-section (2) of section 145:

Provided that profits and gains arising from a contract for providing services,— (i) with duration of not more than ninety days shall be determined on the basis of project completion method;

(ii) involving indeterminate number of acts over a specific period of time shall be determined on the basis of straight line method.

(2) For the purposes of percentage of completion method, project completion method or straight line method referred to in sub-section (1)— (i) the contract revenue shall include retention money; (ii) the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains.”

9. From the explanatory notes regarding this section, it can be seen that the intention of legislature in introducing this provision to legitimatise the notified IDCS and to regularise the compliance of such notified ICDS, since many taxpayers have complied with provision of ICDS for computing income for the Assessment Year 2017-18 and hence this amendment was taken effect retrospectively from 01.04.2017. The notes also state that:

“The new section 43CB has been inserted in the Income-tax Act to provide that profits arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method except for certain service contracts, and that the contract revenue shall include retention money, and contract cost shall not be reduced by incidental interest, dividend and capital gains”.

10. In the assessee’s case, the AMC involves rendering of maintenance services through an indeterminate number of acts, as the number of service calls during the contract period is uncertain and cannot be predetermined. At the same time, the services are rendered over a clearly defined period, namely the tenure of the AMC. Accordingly, in terms of the statutory mandate of section 43CB, which is applicable to the impugned Assessment Year, recognition of AMC revenue over the period of the contract on a straight-line basis is legally correct.

11. Moreover, the said provision came into effect from 01.04.2017 and the assessment year under consideration is 2022-23. Therefore, irrespective of any debate concerning retrospective operation, it remains an undisputed position that Section 43CB of the Act squarely governs the assessee’s case for the impugned assessment year. In such circumstances, the authorities below erred in law and on facts, in merely relying upon the earlier judicial decision rendered in the assessee’s own case for Assessment Year 2009-10, without undertaking an independent examination of the statutory framework applicable to the present year.

12. While the principle of consistency has persuasive value in income-tax proceedings, it is trite law that such principle cannot override or dilute the binding force of a statutory provision that is operative for the relevant assessment year. Each assessment year constitutes a separate unit of assessment and the rights and liabilities of the parties must necessarily be determined in accordance with the law as it stands during that assessment year. Where the legislature has introduced a specific provision governing the field, adjudicatory authorities are duty-bound to apply the same, even if the earlier assessment years were decided under a different legal regime or in the absence of such provision.

13. Accordingly, the authorities below ought to have appreciated that the existence and applicability of Section 43CB for A.Y.2022-23 materially distinguishes the present proceedings from those relating to A.Y.2009-10. By mechanically treating the issue as concluded solely on the basis of the earlier decision, without analysing the impact of the subsequently operative statutory provision, the Revenue authorities failed to exercise jurisdiction in the manner required by law. The impugned order, therefore warrants interference. We, accordingly allow the present appeal and direct the Assessing Officer to delete the addition made towards the issue on advance received for AMC charges.

14. In this result, the appeal of the assessee is allowed.