Advance AMC Income Under Section 43CB: Chennai ITAT Deletes ₹7.65 Crore Additions

Background: Two Connected Appeals Before ITAT Chennai

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) dealt with a common controversy in DCIT v. Johnson Lifts Pvt. Ltd., ITA Nos. 3401 & 3460/Chny/2025 (AYs 2020-21 & 2018-19), order dated 20.08.2026.

Both departmental appeals arose from separate assessment orders passed under Section 143(3) of the Income Tax Act 1961 by the National Faceless Assessment Centre, Delhi for:

  • AY 2018-19 – Assessment order dated 24.09.2021
  • AY 2020-21 – Assessment order dated 26.09.2022

The respective orders of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi dated 10.09.2025 (AY 2018-19) and 11.09.2025 (AY 2020-21) were challenged by the Revenue.

Since both appeals involved the same legal issue and substantially similar facts, the ITAT heard them together and disposed of them by a single consolidated order.

The narrow question before the Tribunal was:

Whether advance Annual Maintenance Contract (AMC) charges collected by the assessee are fully taxable in the year of receipt, or whether income should be recognised proportionately over the AMC period in line with Section 43CB.

Facts of the Case: Business Model and Accounting of AMC Receipts

Nature of the assessee’s business

Johnson Lifts Pvt. Ltd. is engaged in:

  • Manufacture of lifts and escalators
  • Sale and installation of such equipment
  • Post-installation servicing and maintenance, carried out through Annual Maintenance Contracts (AMCs) with customers

How the AMC contracts operated

Under the standard AMC arrangement:

  • Customers execute a maintenance contract, generally for 12 months
  • A lump-sum AMC fee is normally collected in advance at or around the start of the contract
  • The services are to be provided throughout the agreed contract period
  • The AMC period often cuts across two financial years – e.g., contract from October to next September

Assessee’s revenue recognition method

The assessee followed a matching concept-based approach:

  1. Only that part of AMC revenue relating to the portion of the contract period falling in the relevant previous year was recognised as income;
  2. The balance corresponding to the unexpired portion of the contract period was carried as “deferred income” in the balance sheet;
  3. Such deferred component was recognised and offered to tax in the subsequent year(s), as the related maintenance services were performed.

AO’s view and additions made

The Assessing Officer (AO) rejected the assessee’s method for both years, holding that:

  • Once AMC consideration is received in advance, the entire amount has accrued in that year;
  • The assessee has an absolute right to receive and retain the entire AMC fee at the time of contract;
  • The absence of any contractual refund obligation in case of early termination indicated that there was no continuing liability;
  • Therefore, no part of the AMC fee could be treated as deferred income.

Based on this reasoning, the AO made the following additions representing AMC income shown as deferred:

  • AY 2018-19: Rs. 5,08,23,286/-
  • AY 2020-21: Rs. 2,56,34,992/-

These sums were added to the assessee’s taxable income as income accrued in the respective years.

Reliance by AO on earlier case law

While making the additions, the AO mainly relied on:

  • The judgment of the Hon’ble Madras High Court in the assessee’s own case for AY 2009-10 (T.C.A. No.54 of 2015, dated 29.10.2024), wherein the High Court held that entire AMC consideration is taxable in the year in which the contract is entered, and not spread over the contract period;
  • The decision of the Hon’ble Madras High Court in CIT v. G.S.R. Krishnamurthy (2003) 262 ITR 393;
  • A distinction sought to be drawn from Coral Electronics (P.) Ltd. (274 ITR 336), where spreading of AMC income was allowed, but on facts involving refund of the unexpired portion of AMC charges.

In essence, the AO concluded that where there is no refund clause, the entire amount is unconditionally earned at receipt and must be fully taxed in that year.

First Appeal: CIT(A) Accepts Proportionate Recognition

The assessee challenged the additions before the CIT(A), NFAC for both AYs.

The CIT(A):

  • Accepted the assessee’s method of recognising AMC income over the contract period;
  • Relied upon the Special Bench decision in ACIT v. Mahindra Holidays & Resorts India Ltd. [2010] 39 SOT 438 (Chennai)(SB), in the context of membership fees received upfront for long-term services/privileges;
  • Held that where receipts relate to services to be rendered over time, entire receipt cannot automatically be treated as income of the year of receipt;
  • Distinguished G.S.R. Krishnamurthy on facts.

On this basis, the CIT(A) deleted:

  • Rs. 5,08,23,286/- for AY 2018-19; and
  • Rs. 2,56,34,992/- for AY 2020-21.

The Revenue, aggrieved by the deletions, appealed to the ITAT.

Revenue’s Arguments Before ITAT

The learned Departmental Representative (Ld. DR) advanced the following submissions:

  1. Accrual under mercantile system
    • The assessee follows the mercantile system of accounting;
    • Once AMC charges are received in advance and there is no obligation to refund, the right to receive is complete;
    • Hence, the income accrues in the very year of receipt, irrespective of when services are actually rendered.