2025 (6) TMI 1686 - AT - Income Tax

Differential receipt/turnover - assessee has declared less turnover in comparison to the turnover reflected in Form 26QB as well as the audit report in Form 3CA - AO made addition of the entire differential amount to the total income of the assessee - CIT (A) has restricted the addition to the profit element in the differential receipt/turnover by adopting the profit @ 15% of the said receipts - HELD THAT - CIT (A) has not discussed the point as raised by the learned DR that the expenditure has already been booked by the assessee in the P L Account however we find that in the P L Account the assessee has debited only the net amount of material consumed during the year by taking into account the opening balance on WIP expenditure and subtracting the closing work-in-progress. Once the assessee has taken into consideration the opening and closing work-in-progress then the entire differential amount cannot be treated as income of the assessee. It is an undisputed fact that the assessee has declared the GP @ 16.22% for the year under consideration and therefore the addition of profit element in the differential amount ought to have been computed at the GP rate declared i.e. 16.22%. Accordingly we modify the impugned order of CIT (A) and direct the AO to compute the income on this account by taking the GP @ 16.22% as against 15% adopted by the learned CIT (A). Appeal of the Revenue is partly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the entire amount of Rs. 2,23,50,000/- received from Mr. Nandagopal Salem during the relevant assessment year (A.Y. 2016-17) should be recognized as revenue (sale consideration) or treated as an advance receipt not constituting income for that year.

(b) Whether the assessee has followed a consistent accounting methodology for revenue recognition across assessment years, and the implications of any inconsistency.

(c) Whether the nature of the receipts-installments typically associated with sale consideration-mandates their full inclusion as income in the year of receipt.

(d) Whether the discrepancy between turnover reported in Form 26QB and that shown in the profit and loss account indicates underreporting of income.

(e) Whether the significant decline in gross profit margin from 37.31% in A.Y. 2015-16 to 16.22% in A.Y. 2016-17 signals underreporting or manipulation of income.

(f) Whether the Tribunal and CIT(A) adequately considered transaction records including ledger extracts, registered sale deed, and dates of receipt and registration, to determine the nature and timing of income recognition.

(g) Whether the CIT(A) erred in restricting addition to only 15% of the advance receipt as profit element, instead of recognizing the entire amount as income.

(h) Any other grounds raised by the Revenue at the time of hearing.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Recognition of Rs. 2,23,50,000/- as Revenue or Advance

Relevant legal framework and precedents: Revenue recognition principles under the Income Tax Act and accounting standards require that sale consideration be recognized as income when the sale is complete or the right to receive payment is established. Advances received are generally treated as liabilities unless the sale is effectively completed.

Court's interpretation and reasoning: The Tribunal noted that the entire amount was received in three installments during the year under appeal, and the occupation certificate for the project was obtained earlier in 2014. The sale deed was executed only in February 2018, after the year under consideration. The CIT(A) initially treated the entire amount as sale consideration but restricted the addition to 15% as profit element.

Key evidence and findings: The installments were received on 24.07.2015, 12.10.2015, and 10.02.2016. The sale deed was executed on 05.02.2018. The assessee treated the amount as advance in its books and did not include it as turnover in the P&L account for the year under appeal.

Application of law to facts: The Tribunal observed that the receipt was "purely in the nature of sale consideration" and could not be construed as an advance during the relevant year. The earlier acceptance of similar receipts as revenue in prior years also weighed against the assessee's claim of treating the amount as advance.

Treatment of competing arguments: The Revenue argued for full addition as income, while the assessee contended that the amount was advance and the sale was completed only in the subsequent year. The CIT(A) compromised by allowing only the profit element as addition. The Tribunal found the CIT(A)'s approach partially correct but required modification.

Conclusion: The entire amount should be treated as sale consideration for the year under appeal, but only the profit element should be added to income, not the entire receipt.

(b) Consistency in Accounting Methodology

Relevant legal framework: Consistency in accounting treatment is a fundamental principle in tax and accounting jurisprudence. Changes without justification may lead to adjustments by tax authorities.

Court's reasoning: The Tribunal noted that the assessee had recognized similar receipts as revenue in earlier years, but in the year under appeal, treated the amount as advance. This inconsistency undermined the assessee's claim and justified the addition of the amount as income.

Conclusion: The assessee's inconsistent treatment was not accepted, supporting the Revenue's case for inclusion of the amount as income.

(c) Nature of Receipts and Timing of Income Recognition

Analysis: The receipts were in installments typically associated with sale consideration. The Tribunal observed that the occupation certificate was obtained earlier, and possession was likely delivered. The sale deed was executed later, but the receipts were substantial and related to the sale transaction.

Conclusion: The receipts should be treated as income in the year of receipt rather than as advances.

(d) Discrepancy Between Turnover Reported in Form 26QB and P&L Account

Evidence: Form 26QB showed turnover of Rs. 10,71,70,184/-, whereas P&L account declared Rs. 8,48,07,948/-. The difference of Rs. 2,23,50,000/- corresponded to the disputed amount.

Court's reasoning: The discrepancy indicated underreporting of income. The Assessing Officer's addition of the entire differential was justified to prevent understatement of income.

Conclusion: The discrepancy supported the Revenue's claim for addition.

(e) Drop in Gross Profit Margin

Evidence: Gross profit margin declined from 37.31% in A.Y. 2015-16 to 16.22% in A.Y. 2016-17 despite increased turnover.

Interpretation: The Tribunal found that the decline could indicate underreporting or manipulation, supporting the need for adjustment in income.

Conclusion: The gross profit margin drop corroborated the Revenue's case for addition of income.

(f) Consideration of Transaction Records and Sale Deed

Evidence: Ledger extracts, registered sale deed executed in February 2018, and dates of receipt were considered.

Court's reasoning: Though the sale deed was executed later, the receipt of installments and occupation certificate indicated the transaction was substantially complete, and the amount was rightly treated as sale consideration.

Conclusion: The transaction records supported treating the amount as income for the year under appeal.

(g) Restriction of Addition to 15% of Advance Receipt

Court's reasoning: The CIT(A) accepted that the entire amount could not be treated as profit and restricted the addition to 15% of the amount, reasoning that the entire receipt was not profit but included costs and expenses already accounted for.

Key finding: The Tribunal noted that the assessee had declared a gross profit margin of 16.22% for the year and had accounted for material consumption by adjusting opening and closing work-in-progress in the P&L account.

Application of law to facts: Since the entire amount was not profit, only the profit element should be added. However, the profit percentage should correspond to the actual declared gross profit margin (16.22%) rather than the 15% adopted by the CIT(A).

Conclusion: The Tribunal modified the CIT(A)'s order to direct the Assessing Officer to compute addition using 16.22% gross profit margin instead of 15%.

3. SIGNIFICANT HOLDINGS

"It is an admitted fact that the said purchaser has paid entire cost of plot in 3 installments...the said receipt was purely in the nature of a sale consideration and cannot be construed as a receipt of advance during the relevant year."

"The appellant company has offered such receipts from the purchasers as revenue in the earlier years. Hence, the appellant company is not consistent in treating the receipts from the buyers of flat as income in the relevant assessment year. Therefore, the appellant's stand that the above receipt is nothing but an advance cannot be accepted."

"The entire advance receipt cannot be considered to be the profit of the appellant...the AO is directed to add only an amount of 15% of the receipt of the said advance...as income of the relevant assessment year."

"Once the assessee has taken into consideration the opening and closing work-in-progress, then the entire differential amount cannot be treated as income of the assessee...the addition of profit element in the differential amount ought to have been computed at the GP rate declared, i.e. 16.22%. Accordingly, we modify the impugned order of the learned CIT (A) and direct the Assessing Officer to compute the income on this account by taking the GP @ 16.22% as against 15% adopted by the learned CIT (A)."

The Tribunal's final determination was to partly allow the Revenue's appeal by directing the addition of profit element on the differential amount at the declared gross profit margin of 16.22%, instead of the 15% adopted by the CIT(A). The entire amount was held to be sale consideration for the year under appeal, rejecting the assessee's claim that it was merely an advance. The inconsistency in the assessee's accounting treatment and the discrepancy in turnover reporting supported the addition. However, recognizing that the receipt was not pure profit, only the profit element was to be added to income, reflecting the matching principle and accounting standards.