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Facts
The assessee, Virgo Softech Limited, appealed against an addition of Rs. 5,97,14,197/- made by the Assessing Officer (AO) and confirmed by the CIT(A). The addition pertained to contractual receipts that the assessee had adjusted against its Work-in-Progress (WIP) account, claiming the services were rendered in earlier years (2011-12 and 2012-13) but payments were received in the current assessment year after penalties. The assessee followed the completed service contract method of accounting.
Held
The Tribunal held that the assessee failed to provide sufficient evidence that the disputed receipts were offered for taxation in earlier years. The Tribunal noted that the assessee's claim of pending litigation was contradicted by the auditor's certificate stating no pending litigation impacted the financial position. The Tribunal concluded that the receipts, accompanied by TDS deductions, were taxable in the year of receipt, as the assessee did not substantiate its claim for deferring recognition or justifying the adoption of the completed service contract method.
Key Issues
Whether contractual receipts adjusted against Work-in-Progress and received in the current year, for services allegedly rendered in prior years, are taxable in the current assessment year, especially when the assessee claims to follow the completed service contract method of accounting.
Sections Cited
143(3), 143(3A), 143(3B), 142(1), 194A, 194C, 194H, 270A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH, ‘E’: NEW DELHI
Before: SHRI SATBEER SINGH GODARA
ORDER PER AMITABH SHUKLA, AM,
This appeal filed by the assessee is against order dated 07.01.2025 of National Faceless Appeal Centre/learned Commissioner of Income Tax (Appeals), New Delhi, [hereinafter referred to as ‘ld. CIT(A)] arising out of assessment order dated 22.02.2021 passed u/s 143(3) r.w.s. 143(3A) r.w.s. 143(3B) of the Income Tax Act, 1961 pertaining to Assessment Year 2018-19. The word ‘Act’ herein this order would mean Income Tax Act, 1961.
The appeal has been e-filed by the assessee on 18.02.2025 by the assessee. Form-36 indicates that the assessee has raised following grounds of appeal:-
1. That the assessment order passed by Ld. FAO is not tenable under the law as neither any show cause notice was issued nor any draft assessment order proposing variations was issued by Ld. AO prior proceeding to make additions to income of assessee company.
2. That the Ld. AO grossly erred in making additions of Rs.5,97,14,197/- to the income of assessee on belief that the stated amount was not offered for tax by the assessee company.
3. That the Ld. AO as well as Ld. CIT(A) grossly erred in making and upholding additions of Rs. 5,97,14,197/- holding that the said receipts were not credited to or routed through Profit and Loss account and were credited to WIP account in Balance Sheet.
4. That Ld. AO as well as Ld. CIT(A) grossly erred in law and in facts of the case in assessing gross receipts as income of assessee without allowing expenses incurred for caring said receipts which due to disputes with clients were debited to WIP account in earlier years.
5. That the assessee company seeks leave to add, alter, modify or delete any ground of appeal
during the course of appellate proceedings.
6. That the assessment order passed by Ld. AO as well as the appellate order passed by Ld. CTI(A) are bad in law and have been passed in contravention of prevailing law as well as facts of the case, therefore liable to be annulled.
The first issue raised by the appellant assessee through its effective ground of appeal no.1 is regarding non-issue of any show-cause notice or any draft assessment order before making the impugned additions.
We have heard rival submission in the light of material placed on record. The ld. AO in para-3 on page-2 of his order has vividly narrated that various statutory notices under section 143(2) of the Act were issued to the assessee calling for details and explanations which were duly complied. The basic argument taken by the appellant assessee is about non-rendering of adequate opportunity of being heard. The ld. AO has also clearly stated that ‘the assessment is being completed’ in the light of ‘details/explanation submitted by the assessee’. We have further noted that on pages-2 to 8 of his order, the ld. AO has explicitly discussed the show-causes issued to the assessee, replied given and the conclusions drawn. Further, we have noted that no such controversy was raised before the ld. CIT(A) as evident from the grounds of appeal extracted on page-2 and 3 of the appellate order as well as decision of the appellate authority on pages-52 to 55 of the appellate order. We are of the considered view that no case of non-rendering of any opportunity to the assessee is thus made out. Accordingly, ground of appeal no.1 raised by the assessee is dismissed.
The next issue which emanates from the controversy raised through effective grounds of appeal nos.2 to 4 is as to the taxation of the impugned contractual receipts. It is nobody case that the impugned receipts are not taxable. The only question that remains is as to year of their taxability. Income Tax Act provides taxation of receipts on the basis of method of accounting
Page 3 of 17 deployed by the taxpayer. Thus, the receipts can be taxed on ‘cash basis’ in the year of their actual receipts or on ‘accrual basis’ in the year in which income is booked into the books irrespective of the actual receipt by the assessee. The assessee is at liberty to apply to adopt either of the two basic options of offering its receipts to taxes.
At this stage, we deem it necessary to briefly discuss the facts of the case as noted from the order of lower authorities. The Appellant is a company which was incorporated on January 18,1991 under the provision of Companies Act, 1956. The company is a multifaceted Information technology company with interest in e- governance, smart card solution and is engaged in developing e-governance solutions. The appellant/assessee also provides IT facility management and other IT enabled services. The Appellant had filed its return of income on October 26, 2018 declaring a loss of INR 79,18,188. Subsequent to processing under section 143(1), the return of Income was selected for scrutiny assessment to verify Investments/Advances/Loans, Business Loss and Contract Receipt or Fees. The ld AO made an addition of Rs.6,10,82,722/- on account of contract receipts available and appearing in the 26AS statement of the assessee and which were not disclosed and offered for taxes in the Return of Income. Considering the complexity of the issue, we deem it necessary to extract hereunder the findings of the ld. AO made in pages 2 to 8 of his order:- “….5.1. On verification of TDS Report available in the systems it is seen that Page 4 of 17
during the previous year relevant to the assessment year under consideration the total amount of Rs.6,18,28,407/- was credited/paid to the assessee by various parties on which TDS was deducted by them u/s 194A, 1940 and 194H. However, the income shown by the assessee in the Return of Income was very less as compared to the above credit. Considering the above facts the assessee, vide notice u/s 142(1) of Income Tax Act, dated 17.11.2020 was asked to explain as under; “On verification of TDS Report available in the systems it is seen that during the previous year relevant to the assessment year under consideration the total amount of Rs. 6,18,28,407/- was credited/paid to you by various parties on which TDS was deducted by them u/s 194A, 194C and 194H. However, on verification it Return of Income it is seen that you have shown Rs.31,58,098/- as sale of service and Rs.3,36,266/- as other income, including Rs. 1,29,043/- as interest on FD, in the income side. Please explain as to why the other amount credited/ paid to you (as per TDS details) was not shown by you as income in the return of income. Also explain as to why the amount credited/ paid to you, other than the amount shown as income, should not be treated as your income for the year under consideration. ” In response to the above notice the assessee, vide letter dated 08.02.2021 5.2. uploaded on 10.02.2021, has explain the above issue as under; “Point No. 4 of the Questionnaire: During the previous year relevant to AY 2018- 19, as per 26AS following amounts were credited/paid to the Company:
Party Name TAN Section Amount TDS Rajcomp Info IPRR06208G 194C 616,620 27,968 Services Limited ITl Limited 194C 59,950 1,199 LKN105174B NSDL E-Governance Infrastructure Limited MUMN05226E 194C 1,308,575 26,170 Bharat Electronics BLRB03693E fl94C 110,845 2,217 DOEACC Centre NSKD01790F 238,522 194C 11,881,011 Auranganbad National Institute of PTLD11376B 47,722,341 194C 954,448 Electronics and Information technology Chandigarh Total-194C 61,699,342 1,250,524 EZYPAY Online CALE03382B 194H 23 1 Services Private Limited Bank of Baroda DELB07712F 194A 87,660 8,766 Page 5 of 17
Bank of Baroda 194A 41,383 4,822 IPRB03590G Total-194A&194H 129,066 13,589 Grand Total 61,828,408 2,528,226
Out of the above the amount paid by the customers amounting to Rs. 6,10,22,772 (details given below) reflected in 26AS were adjusted against the work-in-progress. The services against the below payments were rendered in FY 2011-12 and FY 2012-13 and the TDS was deducted by the parties at the time of payment in FY 2017-18. Party Name TAN Section Amount NSDL E-Governance MUMN05226E 194C 1,308,575 Infrastructure Limited Bharat Electronics BLRB03693E 194C 110,845 NSKD01790F 194C 11,881,011 DOEACC Centre Auranganbad PTLD11376B 47,722,341 National Institute of Electronics and Information technology Chandigarh Total- 194C 61,022,772 As per the accounting policy of the Company, The Company recognises revenue on completed service contract method. Revenue is recognised when the services have been delivered, acceptability of the services have been confirmed and the collectability is reasonably assured. The expenses incurred on the rendering of services for which revenue has been recognised are also recognised in the same period when revenue is recognised till such time the same are treated as work in progress under current assets. Work-in-progress is valued at cost and other attributable costs incurred upto the stage of completion. Out the above the major contracts of National Institute of Electronics and Information technology (NIELIT) Chandigarh and National Institute of Electronics and Information technology (NIELIT) Aurangabad (formerly DOEACC Society, Aurangabad Centre), were awarded to the Company in Financial year 2011-12 and were six month period contracts. The work for the same was done by the Company during the Financial Year 2011-12 and 201213. However, when company approached the NIELIT for the acceptance of services, NIELIT has imposed a penalty on the Company. Since the NIELIT was not ready to accept the services and make the payment, the Company approached the Department of Information technology, Ministry of Communications and Information technology, Govt of India being parent body for the resolution for the payment. However, much to the surprise of the Company, the NIELIT in FY 2017-18 made the above payments to the Company after deduction of heavy penalties. The Company has not accepted the decision of the NIELIT and taken the legal recourse against the same.
The Company has in the light of above has not recognized the same in revenue and adjusted the same against the opening balance of work-in progress (shown under inventory in current assets- Note 16) amounting to Rs. 35,56,44,358. If the Company, had booked the same under revenue and similarly booked the corresponding expenditure of more than 15 crore relating to these contracts from the work-in-progress, it would have resulted in additional tax loss of more than Rs. 8 crore. The balance amount of work-in progress was written off by the company after treating the same as not recoverable. The Company has not claimed the same in its tax computation. The Copy of Audited Financial statement for the FY2017- 18 reflecting the same along with the copy of agreement of National Institute of Electronics and Information technology (NIELIT) Aurangabad (formerly DOEACC Society, Aurangabad Centre) are enclosed as Annexure-3” 1.1 It is clear from the above that the assessee has accepted that it has received Rs.6,18,28,408/- on which tax was deducted by the parties at source. Out of the above receipt from Rajcomp Info Services Limited, EZYPAY Online Services Private Limited and interest received from Bank of Baroda is already shown as income in the Return of income. However the following receipt has not offered as income; Party Name Amount NSDL E-Governance Infrastructure Limited 1,308,575 Bharat Electronics 110,845 DOEACC Centre Auranganbad 11,881,011 National Institute of Electronics and Information technology Chandigarh 47,722,341 Total- 61,022,772
With respect to amount received from the above parties the assessee contention is summarized as under; I According to the assessee the work for the same was done by the Company during the Financial Year 2011-12 and 2012-13. ii. The Company recognises revenue on completed service contract method. Therefore the Revenue is recognised when the services have been delivered, acceptability of the services has been confirmed and the collectability is reasonably assured, i.e. during the F Y 2011-12 and 2012-13. iii. The Company has in the light of above has not recognized the same in revenue and adjusted the same against the opening balance of work-in progress (shown under inventory in current assets- Note 16 ) amounting to Rs. 35,56,44,358. iv. The balance amount of work-in progress was written off by the company after treating the same as not recoverable. The Company has not claimed the same in its tax computation. In support of the above claim the assesee has submitted i. The Copy of Audited Financial statement for the FY2017-18. Page 7 of 17 ii. Copy of agreement of National Institute of Electronics and Information technology (NIELIT) Aurangabad (formerly DOEACC Society, Aurangabad Centre). 5.4 With respect to the assessee’s above argument the details submitted by the assessee and the details available on record have been verifies and observed as under; i. The aseessee has stated that the work for the above payments was done and revenue was also recognized during Financial Year 2011-12 and 2012-13, however, no supporting documents have been submitted by the assessee which shows that the above amount was included in the receipt shown during the Financial Year 2011-12 and 2012-13. ii. The copy of agreement with National Institute of Electronics and Information technology (NIELIT), Aurangabad (formerly DOEACC Society, Aurangabad Centre), only shows that the contract with National Institute of Electronics and Information technology (NIELIT) Aurangabad on 09.01.2012. This contract was for Demographic Data Digitization Service for Zone-12 Jabalpur, Madhya Pradesh. This does not support the assessee’s stand that income received from the above parties during the year under consideration was recognized and offered for taxation during the Financial Year 2011-12 and 2012-13 in spite of the fact that the payment was not received in F Y Financial Year 2011-12 and 2012-13. ¡¡I. On verification of copy of Audited Financial statement (audited under Company’s Act) for the FY 2017-18 submitted by the assessee it is seen that Note 16 of Financial statement shows the amount of WIP as on 31.03.2017 at Rs. 35,56,44,358/- and nil as on 31.03.2018 which shows that the assessee has write off/deleted the amount of WIP without showing any impact on the revenue. This also not supported the stand of the assessee that the receipt in question was treated as income in Financial Year 2011-12 and 2012-13 relevant to the A Y 2012-13 and 2013-14. iv. No any other documentary evidences submitted by the assessee which supports the assessee claim. 5.5 In view of the above discussion it is concluded that the assessee has failed to substantiate it’s claim that the amount received by the assessee from the above parties of Rs.6,10,22,772/-was offered for taxation in A Y 2012-13 and 2013-14. Accordingly the amount credited/paid by the above referred parties totaling to Rs.6,10,22,772/- is treated as the assessee’s income for the year under consideration and added to the total income. 5.6 It is also seen that the assessee has received Rs. 59,950/- on which TDS was deducted by ITI Limited. On verification of the details of sale of service submitted by the assessee it is seen that the assessee has not included the above amount in the amount of sale of service. As the assessee has not submitted any explanation in respect of this receipt, the same is treated as assessee’s income for the year under consideration and added to the total income. Total addition on account of TDS information in TDS Report is Rs.6,10,82,722/- (Rs.6,10,22,772+59,950). Penalty proceeding u/s 270A of Income Tax Act is being separately initiated for under reporting of Income which is in consequence of misreporting thereof….”
Aggrieved by the impugned addition, the assessee moved to the ld. First Appellate Authority, who partly confirmed the action of the AO while observing as under:-
“….7. Ground no. 2 to 8 are relating to addition of Rs.6,10,22,772/- being the amount received from the contractees for which tax has been deducted by the contractees u/s. 194C of the Act. As per ground no. 8 raised by the appellant, it is claimed that the amount received from NSDL e-Governance of Rs.13,08,575/- (which is part of Rs.6,10,22,772/-) was already offered to tax in the return filed, hence, it was pleaded that the addition made by the AO has resulted in double addition. This aspect shall be verified by the AO at the time of giving effect to this appellate order. If it is found that the said amount of Rs.13,08,575/- has already been offered to tax as the income in the impugned A.Y., the same shall be excluded from the addition made. Hence, ground no. 8 is treated to have been partly allowed. 7.1 Thus, the balance addition which needs to be adjudicated is Rs.5,97,14,197/- (Rs.6,10,22,772 – Rs.13,08,575). This amount of Rs.5,97,14,197/- has been confirmed by the appellant that the same has not been offered to tax by the appellant either in the years in which the services were rendered (F.Y. 2011-12 & 2012-13) or in the year of receipt i.e. impugned A.Y. 7.2 The brief facts of the case are that the appellant had rendered certain IT services to some companies in F.Y. 2011-12 & 2012-13. Following the completed service contract method, the amount receivable from the services rendered is transferred to P&L account only when all the three conditions mentioned below are satisfied. i. The services have been rendered. ii. Services rendered are accepted by the customer. iii. There is reasonable certainty regarding the collection. 7.3 Till all the three conditions given above are satisfied, the revenue is not recognized in the P&L account. In the instant cases the customers did not accept the services of the appellant and the Page 9 of 17 same resulted in litigation. The customers ultimately paid the appellant the said Rs.5,97,14,197/- during the impugned A.Y. after deducting certain penalties etc. While making the payment, the customers deducted tax at source u/s. 194C of the Act. Now the appellant says that it follows completed contract method of accounting wherein the services rendered are transferred to work- in-progress. So, these amounts were lying as work-in-progress without there being any effect on the P&L account. 7.4 From the above analysis, it is clear that the amount received by the appellant during the impugned A.Y. was neither offered to tax in A.Yrs. in which the work was actually executed and nor in the impugned A.Y. Thus, technically, this amount of Rs.5,97,14,197/- has not suffered tax and hence, the addition made by the AO is sustainable….”
We have heard rival submissions in the light of material available on records. The ld. Counsel for the assessee, Shri Neeraj Mangla, reiterated the arguments taken before the lower authorities so as to contest and agitate that the addition made by the ld. AO and the relief accorded by the ld. CIT(A) is not correct. It is the case of the appellant, the Appellant had entered into service contracts with some customers Government Agencies e.g. DOEACC Centre (now known as National Institute of Electronic and Information Technology, Aurangabad, National Institute of Electronic and Information Technology, Chandigarh and others in earlier years majorly in FY 2011-12 and FY 2012 -13. The contracts were of short term in nature. However, on completion of the service contract, the customers did not accept the services delivered by raising certain concerns, thus there was no assurance as to collection. Therefore, the Appellant did not recognize the cost and revenue of these contracts in profit and Page 10 of 17 loss account to the extent of dispute and continued to treat it as WIP in the Balance Sheet.
It was further submitted that during the captioned year, the aforesaid customers had paid some amount i.e. INR 7,49,72,090/- out of total disputed amount, which was part of WIP as on 1st April 2017 amounting to INR 35,56,44,358 as shown by the Assessee in the Balance sheet. Since the amount received was just a part of total agreed contracted price, the Assessee reduced INR 7,49,72,090 from its WIP of INR 35,56,44,358 as the whole amount was not recovered from the aforesaid customers. It was explained that the impugned amount was in the nature of just a recovery of the cost of the contract. The ld. Counsel informed that in April 2018, the aforesaid customers had written to the Assessee by mails that such part payments are full and final settlement of their outstanding stating the reason for deducting the balance amount as penalty. Aggrieved by such communication of deductions from the aforesaid customers, the appellant assessee filed a petition before the Delhi High Court in September 2018. The ld. Counsel submitted that since, the matter was under the litigation, the Appellant after deducting the amount received from customers, had written off the balance amount of WIP i.e. INR 28,06,72,268 as on March 31, 2018 in profit and loss account as extra-ordinary item for which the Appellant forgot to claim deduction of the same in the computation of income. Hence, The Appellant is entitled to claim of further losses of INR 28,06,72,268, which was Page 11 of 17 actual cost incurred in servicing the contracts but were not recovered from its customers.
Explaining its method of accounting, the ld. Counsel Shri Mangla, Submitted that the Appellant is following completed service contract method wherein the revenue from services are recognized in profit and loss account after satisfaction of all the 3 conditions namely 1) the services has been rendered, 2) customer has accepted the same and 3) there is a reasonable certainty regarding the collection. Until revenue is recognized in profit and loss account, the cost (including substantial salary cost) incurred is capitalized in balance sheet as work in progress (‘WIP’) in Inventory under current asset and not routed through Profit and Loss Account. The Appellant had briefed the same to the Ld. AO vide their submission dated February 08, 2021. It was contested that the Ld. AO has neither applied his mind nor understood the case and the accounting policies followed by the Appellant.
The ld. DR Ms. Ankush Kalra placed full reliance upon the order of the lower authorities. It was contested that the income embedded in the impugned contractual receipts deserves to be taxed in the year of its receipt or its accrual. The ld. DR invited reference to Accounting Standards and statutory provisions of the Income Tax to allude that the action of the ld. AO and the ld. CIT(A) is based upon firm judicial findings and do not deserve any interference in this stage. It was contended that TDS deductions and the charging of income go
Page 12 of 17 hand in hand and that the assessee has claimed deduction during the year and therefore corresponding income has to be taxed.
From the facts narrated hereinabove, it is clear that the assessee has given, in FY 2011-12 and 2012-13, contractual services to the parties indicated by the ld. AO on page-4 of his order. Admittedly, the said parties during the year under consideration, gave the assessee amount of Rs.6,10,22,772/- and deducted corresponding TDS thereupon under section 194C. It is nobody case that the impugned receipts are not taxable. The only question that remains is as to year of their taxability. Accounting Standards prescribed by the competent authority controlling preparation and maintenance of books of accounts by business entities in conjunction with statutory provisions of the Income Tax Act provides taxation of receipts on the basis of method of accounting deployed by the taxpayer. Thus, the receipts can be taxed on ‘cash basis’ in the year of their actual receipts or on ‘Accrual basis’ in the year in which income is booked into the books irrespective of the actual receipt by the assessee. The assessee is at liberty to apply to adopt either of the two basic options of offering its receipts to taxes. It is in this background that the assessee’s adoption of completed service contract method wherein the revenue from services are recognized in profit and loss account after satisfaction of all the three conditions namely 1) the services has been rendered, 2) customer has accepted the same and 3) there is a reasonable certainty regarding the collection is to be analyzed. The completed
Page 13 of 17 service contract method or the CCM is a revenue recognition approach in construction and service industries where all revenue, expenses, and gross profit are recognized only upon the final completion or substantial completion of a project. It is a conservative method that defers reporting until performance obligations are fully met, often used for short-term projects, high-risk projects, or when estimating completion stages is difficult. However, it is noted that the CCM is used when a company primarily has short-term contracts, there is uncertainty in forecasting the completion date or cost of a project, a project is subject to high hazards or volatility and/or when a project is small and does not warrant complex percentage-of-completion calculations. In the instant case, nothing has been brought on record by the appellant assessee so as to allude the justification for adoption of CCM.
The Income Tax Act also provides that receipts disclosed for taxes in a year can be set-off as bad debts in subsequent years in the event of non-receipt by the tax payer. The typical method of accounting indicated by the assessee shows that it adjusts its receipts and losses and shortages in the receipts in its working progress accounts and offers the net figure for taxation. This practice is not supported by the method of accounting and disclosure of income/receipts currently prescribed by the Income Tax Act. The system and practice adopted by the appellant assessee is an opaque system bereft of any transparent disclosure. The appellant has itself admitted that it had been remitted the impugned receipts of Rs.6,10,82,722/-by the impugned parties along with Page 14 of 17 commensurate TDS deduction. There is nothing on record by way of any demonstrative evidences to suggest that the said receipt was contested and the justification for the contest. We have perused pages no.26 of the paper book filed by the assessee which includes audited tax audit report dated 02.09.2018 of the company. In point-g(i), the auditor has categorically certified that ‘the company does not have pending litigation which would impact its financial position’. Thus, admittedly, there was no legal dispute continuing between the assessee and any other party. The time lag of delivery of service and the disbursal of receipts from 2011-12 to 2017-18 adds credence to the fact that the amounts were finally settled between the appellant assessee’s and the contracting parties. The conclusion drawn by the ld.AO qua taxability of the impugned receipts during the year under consideration and which has been confirmed by the ld. First Appellate Authority is therefore correct and cannot be faulted.
The ld. Counsel for the assessee had also submitted that the contractual receipts available in Form -26AS cannot construed as the income of the assessee for the year consideration. We have noted that Form 26AS is a facility generated by Income Tax Department to its tax payers so as to indicate the receipts received by them during an year and the corresponding tax deducted. The very fact that there is reflection of corresponding tax deduction qua particular receipts, is in itself an indication of taxability of said receipts in the Page 15 of 17 year in which they are disclosed. Further, the non-disclosure of assessee of the impugned receipts in AY 2011-12 and 2012-13 alludes that it is not following ‘accrual basis’ of accounting and the disclosure of the same through 26AS adds credence that the assessee is following ‘cash’ or ‘receipt’ basis of accounting. Therefore, we do not find force in the argument of ld. Counsel that receipts shown in Form 26AS are not income of the assessee for the year consideration. Accordingly, we are of the considered view that the addition made by the ld. AO and its confirmation by the ld. CIT(A) is based upon correct understanding and interpretation of the facts of the case and is supported by statutory provisions covering the subject. We do not feel that there is any need therefore to interfere with the appellate order. We therefore sustain the order of the ld. CIT(A) and dismiss the grounds of appeal raised by the assessee.
In the result, the appeal of the assessee is dismissed. Order pronounced in the open court on 06th April, 2026.