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Facts
The Revenue appealed against the CIT(A)'s order which restricted the addition on an unrecorded advance receipt of Rs.2,23,50,000/- from Mr. Nandagopal Salem to 15% of the amount. The Assessing Officer had made a full addition, arguing the amount was sale consideration and not merely an advance, citing discrepancies between turnover reported in Form 26QB/audit report and the P&L account, and a decline in the assessee's gross profit margin.
Held
The Tribunal upheld the CIT(A)'s decision to treat the differential amount as sales turnover for the year and restrict the addition to a profit element. However, it modified the CIT(A)'s order by directing the Assessing Officer to compute the income on this differential amount using the assessee's declared Gross Profit (GP) rate of 16.22% for the relevant year, instead of the 15% adopted by the CIT(A).
Key Issues
1. Whether an advance receipt should be recognized as full sale consideration or a mere advance for income tax purposes. 2. The appropriate gross profit margin to be applied for an addition arising from undeclared turnover/receipts when the assessee has already accounted for work-in-progress.
Sections Cited
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Income Tax Appellate Tribunal, Hyderabad ‘ DB-B ‘ Bench, Hyderabad
Before: Shri Vijay Pal Rao, Vice-Shri Manjunatha, G.
Per Vijay Pal Rao, Vice President
This appeal by the Revenue is directed against the order dated, 04/04/2024 of the learned CIT (A)-NFAC Delhi, for the A.Y.2016-17.
The Revenue has raised the following grounds of appeal:
The learned DR has submitted that the Assessing Officer has noted from the tax audit report and on verification of Form 26QB that the total receipt of the company for the year under consideration is Rs.10,71,70,184/-, whereas the assessee has declared the sales turnover in the P&L Account at Rs.8,48,798/-. The Assessing Officer further noted that, the assessee has adopted an accounting policy of recognizing the revenue in respect of the amount received at the time of booking, whereas the assessee has not recognized the sale receipt of Rs.2,23,50,000/- and claimed the same as advance received for which a sale deed was executed in February, 2018 i.e. in the subsequent year. Thus, the learned DR has submitted that, when the Auditor has also certified the turnover of the assessee in the audit report at Rs.11,13,55,369/- and the assessee has declared the turnover of Rs.8,48,07,948/- in the P&L Account as well as in the return of income, then the Assessing Officer is justified in Page 3 of 8 making the addition of differential amount of Rs.2,23,62,336/-. The learned DR has further pointed out that, though the learned CIT (A) has accepted the said differential amount as turnover of the assessee for the year under consideration, however, the addition was restricted only to the profit @ 15% which is without any basis when the entire expenditure has already been booked by the assessee in the P&L Account. He has further pointed out that, for the year under consideration, the assessee has declared the gross profit of 16.22% whereas the learned CIT (A) has adopted the profit @ 15%.
On the other hand, the learned AR of the assessee has submitted that the assessee has explained the reasons for difference in the turnover, as declared by the assessee as the said amount was received as an advance and the buyer was subsequently not interested in purchasing the Flat. Therefore, the assessee has shown this amount in the current liability as advance from the buyer, which cannot be treated as turnover of the assessee for the year under consideration. Ultimately, in the month of February, 2018, the buyer has opted for flat No.701 and a sale deed was executed for sale of the said flat and the turnover of the same was offered to tax for the A.Y 2018-19. The learned AR has further submitted that, the learned CIT (A) though treated the said differential amount as turnover of the assessee for the year under consideration, however, in the order passed u/s 154, the learned CIT (A) has directed the Assessing Officer to give necessary relief in the A.Y 2018-19 by ensuring the fact that the Page 4 of 8 assessee has accepted the order of the learned CIT (A) and also paid the tax on the said income. Thus, the learned AR has submitted that, the addition made by the Assessing Officer of the entire amount is not justified when the assessee has already taken into consideration the closing work in progress in the P&L Account. He has referred to page No.66 of the paper book and submitted that, the assessee has debited the P&L Account on account of material consumed, as a difference of opening work in progress and closing work in progress as Rs.7,40,69,227/-. Once the assessee has already taken into account the closing work in progress, then the addition made by the Assessing Officer of the entire turnover is highly unjustified and the learned CIT (A) has rightly restricted the same to the profit element of the additional turnover. He has supported the impugned order of the learned CIT (A).
We have considered the rival submission as well as relevant material available on record. The assessee has declared less turnover to the extent of Rs.2,23,50,000/- in comparison to the turnover reflected in Form 26QB as well as the audit report in Form 3CA. The Assessing Officer made addition of the entire differential amount to the total income of the assessee. On appeal, the learned CIT (A) has restricted the addition to the profit element in the differential receipt/turnover by adopting the profit @ 15% of the said receipts in para No.4.3.5 to 4.3.8 as under:
Thus, it is clear from the impugned order of the learned CIT (A) that, the differential amount has been treated as sales turnover for the year under consideration, however, the addition was restricted to 15% of the said receipt. Though the learned 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 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).