ORBIT 9 ELECTRONICS ,HYDERABAD vs. INCOME TAX OFFICER, WARD-6(2) , HYDERABAD

Relevant facts are that the assessee is a partnership firm, engaged in the business of retail sale of software, providing AMC of software and other technical services. They have filed a return of income for the

Such return of income was processed u/s.143(1) of the Act determining the total income at Rs.77,14,296/- by making an addition to the extent of Rs.64,53,580/- by invoking the provisions u/s.44ADA of the Act. For reaching this conclusion, the basis that appears from the record is that the receipts to the tune of Rs.1,29,07,148/- in respect of which TDS was deduction u/s.194J of the Act was not disclosed in the return of income. Feeling aggrieved by such an action of the learned Assessing Officer, assessee filed an application u/s.154 of the Act but the same was rejected. Assessee, therefore, preferred an appeal before the Ld. CIT(A).

Vide impugned order, Ld. CIT(A) considered the contentions of the assessee and reached a conclusion that the case of the assessee does not fall under the provisions of Section 44ADA of the Act inasmuch as the gross business receipts of the assessee exceed the threshold limit of Rs.50 lakhs. Nextly, as a matter of fact, on verification of record, Ld. CIT(A) found that this amount of Rs.1,29,07,148/- which was received from the clients/customers and in respect of which, TDS was deducted was in fact included in the disclosed receipts of Rs.1,85,91,980/-. Ld. CIT(A), however, found that the learned Assessing Officer committed error in law in not considering the case u/s.44AD of the Act inasmuch as the detailed furnished by the assessee disclose that though the basic amount of receipt

Assessee is, therefore, before us in this appeal contending that while estimating the net profit on the turnover, the Ld. CIT(A) included the VAT/CST/Service Tax which do not have any profit element.

Learned AR contended that the provisions u/s.44BB of the Act are in pari materia with the provisions u/s.44AD of the Act and in DIIT Vs. Schlumberger Asia Services Ltd [2010] 186 Taxman 436 (Uttarakhand) it was held that the reimbursement of customs duty could not form part of amount taxable u/s.44BB of the Act, in the case of DIT Vs. Mitchell Drilling International (P) Ltd., [2015] 62 taxmann.com 24 (Delhi) it was held that the service tax collected by the assessee and passed on to Government does not have any element of income and, therefore, cannot form part of gross receipts for purposes of computing presumptive income of assessee

Per contra, learned DR argued that “turnover”, “gross receipts” and “sales” are the starting point of tax audit and they form the qualifying criteria to determine whether a taxpayer is liable to tax audit during a given year. He further submits that though Section 44AB of the Act lays down the threshold turnover for its non-applicability or for getting the accounts audited, it does not define the said word and, therefore, resort has to be had to Section 145A of the Act, which deals with the accounting in certain cases. He brings it into our notice that u/s.145A of the Act, while dealing with the method of accounting, it stipulates that for the purpose of determining the income chargeable under the head profits and gains of business/profession, the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation.

He accordingly submitted that the value of sales tax and VAT/CST is includable in the turnover of the assessee. He further submitted that even as per the “guidance note on terms used in financial statement” published by the ICAI, turnover means the aggregate amount for which sales are effected by an enterprise. He submits that under this guidance note the

He further explained that if the assessee maintains books of account by following the inclusive method, where the sales price include the service tax, sales tax and excise duty, then, no adjustment in respect thereof need be made for considering the quantum of turnover. However, in case where the assessee maintains the books of accounts by following the practice of crediting the sale tax or/and VST/CST to the respective account and payments to the Central Government are debited in the same account, then in such case, the sales tax or/and VST/CST are not to be included while quantifying the turnover. Inasmuch as the case of the assessee for this assessment year is concerned, they did not get the accounts audited, the assessee is not entitled to claim that the sales tax or/and VST/CST is not includable while quantifying the turnover. He submitted that the purpose of allowable deductions u/s.80HHC of the Act and Section 44BB of the Act is different and it is not known what accounting method the assessee followed therein and, therefore, the assessee cannot rely upon the decisions cited by them.

We have gone through the record in the light of the submissions made on either side. Facts are not in dispute and on the other hand, the submissions made on behalf of the assessee are clear to the effect that the assessee got the accounts audited for the AYs.2014-15 to 2016-17 and subsequently for AY.2020-21. However, according to the assessee, for this AY.2017-18, the turnover is less than Rs.2 Crores threshold limit and, therefore, no accounts are audited nor produced before the authorities

It could be seen from the decisions in Lakshmi Machine Works (supra) and CIT Vs. Sudarshan Chemical Industries (supra), the working out of deduction u/s.80HHC of the Act was the issue and not the determination of the threshold parameter for the purpose of applicability or otherwise of a particular provision. Further, the facts in the case of Schlumberger Asia Services Ltd., (supra) and in Mitchell Drilling International (P) Ltd., (supra), clearly indicate that the sales tax component was either reimbursed or paid to the Government as could be verified from the books. This shows that the assessee in such cases, followed the practice of crediting the sales tax or/and VST/CST covered the sales and debiting the same in the same account after paying it to the Government. But here in this case, the accounts are not audited and there is nothing on record to show that the method of accounting followed by the assessee is not inclusive method.

Since Section 145A of the Act is clear in its import that for the purpose of determining the income chargeable under the head “profits and gains of business/profession”, the valuation of purchase and sales of goods shall be adjusted to include the tax component also and it was so understood by the ICAI the turnover shall include the tax component unless the assessee maintains a separate tax account in respect of sales

Now coming to the net profit relevant for taxation is concerned, Ld. CIT(A) estimated the same at 25% of the gross turnover but the figures furnished by the assessee by way of written submissions, show that the net profit was 12.82%, 12.54% and 5.52% for the AYs.2014-15, 2015-16 and 2016-17 respectively. In these circumstances, we find that estimate of the same at 25% is very high and taking a pragmatic view, we estimate the same at 12.5% of the gross receipts/turnover. Learned Assessing Officer is directed to re-compute the income under the head “profits and gains of business/profession” of the assessee at 12.5% of the gross receipts/turnover.

In the result, appeal of the assessee is allowed in part.