Mismatch Between Service Tax and Income Tax Records Due to Accounting Methods Cannot Justify Addition

ORDER

Anubhav Sharma, Judicial Member. – These appeals preferred by the revenue against the different order of the Ld. Commissioner of Income Tax (Appeals)-3, Noida (hereinafter referred to as the First Appellate Authority or ‘the ld. FAA’ for short) in appeals filed before him against the orders of the ld. Assessing Officer (hereinafter referred to as the Ld. AO, for short) passed u/s 143(3)and u/s 270A of the Income-tax Act, 1961 (hereafter referred to as ‘the Act’). Further details of the orders of the lower authorities are as under: –

2. Heard and perused the record. Assessee company is engaged in the business of real estate development, executing a single project “Rudra Aqua Casa” at Greater Noida (West). The return for AY: 2018-19 was filed and assessment was completed u/s 143(3) of the Act determining income at Rs.20,14,73,350/- and returned income of Rs.94,82,730/- but on account of alleged suppressed turnover an addition of Rs.10,63,68,619/- was made on the basis of difference between turnover as per service tax record and turnover as per ITR and Form 3 CD. The same is deleted by ld. CIT(A) observing that difference arose from on account of difference of basis of recognition on income in two different statutes. Then disallowance u/s 40(a)(ia) of Rs.8,56,22,003/-was made on account of difference between inadmissible amount in Form 3CD and the amount disallowed and the same also stand deleted by the ld. CIT(A) holding that only 30% is disallowable as the remaining is disallowed by the assesse. Accordingly, department is in appeal and has raised following grounds:

3. On hearing both sides as with regard to ground No. 1 to 3 we find that ld. DR has relied the impugned order of ld. AO but we find that additions rests on an alleged mismatch between two returns filed under two different revenues statutes. We are of the considered view that two different revenue statutes provide different reporting income for taxability on two different taxing events and unless the Income Tax Act 1961 specifically provides admissibility and consideration of income reported in another revenue statutes to be made basis for consideration of income under the Act too then on the basis of any mismatch between the returns filed under two different statutes, addition or a disallowance is not sustainable. In the case of assesse under the erstwhile services tax regime tax was deducted on advance received, even before service was rendered by position handed over i.e. on receipt/advance basis whereas under the Act revenue is recognized on percentage of completion method or mercantile basis only to the extent of stage of completion actually achieved as mandated by Section 145(1). Thus, advances not yet recognized as revenue under POCM were carried by assesse in the added balance sheet under advances from customers in the form of liability and duly disclosed the impugned assessment order nowhere costs any illegality in the manner of reporting income under the Act. In the revenue recognized of Financial Year 2017-18 correctly stood at Rs.5,10,47,004/- in line with POCM and accounting standards. The assessee’s audited books of accounts and audit report in Form 3CD have not been shown to be suffering from any discrepancy and the entire difference alleged in the form of mismatch is attributable to difference in accounting basis under the two different statute and ld. AO has not taken into consideration the said facts while ld. CIT(A) has duly considered these facts and circumstances and its findings in para 7 of the impugned order and the relevant para of the same is reproduced below:

7.1 That the Assessing Officer (AO) has concluded that the assessee has concealed income to the extent of Rs. 10,63,68,619/- based solely on a mismatch between turnover figures reported in the Service Tax Return (Rs. 15,74,15,623/-) and the Income Tax Return and Tax Audit Report (Rs. 5,10,47,004/-), without conducting any independent inquiry or verification.

7.2 That the Ld. AO presumed that the entire difference between the two figures to preset unaccounted turnover and undisclosed income and added it to the total income of the assessee purely on a presumption, without seeking any reconciliation or clarification.

7.3 That the addition has been made without invoking or applying the provisions of Section 145(3) of the Income Tax Act, 1961, i.e., without rejection of books of accounts maintained by the assessee. The assessee was not issued any notice or opportunity to explain the nature of the difference, nor was any inquiry conducted into the assessee’s method of accounting or the basis of recognition of revenue.

7.4 That the Ld. AO failed to analyze the nature of the receipts, the stage of completion of projects, or the revenue recognition method adopted by the assessee, which is critical in the case of real estate transactions. That the assessee is engaged in the business of real estate development and follows the Percentage of Completion Method (POCM) for recognizing revenue, as is appropriate and mandated for such businesses.

7.5 That the assessee is engaged in the business of real estate development, which follows percentage of completion method. The details of Rs.15,63,58,844/- are as under:

7.6 That the sum of Rs. 15,63,58,844/- reported in the Service Tax Return comprises multiple components, including amounts received in April (Rs.1,09,64,422), May (Rs. 42,80,688), and June (Rs. 2,85,28,088), and demand raised in June (Rs.11,25,85,646).

7.7 That these amounts represent amount received and demands raised, and under mercantile system and POCM, such receipts do not constitute income until the relevant stage of construction or sale is achieved. The recognition of income under POCM requires matching of revenue with proportionate project costs incurred, which ensures income is recorded only when it is accrued and earned.

7.8 The calculation of turnover on the basis of percentage of completion method is as under:

7.9 Based on POCM, the total cost of the project was Rs. 6,02,29,00,000, and cost incurred till date was Rs. 2,33,08,16,514, representing 38.70% completion. Total saleable area was 21,43,394 sq. ft., of which 7,03,227 sq. ft. was sold, with an expected sales realization of Rs. 2,10,37,96,149. Accordingly, revenue to be recognized till date was Rs. 81,41,53,117 (i.e., 38.70% of total expected realization), out of which Rs. 52,27,87,050 was recognized in FY 2015-16 and Rs. 24,03,19,063 in FY 2016-17.The screenshot of the revenue recognised is as under:

Rudra Buildwell Homes Private Limited

CIN U45201DL2012PTC231495

D-53. Okhla Phase-1

New Delhi, Delhi

Statement of Profit and Loss for the year ended 31-03-2017

7.10 The revenue recognized for FY 2017-18, therefore, correctly stood at Rs. 5,10,47,004, fully in line with the PoCM and accounting standards. The assessee has maintained complete and audited books of accounts as per Section 44AB, and no discrepancies have been reported in the audit under Form 3CD.

7.11 The differential figure between STR and ITR arises purely due to difference in the basis of recognition-STR recognizes turnover on receipt basis for service tax applicability), while the books recognize income as per PoCM under the mercantile system.

7.12 Under the erstwhile Chapter V of the Finance Act, 1994, service tax was applicable on advances received, even if the service was yet to be rendered or possession not given, thereby inflating the STR turnover figure.Under the Income Tax Act, 1961, Section 145(1) permits computation of income in accordance with the method of accounting regularly followed by the assessee, which in this case POCM.

7.13 The ICAI’s Guidance Note on Accounting for Real Estate Transactions (Revised 2012) mandates that revenue must be recognized only when the conditions of revenue recognition are fulfilled, including substantial completion and transfer of significant risks and rewards.The AO failed to appreciate the applicable accounting standards, and made the addition without referring to the assessee’s accounting policy, disclosures in the financials, or supporting documents like customer ledgers and bank statements.

7.14 The entire difference is attributable to timing differences and accounting basis, and cannot be treated as unaccounted income unless it is proved to be bogus or unexplained.The AO failed to carry out any verification or inquiry to examine whether the receipts were indeed advances or whether they had culminated in revenue through completed sales.There is no finding or allegation of suppression, falsification, or manipulation of accounts, and no defect has been pointed out in the regularly followed accounting method.

7.15 It is a settled legal principle, as held by the Hon’ble Supreme Court in CIT v. Excel Industries Ltd. (2013) 358 ITR 295 (SC), that income must be realand not hypothetical, and mere advances cannot be treated as taxable income z. That the AO acted in a mechanical manner and treated the entire STR turnover as taxable income, without applying his mind to the nature of real estate business or the established accounting and taxation principles.

7.16 Even assuming without admitting that a portion of the advance might be attributable to income, the AO was duty-bound to determine what portion had actually accrued as income based on project status, which he failed to do.The assessee’s financials disclose advances received, and these figures match the amounts reported in the STR, demonstrating consistency and transparency in reporting.

7.17 The Tax Audit Report under Form 3CD clearly sets out the accounting policies followed, including revenue recognition method, which has not been questioned or rejected by the tax auditor or AO. In absence of rejection of books, absence of any finding of suppression or concealment, and full disclosure in the financials and audit report, the impugned addition is entirely unjustified. The AO has not brought any evidence or adverse material on record to justify the addition, and has acted solely on a perceived mismatch without understanding the underlying accounting treatment. The addition of Rs.10,63,68,619/- is thus contrary to law, factually incorrect, unsupported by evidence, and deserves to be deleted in full.

4. As far as ground no Ground 3 is alleging that no project-wise working or stage-wise completion details were furnished and that the learned CIT(A) merely relied upon the appellant’s internal working. However, ld. AR demonstrated that the appellant had duly furnished the complete project-wise working for the relevant assessment year, which forms part of the audited financial statements and audit report. The same is available at page 199 of the Paper Book, while the relevant extracts as relied by the CIT(A) are also placed at pages 113, 123 and 124 of the Paper Book. Thus, the finding that no project wise working was furnished is demonstrably erroneous.

5. We find no reason to interfere the aforesaid findings and accordingly grounds No. 1 to 3 raised by revenue in quantum appeal are sustained and no substance is left in the appeal against the penalty levied u/s 270A of the Act. The appeals of revenue are accordingly dismissed.