Assessee's appeal allowed as income addition based on ITR-service tax differences deleted after satisfactory reconciliation provided

ITAT Mumbai allowed the appeal regarding addition of income based on difference between ITR and service tax/GST returns. The assessee followed cash accounting system recognizing only received fees as income, while service tax/GST were based on invoices issued. The AO's addition was deleted as the assessee provided satisfactory reconciliation with documentary evidence. Addition for payments to retired partners was also deleted as these were made per partnership deed terms for services rendered. The TDS credit issue was remitted back to AO for verification as directed by CIT(A).

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Issues Involved:
1. Addition of Rs. 147,22,44,468/- due to alleged difference between turnover/receipts as per ITR and service tax/GST returns.
2. Payments made to retired partners amounting to Rs. 11,49,40,775/-.
3. Short credit for tax deducted at source (TDS) amounting to Rs. 18,62,08,841/-.
4. Levy of interest under Section 234A of the Income-tax Act, 1961.
5. Levy of interest under Section 234C of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition of Rs. 147,22,44,468/- due to alleged difference between turnover/receipts as per ITR and service tax/GST returns:

The assessee, a limited liability partnership firm providing professional services, filed its return of income for AY 2018-19. During assessment, a difference of Rs. 2294,40,98,802/- was noted between the turnover/receipts as per the ITR and the service tax return. The assessee explained this difference by stating that it follows the cash system of accounting, where only the fees received during the year are considered as income, while service tax and GST are based on invoices issued. The reconciliation provided by the assessee included out-of-pocket expenses, invoices rendered but not paid, and intra-firm invoices. The Assessing Officer initially accepted the explanation and reduced the difference to Rs. 147,22,44,468/-. However, the NFAC/CIT(A) confirmed the addition without properly considering the reconciliation and explanations provided by the assessee. The Tribunal found the reconciliation justified and deleted the addition, allowing the assessee's grounds on this issue.

2. Payments made to retired partners amounting to Rs. 11,49,40,775/-:

The assessee reduced Rs. 11,49,40,775/- from its gross receipts, which was paid to retired partners as per the partnership deed. The assessee argued that these payments were diverted by overriding title and should not be considered as income. Alternatively, the assessee claimed that these payments should be allowed as a deduction under Section 37(1) of the Act. The NFAC/CIT(A) and the Assessing Officer did not accept these arguments and added the amount to the assessee's income. The Tribunal, after considering the partnership deed and judicial precedents, concluded that the payments to retired partners were indeed diverted by overriding title and should not be considered as income of the assessee. Consequently, the addition was deleted, and the alternate plea for deduction under Section 37(1) was rendered infructuous.

3. Short credit for tax deducted at source (TDS) amounting to Rs. 18,62,08,841/-:

The assessee claimed a TDS credit of Rs. 82,84,20,418/- in its return of income, but the Assessing Officer restricted the credit to Rs. 64,22,11,577/-, resulting in a short credit of Rs. 18,62,08,841/-. The NFAC/CIT(A) directed the Assessing Officer to verify Form No. 26AS and other challan details and allow the credit accordingly. The Tribunal concurred with this direction and remitted the matter to the Assessing Officer for verification and appropriate action.

4. Levy of interest under Section 234A of the Income-tax Act, 1961:

The NFAC/CIT(A) confirmed the levy of interest under Section 234A, which the assessee contested, arguing that the return of income was filed within the due date. The Tribunal did not specifically address this issue, as it was consequential to the main issues decided.

5. Levy of interest under Section 234C of the Income-tax Act, 1961:

Similar to the issue under Section 234A, the NFAC/CIT(A) confirmed the levy of interest under Section 234C. The assessee argued that the interest should be levied on the returned income. The Tribunal did not specifically address this issue, as it was also consequential to the main issues decided.

Conclusion:

The Tribunal allowed the appeal of the assessee, deleting the additions made on account of the difference in turnover/receipts and payments to retired partners. The issue of short credit for TDS was remitted to the Assessing Officer for verification. The issues related to the levy of interest under Sections 234A and 234C were not specifically adjudicated, as they were consequential in nature. The order was pronounced in the open court on 21 June 2024.

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