2025 (7) TMI 1577 - AT - Income Tax

ITAT directs AO to verify tax treatment of customer advances and interest under Sections 234B and 234C

The ITAT Mumbai remanded the issue of addition of advances from customers to the AO for factual verification, directing examination of whether the ... Addition towards advance received from customers outstanding as on 31 March 2021 - whether advance received by the assessee from various customers has been brought to tax as per the method of accounting followed by the assessee for revenue recognition? - lower authorities have made an addition on account of the receipt of money received by the assessee under the head “Advance from customers” were advances were received from major parties viz. NPCIL and from other customers - assessee’s contention was that these advances were received in a normal course of business and were offered to tax in subsequent years as and when the project is completed HELD THAT:- It is evident that there has been no such addition made in the earlier years and in the subsequent years as contended by the assessee and further it is evident that the lower authorities have not looked into the terms and conditions of the contractual obligation entered into by the assessee with the NPCIL from whom the assessee has received an advance of Rs. 58.49 crores. As the same requires factual verification with regard to the said transaction and also the fact that the advance received from other customers which aggregated to Rs. 84.82 crores, the assessee has offered Rs. 77.30 crores, we deem it fit to remand these issues back to the file of AO for verifying whether or not the assessee has offered the same to tax in the subsequent years as and when the project has been completed. We also direct the assessee to provide complete details along with documentary evidence to establish that the assessee has offered the same to tax on completion of the projects and to also consider the terms of agreement with NPCIL. While considering the same, AO is also directed to take into consideration the method of accounting followed by the assessee in earlier and subsequent years for revenue recognition and to decide the issue in hand in accordance with the same. Ground no. 1 to 8 raised by the assessee are hereby allowed for statistical purpose. Interest levied for default in furnishing return of income, default in payment of advance tax and for deferment of advance tax - assessee contends that the return of income has been filed on time and there has been no delay in the same - As this requires factual verification, we deem it fit to remand this issue also back to the file of the AO and the other two grounds on 234B and 234C being consequential in nature requires no separate adjudication. ISSUES: Whether the addition of advances received from customers outstanding as on 31 March 2021 can be made as income under section 28 of the Income Tax Act, 1961.Whether advances received in earlier years and outstanding as on 31 March 2021 can be added to income in the current assessment year.Whether recognizing advances as income is proper only upon fulfillment of corresponding contractual obligations, including delivery of goods and transfer of risk, title, control, and economic ownership.Whether addition on advances without allowing corresponding expenses is justified.Whether double taxation arises from taxing advances both in the year of receipt and in subsequent years when invoiced and recognized as income.Whether interest under sections 234A, 234B, and 234C of the Income Tax Act has been correctly levied, particularly regarding excess interest and applicability on returned income. RULINGS / HOLDINGS: The addition of Rs. 143.32 crores towards advances received from customers was not upheld without factual verification; the court held that 'the ld. AO is directed to verify whether or not the assessee has offered the same to tax in the subsequent years as and when the project has been completed.'The addition of advances received in earlier years and outstanding as on 31 March 2021 cannot be made without considering revenue recognition in subsequent years; the court noted that 'the lower authorities have not looked into the terms and conditions of the contractual obligation.'Revenue recognition is appropriate only upon fulfillment of contractual obligations, including transfer of risk and ownership; the court emphasized that 'the method of accounting followed by the assessee for revenue recognition' must be considered.Addition on advances made on a gross basis without allowing corresponding expenses was found to be erroneous; the court allowed grounds challenging this treatment for statistical purposes.Double taxation arises if advances are taxed both in the year of receipt and in subsequent years; the court directed verification to avoid 'double taxation of such sum.'The levy of interest under sections 234A, 234B, and 234C requires factual verification; the court remanded the issue stating that 'the return of income has been filed on time' and that interest under section 234C 'can be charged only on the returned income.' RATIONALE: The court applied the provisions of section 28 of the Income Tax Act, 1961 relating to income chargeable under the head 'Profits and gains of business or profession,' focusing on the timing of revenue recognition consistent with the method of accounting followed by the assessee.The principle that advances cannot be recognized as income until contractual obligations are fulfilled, including transfer of risk, title, and control, was emphasized, aligning with established accounting and tax jurisprudence on revenue recognition.The court noted the necessity of examining contractual terms and documentary evidence to substantiate claims regarding advances and revenue recognition, indicating a fact-intensive inquiry rather than a purely legal determination.The decision reflects adherence to the doctrine that income should not be taxed twice, highlighting the importance of avoiding double taxation through proper accounting and assessment procedures.The remand for factual verification on interest levies under sections 234A, 234B, and 234C indicates a procedural approach to ensure correctness in applying provisions related to defaults in filing returns and payment of advance tax.No dissent or doctrinal shift was indicated; the judgment primarily reinforces existing principles concerning revenue recognition and taxability of advances under the Income Tax Act.