2025 (10) TMI 31 - AT - Income Tax

Adhoc 10% turnover addition deleted where reconciliation and documents supported books; sale-promotion and section 14A disallowances overturned

Aarone Developers Private Limited Versus DCIT Circle – 1 (1) New Delhi

ITAT DELHI - AT deleted the adhoc 10% turnover addition, finding the AO and CIT(A) erred in making an unexplained estimate despite the assessee filing ... Addition of 10% of Turnover as per Service Tax Turnover as per books on estimation basis - whether CIT (A) & AO erred on the facts and in law in making an adhoc addition on his whims, fancies, assumptions, presumptions without assigning any reasons, without pointing out any error, flaw, mistake or anomaly either in the books of accounts maintained in the normal course of business or documents/ evidences/ information furnished during the course of assessment - HELD THAT:- As decided in own case [2024 (12) TMI 1480 - ITAT DELHI] turnover declared on the Service Tax Act which is based on receipt of advances not based on completion of project. The determination of gross revenue is different from the actual turnover. On the basis of reconciliation, there will be difference between turnover declared for the purpose of service tax and the return of income. From the records submitted before us shows that assessee has submitted relevant reconciliation statement before the lower authorities along with relevant documents. The lower authorities failed to consider the same. Therefore, we do not see any reason to sustain the additions made by the AO. Accordingly, the estimated profit on the undisclosed turnover is deleted. AO and CIT(A) in their orders have not disregarded the conciliation submitted by the assessee. No additional documents were sought by the authorities. They have not rejected the books of accounts of the assessee. As decided in NATIONAL INDUSTRIAL CORPORATION LTD. [2002 (8) TMI 93 - DELHI HIGH COURT]there is no material on record to show that any part of the sale promotion expenditure was incurred for non-business. The Tribunal has not given any basis whatsoever while confirming the disallowance - Decided in favour of asseseee. Disallowance u/s 14A - According to AO the assessee has not claimed the disallowance u/s 14A of the Act in the original return of income but disallowance made in the return of income filed in the response of the notice u/s 148 - HELD THAT:- The assessee company has not earned any exempt income during the year under consideration, during the course of hearing the ld. AR has stated that assessee have not earned any Dividend Income during the Financial Year 2014-15. The Ld. AR has also filed the certificate in this regard in which stated that assessee has not earned any exempt income during the year under consideration, hence the disallowance made by the AO and confirmed by the Ld. CIT(A) is deleted. ISSUES PRESENTED AND CONSIDERED 1. Whether an assessing officer may make an estimated addition to income on the basis of a variance between turnover declared for Service Tax (point-of-taxation/advances basis) and turnover as per audited books (percentage-of-completion/GAAP basis) when the assessee furnishes a reconciliation and supporting documents. 2. Whether advances included in turnover for Service Tax purposes and expenses subject to reverse charge can be treated as undisclosed business receipts for income-tax purposes where turnover under Income-tax is determined by GAAP/POCM. 3. Whether an assessing officer/AO's statement that supporting evidence was not filed can justify rejection of the reconciliation when records show reconciliation and supporting documents were filed through the IT portal. 4. Whether an estimated addition computed as 10% of the variance (undisclosed turnover) without pinpointing unrecorded transactions or demonstrating flaws in books of account is sustainable. 5. Whether disallowance under section 14A is sustainable where the assessee claims no exempt income in the year under consideration. ISSUE-WISE DETAILED ANALYSIS Issue 1: Legality of estimated addition based on variance between Service Tax turnover and book turnover where reconciliation and documents are furnished Legal framework: Assessment under section 147 read with applicable assessment provisions permits reopening where there is information suggesting escapement of income. Reconciliation between different statutory bases of turnover (service tax point-of-taxation rules v. GAAP/AS-7/POCM) is relevant to determine whether the variance reflects unrecorded receipts or merely different recognition rules. Precedent treatment: The Tribunal referred to the approach in National Industrial Corporation (as applied by the authorities) criticizing adhoc disallowances lacking basis; the Tribunal followed the proposition that additions must be founded on material showing transactions not recorded or books rejected on cogent reasons. Interpretation and reasoning: The Court examined documentary record (IT Portal acknowledgements, reconciliation statement, details of fresh advances, agreements, PCOM calculations, reverse-charge expense details) and found the variance explained by differing recognition mechanisms: Service Tax includes advances (point-of-taxation), whereas Income-tax/accounting recognizes revenue under POCM subject to specified thresholds. The assessing officer's basis for reopening was information of variance from DG GSTI; however, during assessment the assessee furnished a detailed reconciliation and supporting documents which the AO either ignored or incorrectly claimed were not filed. The Tribunal held that where reconciliation is supported by documents and no anomaly or error is shown in books, the addition is unsustainable. Ratio vs. Obiter: Ratio - An assessing officer cannot sustain an addition based on a mere difference of computation under Service Tax and Income-tax when the assessee furnishes a reconciled explanation supported by documents and when the variance arises from differing legal/accounting recognition principles. Obiter - Observations on the general applicability of point-of-taxation rules vis-à-vis POCM in other factual permutations. Conclusions: The estimated addition based on the GST/Service Tax variance was deleted because the assessee had filed a reconciliatory statement with supporting documents explaining the variance as arising from different recognition rules, and the AO failed to point to transactions not recorded in books or flaws in accounts. Issue 2: Treatment of advances and reverse-charge expenses as business income for Income-tax where Service Tax includes them Legal framework: Recognition of revenue for builders/developers under Accounting Standard-7 and Section 145(2) requires use of percentage-of-completion method (POCM) subject to prescribed conditions; Service Tax/Point-of-Taxation Rules treat receipts/advances differently for levy purposes. Expenses subject to reverse charge may be included in Service Tax turnover calculations under service-tax notifications. Precedent treatment: The Tribunal relied on accounting principles and the distinction between tax bases rather than past precedents that conflated Service Tax turnover with income-tax turnover; reference to the High Court's criticism of ad hoc additions underscored requirement for reasons. Interpretation and reasoning: The Tribunal accepted that advances received are liabilities under GAAP and become revenue only upon satisfaction of POCM thresholds; therefore advances included in Service Tax turnover do not automatically constitute taxable business receipts for Income-tax. Similarly, expenses which are the subject of reverse-charge service tax may be treated as turnover under Service Tax computation but are expenses under GAAP and not income. The difference in computation mechanism explains the variance identified by DG GSTI and does not, by itself, indicate undisclosed income. Ratio vs. Obiter: Ratio - Advances and reverse-charge expense inclusions under Service Tax cannot be treated as business income for Income-tax merely because Service Tax treats them as part of turnover; proper recognition depends on accounting/Income-tax rules (POCM). Obiter - Detailed discussion of the specific POCM thresholds and their application to the facts. Conclusions: The additions treating such amounts as undisclosed business receipts are unwarranted where the assessee demonstrates that GAAP/POCM recognition results in their exclusion from turnover for Income-tax; accordingly the addition was deleted. Issue 3: Requirement of AO to verify filing of supporting documents before rejecting reconciliation Legal framework: Assessment requires consideration of material on record; if assessee files supporting documents, AO must address deficiencies or reject books/accounts on recorded reasons. The burden on AO to point to omissions or falsehoods in books if relying on estimation. Precedent treatment: The Tribunal applied principle that mere assertion by AO that evidence is not filed is insufficient where records (IT Portal entries and acknowledgements) demonstrate filing; authorities must examine and, if unsatisfied, communicate specific insufficiencies or ask for additional material. Interpretation and reasoning: The Tribunal reviewed IT portal acknowledgements and paper-book pagination showing reconciliation and documentary support were lodged with AO and CIT(A). The AO's contrary finding was therefore incorrect. Because materials were on record and not discredited, the AO could not make an adhoc addition without confronting the supporting material. Ratio vs. Obiter: Ratio - An assessing officer cannot disregard reconciliatory evidence actually filed and make an addition on the premise that no supporting documents were filed; the record must be considered and reasons given for rejecting filed material. Obiter - Procedural admonition that electronic filing receipts constitute prima facie proof of submission. Conclusions: The AO's rejection of reconciliation for lack of supporting documents was unsustainable; the Tribunal held the reconciliation and documents had been filed and ought to have been considered. Issue 4: Validity of making a blanket 10% estimated profit addition absent pinpointing of unrecorded transactions or rejection of books Legal framework: Estimation additions must be based on material and justification; the tax authorities must either point to specific unrecorded transactions or validly reject books after recording reasons. Ad hoc percentages without foundation are vulnerable to judicial review. Precedent treatment: Reliance was placed on principles disfavoring arbitrary additions (as illustrated by the Tribunal's reference to the High Court's disapproval of ad hoc disallowances) and on intra-tribunal consistency from a coordinate bench decision in a related assessment year where similar estimation was set aside. Interpretation and reasoning: The AO applied a 10% estimated profit on the alleged undisclosed turnover without demonstrating that the books were unreliable, that particular transactions were omitted, or that 10% reflected actual profit margin evidenced by the business. Given the reconciliatory material and absence of attacks on books, the estimation lacked basis. Ratio vs. Obiter: Ratio - An estimation addition based on a percentage of a claimed variance is not sustainable if authorities have not pointed to unrecorded receipts or validly discredited the books; such additions must be supported by reasons and material. Obiter - Commentary that estimation may be permissible where books are rejected or specific irregularities are identified. Conclusions: The Tribunal deleted the 10% estimated addition as arbitrary and unsupported by record or reasoning. Issue 5: Disallowance under section 14A where no exempt income is earned Legal framework: Section 14A disallows expenditure incurred in relation to exempt income. If no exempt income is earned in the relevant year, s.14A disallowance is not warranted; the AO must record satisfaction and demonstrate nexus between expenditure and exempt income. Precedent treatment: The Tribunal applied settled principle that disallowance under s.14A requires existence of exempt income and that a self-serving disallowance in absence of exempt income is incorrect. Interpretation and reasoning: The assessee filed a certificate and represented that no exempt income (dividend) was earned in the year; on the basis of the record and submissions the Tribunal found no exempt income and therefore no occasion for s.14A disallowance. The Tribunal also noted absence of any AO-recorded satisfaction or pinpointing of expenditure connected to exempt income. Ratio vs. Obiter: Ratio - Section 14A disallowance is unsustainable where there is no exempt income in the year; any disallowance must be predicated on existence of exempt income and specific connection to expenditure. Obiter - Remarks on procedural requirement to record satisfaction before invoking s.14A. Conclusions: The Tribunal deleted the s.14A disallowance as the assessee had not earned exempt income during the year and the AO had not demonstrated nexus or recorded requisite satisfaction.