2017 (12) TMI 1481 - HC - Income Tax

Addition of difference in receipt as per receipts of the assessee mentioned in 26AS and receipts shown by the assessee to the net profit ratio @1.96% - Held that - The assessee had disclosed a total turnover of ₹ 9,92,47,244/- in the return of income. The differential amount was not shown in the return of income on the ground that such amount was received from the Municipal Corporation in the subsequent financial year. It is an admitted position that such income had accrued to the assessee in the financial year 2010-11 and hence, all the authorities below, including the Tribunal, held that such income would be the income of the assessee in financial year 2010-11 relatable to assessment year 2011-12. However, the differential amount which was shown by the assessee in the subsequent year was in fact receipt and not the profit of the assessee. The entire amount of ₹ 11,63,87,407/- would, therefore, be turnover of the assessee. Accordingly, the Tribunal was wholly justified in computing the profit at the rate of 1.96% of the differential amount and holding the same to be the income of the assessee. Even according to the revenue in the memorandum of appeal, it has been stated that the income embedded in the receipts could not be shifted to the next financial year. Therefore, it is only the income embedded in the receipts that was required to be taxed and not the entire amount of the receipts.

Summary

Issues:
Challenge to the order of the Income Tax Appellate Tribunal regarding the addition of difference in receipt amount, application of mercantile system of accounting, determination of taxable income, and justification of the Tribunal's decision.

Analysis:
The appellant, challenging the Income Tax Appellate Tribunal's order, questioned the justification of restricting the addition of a significant difference in receipt amount despite the assessee following the mercantile system of accounting. The dispute arose from the difference in receipts reflected in 26AS and the return of income, leading to an addition of ?1,71,40,163 by the Assessing Officer. The assessee declared a gross profit of 13.50% and net profit of 1.96% on the total turnover, while the actual receipts were higher. The Assessing Officer contended that the income embedded in the receipts could not be shifted to the next financial year, resulting in the addition to the total income.

For the assessment year 2011-12, the appellant argued that the Tribunal's decision to restrict the addition to 1.96% of the differential amount was not justified. The Tribunal, considering the mercantile system of accounting followed by the assessee, held that income received or accrued in the financial year 2010-11 must be included in the relevant financial year itself. However, the Tribunal limited the addition to ?2,77,754, equivalent to the 1.96% net profit ratio declared by the assessee.

The High Court analyzed the facts and confirmed that the income accrued to the assessee in the financial year 2010-11, even though the amount was received in the subsequent financial year. The Court agreed with the Tribunal's decision to compute the profit at 1.96% of the differential amount, considering it as the income of the assessee. The Court emphasized that only the income embedded in the receipts needed to be taxed, not the entire amount of receipts. Consequently, the Court found no legal infirmity in the Tribunal's order and dismissed the appeal summarily.

In conclusion, the High Court upheld the Tribunal's decision based on the application of the mercantile system of accounting, the determination of taxable income, and the justification for restricting the addition of the difference in receipt amount. The Court ruled that only the income embedded in the receipts should be taxed, affirming the Tribunal's computation of profit and income in the case.