2024 (9) TMI 635 - AT - Income Tax

Treatment of foreign contribution income - difference in actual FCRA received by the assessee and the income declared by the assessee in its return of income - HELD THAT - Assessee has been following Accrual basis of accounting, the Assessee recognized an income for AY 2021-22 and reported the said income in Serial No. B(ii) of Schedule VC and carried forward the liability as Unspent Grant for INR 1,04,99.998/- in the Balance Sheet under Note D-Other Current Liabilities which is recognized as Income in the subsequent period to the extent of expenditure incurred. Assessee has produced detailed working on recognition of income and Unspent Grant for AY 2021-22 and AY 2022-23 to prove that the Unspent grant for AY 2021-22 was recognized as income in AY 2022-23 as against actual receipt of Rs. 2,96,57,598/-, an income of Rs. 3,76,29,175/- was offered to tax in AY 2022-23, which can be corroborated from Annexure A produced. Considering the fact that the Unspent Grant income has been offered to tax in the subsequent year i.e. AY 2022-23, we find no reason to make an addition at the hands of the Assessee in the year under consideration. Accordingly, the subject addition made by the AO is hereby deleted. Appeal filed by the Assessee is allowed.

Summary

Issues:
1. Discrepancy in treatment of foreign contribution income by the assessee.
2. Application of accounting principles in recognizing income.
3. Validity of addition made by the Assessing Officer.

Analysis:
1. The appeal was filed against the order of the National Faceless Appeal Centre for Assessment Year 2021-22, regarding the treatment of foreign contribution income by the assessee. The appellant contended that the Commissioner of Income Tax (Appeals) erred in considering the income based on the cash basis method instead of the accrual basis method, resulting in an increase of income by INR 69,84,169. The appellant also challenged the addition made in the intimation order and rectification order under different accounting principles. The appellant argued that the income should be recognized systematically over the grant period to match related costs.

2. The Commissioner of Income Tax (Appeals) dismissed the appeal, stating that the appellant failed to provide sufficient evidence to support the treatment of funds received through Foreign Contribution Regulation Act (FCRA) as revenue receipts. The Commissioner noted that the appellant did not file a balance sheet or profit & loss account along with the return of income, and there was no proof that unspent FCRA receipts were carried forward or utilized in the subsequent year. The Commissioner concluded that the FCRA receipts were for the year under consideration, and the unspent amount was not included in the appellant's income.

3. The Tribunal heard both parties and observed that the assessee followed the accrual basis of accounting. The assessee recognized income for the year and carried forward the unspent grant as a liability in the balance sheet. Detailed workings were presented to show that the unspent grant income for the previous year was recognized in the subsequent year. The Tribunal found no justification for the addition made by the Assessing Officer and deleted the amount of INR 69,84,169 from the appellant's income. The appeal filed by the assessee was allowed, and the order was pronounced on 29th August 2024.