2024 (12) TMI 500 - AT - Income Tax

Determining the tax rate applicable under the Finance Act 2017 - interbranch transfers should be included in the turnover or not? - HELD THAT - The concessional tax rate of 25% was introduced under the Finance Act 2017 applicable to domestic companies for FY 2017-18 (AY 2018-19). The relevant provision states that a domestic company is eligible for the concessional tax rate if its turnover or gross receipts for the base year FY 2015-16 does not exceed Rs. 50 crores. In the present case the turnover of the assessee as per the audited financial statements for FY 2015-16 was reported at Rs. 51, 18, 86, 268/-. This turnover figure included Rs. 1, 41, 39, 000/- representing inter-branch transfers. Excluding inter-branch transfers of Rs. 1, 41, 39, 000/- the assessee s revised turnover for FY 2015-16 is Rs. 49, 77, 47, 420/- which is below the threshold of Rs. 50 crores. Therefore the assessee qualifies for the concessional tax rate of 25% under the Finance Act 2017. The application of the higher tax rate of 30% by the lower authorities was based on an erroneous inclusion of inter-branch transfers in turnover which does not align with statutory provisions accounting principles or judicial guidance. AO and CIT(A) did not adequately consider the assessee s submissions and evidence. CIT(A) dismissed the assessee s contentions without proper examination relying solely on the figures in the audited financial statements. The above findings the orders of the AO and CIT(A) are set aside. AO is directed to - Exclude inter-branch transfers of Rs. 1, 41, 39, 000/- from the turnover for FY 2015-16 after verifying the reconciliation statements CA certificate and other supporting evidence provided by the assessee. - Apply the concessional tax rate of 25% for A.Y. 2018-19 as per the Finance Act 2017 since the assessee s turnover is below Rs. 50 crores. - Recalculate the tax liability for A.Y. 2018-19 based on the corrected turnover and tax rate. - Provide the assessee with a reasonable opportunity to present any additional evidence or explanations during the process. Appeal of the assessee is allowed.

Summary

Issues:
- Whether inter-branch transfers should be included in turnover for tax computation purposes under the Finance Act, 2017.
- Whether the assessee qualifies for the concessional tax rate of 25% under the Finance Act, 2017 based on turnover calculations.

Analysis:
The case involved an appeal against an order passed by the Commissioner of Income Tax (Appeals) [CIT(A)] under Section 250 of the Income Tax Act, 1961, upholding a rectification order passed by the Assistant Commissioner of Income Tax for the Assessment Year 2018-19. The primary contention was regarding the treatment of inter-branch transfers in the turnover calculation for determining the tax rate applicable under the Finance Act, 2017.

The assessee, engaged in electrical contracting and trading, filed for rectification under Section 154 due to an error in tax liability computation. The dispute arose when the CIT(A) upheld the inclusion of inter-branch transfers in the turnover, leading to a higher tax rate application. The assessee argued that inter-branch transfers should be excluded from turnover calculation as they are not actual sales but internal movements of goods.

During the appeal hearing, it was revealed that the inter-branch transfers were mistakenly included in the total sales and purchases figures. The Authorized Representative (AR) provided details of sales and purchases along with a certificate from the Chartered Accountant to support the exclusion of inter-branch transfers from turnover. The Departmental Representative (DR) maintained that inter-branch transfers should be considered part of turnover.

The Tribunal analyzed the concept of turnover, noting that inter-branch transfers, being internal movements within the same entity, are typically excluded from turnover calculations. The Tribunal emphasized that revenue from external customers constitutes turnover, as per accounting principles. It was also highlighted that while VAT includes branch transfers in aggregate turnover, this does not automatically apply to income tax computations.

Based on the evidence presented by the assessee and the statutory provisions, the Tribunal concluded that inter-branch transfers should not be included in turnover for income tax purposes. Consequently, the assessee qualified for the concessional tax rate of 25% under the Finance Act, 2017, as its revised turnover fell below the threshold. The Tribunal set aside the lower authorities' orders and directed the AO to recalculate the tax liability based on the corrected turnover and tax rate, providing the assessee with an opportunity to present additional evidence if needed.

In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing the correct interpretation of turnover and the application of the concessional tax rate in accordance with statutory provisions and accounting principles.