Adjustment of receipts in WIP & offering net figure for taxation against tax law

Practice of adjustment of receipts in working progress accounts and offering the net figure for taxation is not supported by the Income Tax Act

In a recent judgment, ITAT had held that practice of adjustment of receipts in working progress accounts and offering the net figure for taxation is not supported by the method of accounting and disclosure of income/receipts currently prescribed by the Income Tax Act.

ABCAUS Case Law Citation:
5090 (2026) (04) abacus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in partly confirming the addition on account of contact receipts reflecting in Form 26AS but not offered to tax.

The Appellant was a company which filed its return of income declaring a loss. Subsequent to processing under section 143(1), the return of Income was selected for scrutiny assessment to verify Investments/Advances/Loans, Business Loss and Contract Receipt or Fees. 

The Assessing Officer (AO) made an addition on account of contract receipts available and appearing in the 26AS statement on which TDS was deducted u/s 194C of the Act but he said receipts had not been disclosed and offered for taxes in the Return of Income. 

Before the Tribunal, the assessee submitted that with respect to the receipts in question, on completion of the service contract, the customers did not accept the services delivered by raising certain concerns, thus there was no assurance as to collection. Therefore, the Appellant did not recognize the cost and revenue of these contracts in profit and loss account to the extent of dispute and continued to treat it as WIP in the Balance Sheet.

The assessee explained its method of accounting, and submitted that the company was following completed service contract method wherein the revenue from services are recognized in profit and loss account after satisfaction of all the 3 conditions namely (1) the services has been rendered, (2) customer has accepted the same and (3) there is a reasonable certainty regarding the collection.

It was submitted that until revenue is recognized in profit and loss account, the cost incurred is capitalized in balance sheet as work in progress (‘WIP’) in Inventory under current asset and not routed through Profit and Loss Account.

The Tribunal observed that there was no dispute to the receipts and deduction of TDS u/s 194C, the only question was as to year of its taxability. The Tribunal further observed that Income Tax Act provides taxation of receipts on the basis of method of accounting deployed by the taxpayer. Thus, the receipts can be taxed on ‘cash basis’ in the year of their actual receipts or on ‘accrual basis’ in the year in which income is booked into the books irrespective of the actual receipt by the assessee.  The assessee is at liberty to apply to adopt either of the two basic options of offering its receipts to taxes.

The Tribunal observed that the typical method of accounting indicated by the assessee showed that it adjusted its receipts and losses and shortages in the receipts in its working progress accounts and offers the net figure for taxation.  This practice is not supported by the method of accounting and disclosure of income/receipts currently prescribed by the Income Tax Act.  The system and practice adopted by the appellant assessee was an opaque system bereft of any transparent disclosure. 

The Tribunal opined that non-disclosure of the impugned receipts in relevant AYs confirmed that the company was not following ‘accrual basis’ of accounting and the disclosure of the same through 26AS added credence that the assessee was following ‘cash’ or ‘receipt’ basis of accounting.  Therefore, the argument that receipts shown in Form 26AS were not income of the assessee for the year consideration was not acceptable.

The Tribunal opined that there was no force in the argument that receipts shown in Form 26AS were not income of the assessee for the year consideration.  Accordingly, Accordingly, the Tribunal held that addition made by the AO and its confirmation by the CIT(A) was based upon correct understanding and interpretation of the facts of the case and there was no need to interfere with the appellate order. 

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