Difference of income with Form 26AS due to Percentage Completion Method. Case remanded

ITAT set aside addition and remands issue of difference of income with Form 26AS due to Percentage Completion Method followed by the assessee.

In a recent judgment, ITAT Ahmedabad has set aside the addition and remanded issue of difference of income declared and as appearing in Form 26AS due to Percentage Completion Method followed by the assessee.

ABCAUS Case Law Citation:
4817 (2025) (10) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A), National Faceless Appeal Centre (NFAC) in confirming addition to income under section 69A of the Income Tax Act, 1961 (the Act) based on entries in Form 26AS.

The assessee was a firm engaged in the business of civil construction. The case was selected for scrutiny under CASS. During the course of assessment, the Assessing Officer observed that the gross receipts declared in the Profit & Loss Account did not match the figures of payments reflected in Form 26AS on which TDS was deducted.

The Assessing Officer (AO) observing that the assessee could not offer proper explanation for the difference, made an addition under section 69A of the Act, treating the same as unexplained receipts.

Before the Tribunal, the assessee submitted that the firm follows the Percentage Completion Method and this method was duly disclosed in the Tax Audit Report. It was further submitted that under Percentage Completion Method, income is recognized based on the stage of project completion, not on the basis of actual receipts and the Form 26AS reflects all receipts during the year on which TDS is deducted.

The assessee also submitted that receipts in excess of revenue recognized are recorded as “Advance from Customers” under Other Current Liabilities in the balance sheet, and these advances are recognized as income only when the corresponding work is completed.

It was argued that the unreconciled difference of income declared and payments appearing in Form 26AS was due to accounting and tax timing mismatches, and the same should not have been treated as unexplained income.

The Tribunal observed that it was undisputed fact that the assessee was engaged in civil construction and is following the percentage completion/project completion method. Under Percentage Completion Method, income is recognized in stages based on the percentage of work completed. In contrast, Form 26AS reflects payments received, including advances, on which tax is deducted at source.

The Tribunal further observed that the assessee had explained that receipts in excess of revenue recognized are treated as advances and shown under Other Current Liabilities, which is a valid and appropriate accounting treatment. The Assessing Officer has not pointed out any inconsistency or defect in the assessee’s accounting policy or in the financial statements.

The Tribunal also noted that the assessee had submitted a reconciliation and explained the treatment of advances, segregation of service tax, and timing differences. However, neither the Assessing Officer nor the CIT(A) had made further verifications or issued any adverse findings.

The Tribunal opined that the matter required further factual verification and fresh examination. Accordingly, the impugned order was set aside to the file of the Assessing Officer for de novo adjudication after giving due opportunity to the assessee to explain the reconciliation and produce necessary supporting documents.

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