Form 26AS Receipts Taxable on Cash Basis If Accrual Method Not Substantiated : ITAT Delhi

The Income Tax Appellate Tribunal, Delhi, has clarified that contractual receipts reflected in Form 26AS with corresponding TDS deductions are taxable in the year of receipt when the assessee fails to substantiate a claim of deferral under the completed contract method of accounting. This ruling reinforces the principle that taxability follows actual disclosure and evidentiary support, not merely accounting policy assertions.

Background & Facts

The Dispute

The dispute centers on whether contractual receipts of Rs. 6,10,22,772 received by Virgo Softech Limited during the Assessment Year 2018-19 should be taxed in that year or deferred to earlier years when services were rendered. The assessee claimed that these receipts were adjustments against Work-in-Progress (WIP) from contracts executed in FY 2011-12 and FY 2012-13, and thus不应 be taxed in AY 2018-19.

Key Facts

• The assessee, Virgo Softech Limited, is an IT services company incorporated on 18.01.1991.
• It filed its return of income for AY 2018-19 on 26.10.2018, declaring a loss of Rs. 79,18,188.
• During AY 2018-19, the assessee received Rs. 6,18,28,408 from various government agencies, on which TDS was deducted under Sections 194C, 194A, and 194H.
• Of this amount, Rs. 6,10,22,772 was from contracts with NSDL E-Governance, Bharat Electronics, DOEACC Centre (Aurangabad), and NIELIT Chandigarh.
• The assessee claimed these receipts pertained to services rendered in FY 2011-12 and FY 2012-13, but were not recognized as revenue due to non-acceptance of services and pending litigation.
• The assessee adjusted these receipts against opening WIP balance of Rs. 35,56,44,358 as of 31.03.2017.
• The assessee submitted audited financial statements for FY 2017-18 showing WIP of Rs. 35,56,44,358 as of 31.03.2017 and nil as of 31.03.2018, indicating write-off without recognizing revenue.
• The assessee did not submit any documents proving revenue recognition in FY 2011-12 or FY 2012-13.
• The audit report for FY 2017-18 certified that the company had no pending litigation impacting its financial position.
• The assessee filed a petition in Delhi High Court in September 2018 challenging the penalty deductions by the clients.
• The amount of Rs. 59,950 from ITI Limited was also not disclosed in the return and was added separately.
• Total addition by the Assessing Officer: Rs. 6,10,82,722 (Rs. 6,10,22,772 + Rs. 59,950).
• The CIT(A) reduced the addition by Rs. 13,08,575 (claimed as already taxed), resulting in net addition of Rs. 5,97,14,197.

Procedural History

• 26.10.2018: Assessee filed return of income for AY 2018-19 declaring loss of Rs. 79,18,188.
• 17.11.2020: Notice under Section 142(1) issued by Assessing Officer seeking explanation for unexplained receipts.
• 08.02.2021: Assessee submitted reply explaining receipts as adjustment against WIP.
• 22.02.2021: Assessment order passed under Section 143(3) r.w.s. 143(3A) and 143(3B) adding Rs. 6,10,82,722.
• 07.01.2025: CIT(A) order confirming addition of Rs. 5,97,14,197 after partial relief.
• 18.02.2025: Appeal filed before ITAT Delhi.
• 05.01.2026: Hearing held before ITAT Delhi.
• 06.04.2026: Judgment pronounced.

The Parties' Positions

Assessee (Virgo Softech Limited):

• Follows completed service contract method of accounting.
• Revenue recognized only upon delivery, acceptance, and assured collection.
• Services rendered in FY 2011-12 and FY 2012-13 were not accepted by clients; hence revenue deferred to WIP.
• Receipts in AY 2018-19 were partial recovery of cost, not new income.
• WIP balance of Rs. 28,06,72,268 was written off as irrecoverable, but deduction not claimed.
• No litigation existed as per audit certification.

Revenue (DCIT):

• Receipts reflected in Form 26AS with TDS deduction are prima facie taxable.
• No evidence submitted to prove revenue was recognized in earlier years.
• Accounting practice of deferring revenue to WIP and writing off without claiming loss is not compliant with Income Tax Act.
• Cash basis applies when accrual basis is not substantiated.
• TDS deduction confirms taxability of receipts in the year of receipt.

Relief Sought

The assessee sought:

• Quashing of the addition of Rs. 5,97,14,197 made by the CIT(A).
• Recognition of the write-off of Rs. 28,06,72,268 as a deductible loss.
• Allowance of expenses incurred on contracts as matching costs.

The Legal Issue

The central question was whether contractual receipts reflected in Form 26AS with TDS deductions are taxable in the year of receipt when the assessee fails to substantiate a claim of revenue recognition under the completed contract method in prior years.

Arguments Presented

For the Appellant/Petitioner

The assessee contended that it follows the completed service contract method of accounting, as permitted under Accounting Standards, wherein revenue is recognized only when services are delivered, accepted, and collectability is assured. It argued that since clients rejected services rendered in FY 2011-12 and FY 2012-13, revenue could not be recognized then. The receipts in AY 2018-19 were merely partial recovery of costs already capitalized in WIP, not new income. The assessee submitted that the write-off of the remaining WIP balance of Rs. 28,06,72,268 should be allowed as a deductible loss, and that the AO failed to appreciate the accounting policy. Reliance was placed on the principle of matching revenue with expenses.

For the Respondent/State

The Revenue argued that the burden of proof lies with the assessee to substantiate its accounting method. No documents were produced to show that revenue was recognized in FY 2011-12 or FY 2012-13. The audit report certified no pending litigation, contradicting the assessee’s claim of dispute. Form 26AS clearly showed receipt of funds with TDS deduction, indicating taxability in AY 2018-19. The Revenue emphasized that the Income Tax Act does not permit opaque accounting practices where income is deferred without disclosure and losses are written off without claiming deduction. The principle of cash basis applies when accrual basis is not proven.

The Court's Analysis

The Tribunal examined the assessee’s accounting policy and evidentiary support. It noted that while the completed contract method is permissible under accounting standards, its application must be supported by contemporaneous documentation. The assessee failed to produce any ledger entries, invoices, or financial statements from FY 2011-12 or FY 2012-13 showing recognition of revenue or capitalization of costs. The audited financial statement for FY 2017-18 showed WIP of Rs. 35,56,44,358 as of 31.03.2017 and nil as of 31.03.2018, indicating write-off without any corresponding revenue recognition or loss claim.

"The system and practice adopted by the appellant assessee is an opaque system bereft of any transparent disclosure."

The Tribunal further observed that the audit report explicitly certified that the company had no pending litigation, directly contradicting the assessee’s claim of ongoing dispute. The time gap between service delivery (2011-13) and receipt (2017-18) suggested final settlement, not unresolved dispute. The Tribunal held that Form 26AS, being a statutory record of receipts with TDS deduction, is a strong indicator of taxability in the year of receipt. When an assessee does not follow accrual basis in prior years and cannot prove revenue recognition, the cash basis becomes applicable.

The Tribunal rejected the argument that the receipts were merely recovery of cost, noting that the assessee had not claimed any corresponding expense deduction for the write-off of WIP. The practice of capitalizing costs in WIP and later writing them off without claiming deduction is not recognized under the Income Tax Act. The Tribunal concluded that the additions made by the AO and confirmed by the CIT(A) were legally sound.

The Verdict

The appeal of the assessee was dismissed. The Tribunal sustained the addition of Rs. 5,97,14,197 as income for AY 2018-19. The Tribunal held that the receipts reflected in Form 26AS with TDS deduction are taxable in the year of receipt when the assessee fails to substantiate revenue recognition in prior years under the completed contract method. No relief was granted for the write-off of Rs. 28,06,72,268 as no claim was made or substantiated.

What This Means For Similar Cases

Accounting Policy Must Be Documented and Consistent

• Practitioners must maintain contemporaneous records proving revenue recognition under completed contract method, including client acceptance letters, project completion certificates, and financial statements from prior years.
• Mere assertion of accounting policy without documentary evidence will not suffice.
• Write-offs of WIP without claiming corresponding deductions will not be allowed.

Form 26AS Is a Strong Indicator of Taxability

• Receipts appearing in Form 26AS with TDS deduction are presumed taxable in the year of receipt unless rebutted with credible evidence of prior accrual.
• Taxpayers cannot defer income indefinitely by claiming disputes without legal documentation.
• The absence of litigation certification in audit reports undermines claims of non-acceptance.

Cash Basis Applies When Accrual Is Not Proven

• If an assessee cannot prove it followed accrual basis in prior years, the tax department may apply cash basis.
• Taxpayers must choose and consistently apply a method; switching methods without justification invites adverse inference.
• Claims of loss due to non-recovery must be formally claimed and substantiated in the return; passive write-offs are not deductible.