The Income Tax Appellate Tribunal, Delhi, has delivered a significant ruling affirming that notional income recognized under Indian Accounting Standards (IND AS) cannot be taxed under the Income Tax Act, 1961, unless it represents actual receipt or accrual. The judgment also reinforces the principle that discrepancies between GST invoices and profit and loss accounts must be resolved through documentary evidence, particularly when corroborated by the Assessing Officer’s own findings.
Background & Facts
The Dispute
The assessee, PNC Rajasthan Highways Pvt. Ltd., is a special purpose vehicle (SPV) engaged in highway construction under the National Highways Development Project (NHDP) Phase IV on a Hybrid Annuity Model. It follows IND AS accounting standards, which require recognition of notional interest on service concession receivables during project construction, even when no cash is received. The Assessing Officer (AO) made two additions in the assessment for AY 2020-21: (i) Rs. 2,18,61,14,060/- as a difference between GST invoice turnover and P&L account turnover, and (ii) Rs. 26,06,30,847/- as notional interest income under Section 56.
Procedural History
- 2020: Assessee filed return declaring a loss of Rs. 24.33 crore.
- 2023: AO issued order making two additions totaling over Rs. 2,446 crore.
- 2025: Ld. CIT(A) deleted both additions after reviewing additional evidence submitted by the assessee, including NHAI confirmation letters and Form 26AS.
- 2026: Revenue appealed to ITAT Delhi, challenging the deletion of both additions.
Relief Sought
The Revenue sought to restore the additions on grounds that (i) turnover discrepancy indicated unaccounted income, and (ii) notional interest, though booked under IND AS, was taxable under Section 56 as income from other sources.
The Legal Issue
The central questions were: (1) Whether Section 56 of the Income Tax Act permits taxation of notional interest recognized under IND AS but not actually received or accrued? (2) Can a discrepancy between GST invoicing and P&L account turnover be treated as unaccounted income when documentary evidence proves the amounts were received and accounted for in prior years?
Arguments Presented
For the Appellant (Revenue)
The Revenue contended that the difference between GST turnover and P&L account turnover indicated unaccounted income, as GST invoices were raised in AY 2020-21. It argued that Section 56 captures all receipts not covered under other heads, including notional interest, and that the assessee failed to prove the invoices related to prior years. Reliance was placed on general principles of income taxation requiring all receipts to be accounted for in the year of receipt.
For the Respondent (Assessee)
The assessee argued that IND AS mandates recognition of notional interest on service concession receivables under the effective interest method, and such recognition is purely accounting in nature. It submitted that the turnover discrepancy arose because GST invoices were raised for billing purposes only, while the actual milestone payments were received and accounted for in FY 2017-18 and 2018-19. Documentary evidence, including NHAI confirmation and Form 26AS, was provided and accepted by the AO in the remand report. The assessee further highlighted that subsequent assessments for AY 2021-22 and 2022-23 had not made similar additions, establishing consistency in treatment.
The Court's Analysis
The Tribunal examined the nature of notional interest under IND AS and its compatibility with the Income Tax Act. It emphasized that Section 56 applies to actual income received, not accounting adjustments made under statutory accounting standards. The Tribunal noted that the assessee had reduced the notional interest in its computation of income, meaning it was never included as taxable income in the first place.
"The appellant has worked out the interest income on Service Concession Receivable... which represents 'notional interest Income' which is recognised in compliance to the IND AS. Since the said notional income is not liable to tax, the appellant has duly reduced/claimed deduction of the said income..."
The Tribunal further held that the AO’s own remand report confirmed the turnover discrepancy pertained to prior years’ payments, thereby validating the assessee’s explanation. The fact that the AO accepted this reconciliation during remand proceedings rendered the Revenue’s challenge untenable. The Tribunal observed that the department’s own conduct in subsequent years - where no similar addition was made - established a consistent administrative practice recognizing the non-taxable nature of such notional adjustments.
The Tribunal rejected the Revenue’s argument that GST invoicing equates to taxable income, noting that GST is a consumption tax on supply, not an income tax. The timing of GST invoicing does not determine the accounting year for income recognition under the mercantile system.
The Verdict
The assessee won. The ITAT Delhi upheld the CIT(A)’s order, holding that notional interest recognized under IND AS cannot be taxed under Section 56 and that turnover discrepancies reconciled by documentary evidence and accepted by the AO cannot be reopened. Both additions were dismissed.
What This Means For Similar Cases
Notional Accounting Adjustments Are Not Taxable
- Practitioners must argue that IND AS adjustments reflecting economic reality, not actual receipt, fall outside the scope of Section 56.
- Where income is reduced in computation due to accounting standards, no addition can be made unless the adjustment is reversed or actual receipt occurs.
- The burden shifts to the Revenue to prove actual accrual or receipt, not merely the existence of an accounting entry.
Documentary Evidence Supersedes GST Invoicing Timing
- GST invoices do not determine income recognition under the mercantile system; actual receipt and accounting in books do.
- If the AO accepts reconciliation via remand report, the Revenue cannot challenge it on appeal without new evidence.
- Assessee must retain and produce contemporaneous documents: bank statements, NHAI confirmations, Form 26AS, and accounting policies.
Consistency in Departmental Treatment Is Binding
- If the department has consistently accepted the same accounting treatment in subsequent years, it cannot later challenge it in earlier years without justification.
- This creates a precedent for taxpayers to rely on administrative consistency as a defense against arbitrary additions.
