Advances from customers cannot be treated as sundry creditors in Limited scrutiny: ITAT

The assessee is a partnership firm that is doing the business of construction work of residential complexes, service & renting of immovable property, and consultancy services. It was the submission that the return filed by the assessee for the assessment year 2015-2016 was the subject matter of a limited scrutiny as the same was selected under CASS. The limited scrutiny was specifically for the purpose as mentioned below:-

“i) High turnover reported in Service Tax Return compared to ITR;

ii) Large increase in sundry creditors with respect to turnover as compared to preceding year;

iii) Higher turnover reported in Service Tax Return compared to ITR; and

iv) the assessee has deposited large amount of cash in savings bank account.”

The AO completed the assessment u/s.143(3) of the Income Tax Act on 04.07.2017 after considering all the evidences submitted by the assessee as also the written submission and accepted the return of income.

Further, the assessment order passed u/s 143(3) of the Act was the subject matter of a revision u/s.263 of the Act by the ld. Pr.CIT wherein the Pr.CIT was of the view that the AO had not verified the sundry creditors. It was the submission that the assessee does not have any sundry creditors in its balance sheet.

It was the submission that the assessee did have under the current liabilities and provisions “advanced from customers” to the tune of Rs. 4,89,01,363.80. It was the submission that this could not be considered as sundry creditors insofar as the assessee was following the project completion method and the said advance for the purpose of projects received by the assessee from the customers and these have specifically been converted into profit and offered for taxation as and when the projects were completed. These were not creditors for cash received by the assessee. These were also not the loan creditors.

ITAT Order:

6. At the outset, a perusal of the balance sheet clearly shows that there is nothing in the balance sheet of the assessee under the term “sundry creditors”. We are alive to the fact that this is a limited scrutiny assessment, which is done under CASS. In the limited scrutiny direction, the direction was to verify the large increase in the sundry creditors with respect to the turnover as compared to the preceding year. The hands of the AO are, at the outset, tied when the terms sundry creditors were used in the limited scrutiny. The interpretation of the “advance from the customers” as “sundry creditors” cannot be done when the limited scrutiny direction was given. When an assessment is under limited scrutiny, the powers of the Commissioner u/s.263 of the Act, also get curtailed to the issues directed in the limited scrutiny. It is not open to the Pr.CIT to bring interpretation in respect of other issues within the nomenclature of the terms used in the limited scrutiny. If the limited scrutiny is for “sundry creditors”, the powers of the Pr.CIT u/s.263 of the Act is limited to the “sundry creditors”. The ld. Pr.CIT is in total error in assuming that the “advance from customers” can be treated as “sundry creditors”, especially when the “sundry creditors” are not there in the balance sheet. In any case, the “advances from customers” have been absorbed and offered as income in the subsequent years when the respective projects relating to the advance received from the customers, have been completed. It is further noticed that the ld. Pr.CIT has alleged that the AO has failed to make necessary verification and inquiry before passing the assessment order and he has failed to consider the issue of sundry creditors in proper perspective. In fact, to make this allegation against the AO when the assessment itself has a limited scrutiny and to say that no action has been taken against the AO for violation of limited scrutiny direction is farfetched. The ld. Pr.CIT goes on to hold that the assessee was not confronted on the issue to reach a logical conclusion. We failed to understand what is the logical conclusion that the Pr.CIT desired the AO to reach. Just because a returned income has been accepted, does not postulate it an error in the order of the ld. AO. Non-application of correct law, admittedly, could give powers for revision to be activated but the AO having done what was expected of him under a limited scrutiny, just because no addition has been made, it cannot be said that there was failure on the part of the AO. This being so, we are of the view the fact clearly shows that the order u/s.263 of the Act is unsustainable and consequently the same stands quashed.