AMOUNT WRITTEN BACK CAN NOT BE TREATED AS TURNOVER FOR APPLICABILITY OF SECTION 44AB

 

Case Reference:  Rohtak Panipat Tollway Private Limited Vs Deputy Director of Income Tax (Gujarat High Court)

In a significant move, the Gujrat High Court ruled out an order issued by Dy. Director of Income Tax that had declared the income tax return filed by Rohtak Panipat Tollway Private Limited for the Assessment Year 2022-23 as invalid.

The main issue in that assessment order issued by the department that whether a substantial accounting entry, described as “excess provision written back,” constituted “turnover” or “gross receipts” necessitating a mandatory tax audit under Section 44AB of the Income Tax Act, 1961.

the company filed its return declaring a  loss of approximately ₹184.28 crore. Subsequently, the Income Tax department’s Centralized Processing Centre (CPC) issued a notice under Section 139(9), deeming the return defective. The reason cited was the absence of a Tax Audit Report required under Section 44AB, as the company’s financial statements showed ‘other income’ exceeding the ₹10 crore threshold specified in the Act. This ‘other income’ primarily comprised ₹4,710.43 Lakh (approx. ₹471 crore) labelled as “excess provision of unwinding of discount on NHAI premium written back.

The argument by petitioner contended that this amount did not represent revenue from its business operations and therefore did not fall under the definition of “total sales, turnover or gross receipts” that triggers the audit requirement under Section 44AB. It explained that this entry resulted from writing back a liability provision related to premium payments to the National Highways Authority of India (NHAI). This liability ceased to exist following the termination of the company’s Concession Agreement with NHAI. The company further supported its stance by referencing the Guidance Note on Tax Audit issued by the Institute of Chartered Accountants of India (ICAI), which explicitly states that write-backs of provisions no longer required do not form part of gross receipts for Section 44AB purposes

The  department argued that its automated CPC system detected the income figure exceeding the threshold, mandating the audit. It maintained that the company’s reply was considered but found unacceptable, leading to the invalidation order. The department also contended that the ICAI’s Guidance Notes were not legally binding in income tax proceedings. However, the High Court analyzed the nature of the written-back amount, confirming it stemmed from the cessation of a previously recorded liability and was not income generated from operational activities.

While justifying  its decision, the High Court referred to the Supreme Court’s judgment in Commissioner of Income-tax VII, New Delhi vs. Punjab Stainless Steel Industries (2014). This precedent addressed the definition of “turnover,” interpreting it narrowly as proceeds from the core business activity. Significantly, the Supreme Court in that case also kept relying on ICAI Guidance Notes, stating that material published by a recognized professional body after due deliberation carries weight. Applying this rationale, the Gujarat High Court concluded that the write-back amount could not be classified as turnover or gross receipts. Consequently, the requirement for a tax audit under Section 44AB was not triggered, rendering the invalidation order under Section 139(9) unsustainable. The court quashed the order dated December 13, 2023, and directed the authorities to process the company’s original tax return.