Can Income Be Taxed Based on Form 26AS? ITAT Clarifies Tax on Cash Basis Professional Income

Facts and Issues of the Case

In the recent Rajesh Mohan Singh Hajari v. ITO decision by the Income Tax Appellate Tribunal (ITAT), Mumbai, the tribunal addressed a critical issue concerning the basis of taxation for professionals who follow the cash method of accounting. The assessee in this matter, a medical professional, filed his original income tax return for Assessment Year (AY) 2014-15 declaring his professional income on a cash basis, which means he offered income to tax only when payments were actually received in that year. The original return was accepted by the Assessing Officer (AO) during scrutiny under section 143(3) of the Income Tax Act, 1961.

Subsequently, the AO issued a reassessment notice under section 148 after receiving information that the total professional receipts reflected in the taxpayer’s Form 26AS—which captures tax deducted at source (TDS) and information reported by third parties—were higher than the receipts declared in the return. The AO completed reassessment under section 147 read with section 144B, adding ₹2,02,968 to the taxable income on the basis that the difference between 26AS entries and declared income represented unreported accrued professional receipts. Additionally, the AO denied deductions claimed under Chapter VI-A in the computation sheet, though the original assessment had allowed such deductions.

The key legal issues before the ITAT were:

• Whether income shown in 26AS but not actually received in the relevant year can be taxed when the assessee consistently follows cash accounting.
• Whether the reassessment proceedings were valid.
• Whether the Chapter VI-A deductions erroneously omitted from the computation should be restored.

Observations by the ITAT

ITAT’s analysis revolved around the principles governing the method of accounting and the reliance on Form 26AS entries to determine income liability:

a. Cash Basis vs. Accrual Basis:
The tribunal acknowledged that the assessee had consistently followed the cash system of accounting, as declared in the tax return (in ITR-4 Part A-OI) and supported by detailed reconciliation of receipts. Under the cash basis, income is recognized only when payment is actually received. ITAT reiterated that tax liability cannot be based on notional accruals that merely appear in 26AS or Annual Information Return (AIR), which reflect amounts on which TDS was deducted by payers but not actually credited to the assessee’s account during the year. The Tribunal underscored that recognising income without actual receipt would be inconsistent with section 145(1) and accepted accounting principles for cash basis taxpayers.

b. Form 26AS Entries:
The tribunal stressed that entries in Form 26AS, while useful for information purposes, cannot automatically be equated to receipt of income. These entries may capture TDS deducted and reported by deductors, even where the payment triggering TDS hasn’t been made or received in that year. ITAT held that such AIR/26AS figures are not conclusive proof of actual payments, and an addition solely on that basis would be unjustifiable. This view reflects a broader judicial trend that additions cannot rest solely on third-party reporting without corroborative evidence of actual receipt.

c. Reassessment Validity:
The tribunal also upheld the validity of the reassessment proceedings. The Revenue contended that section 143(2) notice was not issued. However, since the assessee did not file a return in response to the section 148 notice (to reopen the case), the requirement to issue notice under section 143(2) did not arise. The Tribunal adopted the position that absence of a return filed in response to the notice under section 148 removes the statutory necessity to issue a 143(2) notice for reassessment.

d. Chapter VI-A Deductions:
ITAT found that while the original assessment had rightly allowed deductions under Chapter VI-A, the reassessment’s computation sheet omitted these deductions erroneously. Since valid proofs were on record and the claim had been accepted earlier, the tribunal directed the AO to grant those deductions in the reassessment as well.

Law Applicable

The legal analysis in this case hinges on the interaction of several provisions and accounting principles under the Income Tax Act:

a. Method of Accounting (Section 145):
Section 145(1) allows the income computation to follow either cash or mercantile system as regularly employed by the taxpayer. Cash basis recognizes income only upon receipt, whereas the mercantile system recognizes income when it accrues, regardless of actual receipt. For professionals, the chosen method must be consistently followed unless changed with justification. In this case, the assessee consistently used the cash system, which the tribunal upheld as valid.

b. Form 26AS and Third-Party Information:
Form 26AS is an information utility showing TDS/TCS and other reportable transactions, including high-value payments. However, judicial precedents affirm that additions cannot be based solely on Form 26AS or AIR data without establishing actual receipt, especially for cash basis taxpayers. The Tribunal’s approach aligns with prior ITAT rulings that third-party information is only a starting point for inquiry and not conclusive evidence of taxable receipts.

c. Reassessment Jurisdiction (Sections 147, 148, 142):
Reassessment under sections 147 and 148 allows the AO to reopen an assessment if income has escaped assessment. When the taxpayer does not respond by filing a return after a section 148 notice, the AO may proceed under section 142(1). In such scenarios, the requirement to serve a 143(2) notice becomes non-applicable, which the tribunal clarified in this case.

d. Chapter VI-A Deductions:
Deduction claims under Chapter VI-A (like section 80C etc.) must be allowed if valid proofs are submitted, and they were rightly admitted in the original assessment. Their omission in reassessment computations was identified as an error warranting correction.

Conclusion by the Tribunal

In conclusion, the ITAT partly allowed the assessee’s appeal by deleting the entire ₹2,02,968 addition made on account of alleged unreported professional receipts, emphasizing that cash basis income cannot be taxed on the basis of 26AS entries alone when those amounts were not actually received in the relevant year. The tribunal also sustained the reassessment proceedings but clarified the validity of the AO’s action in absence of an ITR filed in response to 148 notice and upheld that no separate section 143(2) notice was needed under these circumstances. Additionally, the tribunal directed restoration of the Chapter VI-A deductions that were erroneously denied in the reassessment’s computation sheet.