2014 (2) TMI 240 - AT - Income Tax

Addition to the income by way of brokerage accrual of income - Held that - The TDS certificates would not be a clinching material to determine the actual income assessable in the hands of the assessee - the CIT(A) while accepting the claims of the assessee with regard to the returned incomes for the years under appeal, also held at the same time that the assessee is eligible to claim credit for TDS only in respect of income offered for tax in the relevant year. In that process, the CIT(A) also upheld the view taken by the Assessing Officer that the assessee cannot claim credit for the TDS unless and until the income in relation to which TDS, was made was offered to tax in the relevant year - the assessee is found to be a del cre dere agent, the role of the assessee, as observed by the CIT(A) in the order, does not cease simply on booking the order for the seller or the delivery of goods to the purchaser, but extends till the time the sale proceeds are realized by the seller from the buyer - Delcredere agent, in which actual receipt of the brokerage would depend on the actual realization of the sale proceeds by the seller from the purchaser, as claimed by the assessee and accepted by the CIT(A), assessee is justified in following cash system of accounting, finding it to be appropriate for its business - When the assessee claims to be following that method of accounting consistently, and it has been recognized by the statute, there is no justification for the Assessing Officer to disturb the book results disclosed by the assessee there was no infirmity in the order of the CIT(A) Decided against Revenue. Disallowance of insurance charges u/s 37(1) of the Act Held that - There is no justification in contesting the orders of the Commissioners (Appeal) on this issue for the assessment years 2002-03 and 2004-05, as they simply followed the reasoning given in the appellate order of the CIT(A) for the assessment year 2003-04 it was correctly observed by the CIT(A) in the order for assessment year 2003-04, which has been adopted for the other two years, assessee, being a del cre dere agent, is responsible for payment of sale amounts to the sellers, which in turn depends on the safe delivery of goods to the buyers - it may also be in the nature of an incentive provided by the assessee to the buyers and sellers there was no infirmity in the orders of the CIT(A) an he was justified in holding that the insurance expenses claimed by the assessee are allowable under S.37(1) of the Act Decided against Revenue.

Summary

Issues Involved:
1. Addition to the income by way of brokerage disclosed by the assessee.
2. Disallowance of insurance charges.

Detailed Analysis:

1. Addition to the Income by Way of Brokerage Disclosed by the Assessee:

The primary issue in these appeals relates to the addition to the income by way of brokerage disclosed by the assessee. The assessee firm, engaged in the business of agency of oil business, follows the cash system of accounting. The Assessing Officer (AO) rejected this method, arguing that the brokerage should be assessed on an accrual basis as per the TDS certificates, leading to an addition of Rs.18,79,778 to the income. The AO provided several reasons, including the provisions of S.199 of the Act, the completion of the brokerage role upon delivery of goods, and the non-verifiability of brokerage receipts in the books of accounts.

Aggrieved, the assessee appealed to the CIT(A), contending that the cash system of accounting has been consistently followed since its inception, and no defects were pointed out by the AO. The CIT(A) upheld the cash system of accounting as an acceptable method under S.145(1) of the Act, stating that the brokerage income offered for tax on a cash basis is liable for tax, and the assessee is eligible to claim TDS credit only for the income offered in that year. The CIT(A) emphasized that the cash system reflects the true state of affairs and that the assessee, being a del cre dere agent, is responsible for payments to sellers, thus justifying the cash system of accounting.

The Revenue's appeal against this decision was dismissed by the Tribunal, which upheld the CIT(A)'s findings. The Tribunal noted that the assessee, being a del cre dere agent, is justified in following the cash system of accounting, and the AO's insistence on the accrual basis was unwarranted. The Tribunal agreed that the cash system is a recognized method under S.145(1), and the brokerage income offered for tax on a cash basis is alone liable for tax. The Tribunal also upheld the CIT(A)'s decision that the assessee is eligible to claim TDS credit only for the income offered for tax in the relevant year.

2. Disallowance of Insurance Charges:

The second issue pertains to the disallowance of insurance charges by the AO, who argued that the assessee, being a broker, is not responsible for the delivery of goods to the buyer and thus should not incur insurance expenses. The CIT(A) deleted this disallowance, observing that the assessee, being a del cre dere agent, is responsible for the goods until they reach the buyer, and the insurance expenses are incurred for the purpose of the assessee's business under S.37(1) of the Act.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee, as a del cre dere agent, is responsible for the payment of sale amounts to the sellers, which depends on the safe delivery of goods to the buyers. The insurance expenses are thus wholly and exclusively for the business purposes of the assessee and are allowable under S.37(1) of the Act. The Tribunal found no merit in the Revenue's appeal on this issue, especially since no appeal was filed by the Revenue on this issue for the assessment year 2003-04, where a detailed order was passed by the CIT(A).

Conclusion:

In conclusion, the Tribunal dismissed all three appeals of the Revenue, upholding the CIT(A)'s decisions on both issues. The Tribunal affirmed that the cash system of accounting followed by the assessee is acceptable under S.145(1) of the Act, and the brokerage income offered for tax on a cash basis is liable for tax. Additionally, the Tribunal upheld the allowance of insurance expenses under S.37(1) of the Act, recognizing the assessee's responsibility as a del cre dere agent.

Order pronounced in the court on 3.2.2014.