2014 (7) TMI 515 - AT - Income Tax

Sustenance of addition @ 8% - Other clearing expenses - Whether some profit rate can be applied on the amount received by the assessee under the head Other clearing expenses to form part of total income - Held that - All the amounts listed in invoice raised on Aksh Optifibre Ltd. represent the reimbursement of expenses without any profit element - The amount of remuneration has been credited by the assessee to its Profit Other clearing expenses is in the nature of expenses incurred by the assessee in getting the goods cleared from customs in the first go which were paid by the clients as such in terms of the agreements as discussed above naturally there is no element of income requiring inclusion of this amount as such or in part thereof in the total income - none of the items culminating into Reimbursement of expenses contained any profit element thus there is no logic in applying 8% or any other profit rate on Other clearing expenses which is a part of the total Reimbursement . Non deduction of TDS on rent paid on behalf of its clients - Godown charges paid and added back to income u/s 40(a)(ia) of the Act whether the provisions of section 40(a)(ia) are magnetized on the amount of Godown rent paid by the assessee on behalf of its clients - Held that - In order to qualify as income or expenditure it is of paramount importance that the assessee must have earned the income or incurred the expenditure in his own right - The expenditure should be directed towards the earning of income and the income should ordinarily be the result of incurring of expenditure - If the expenditure is incurred or income is earned not in own capacity but as representative of some third person then it is the expenditure or income of such third person and not that of the assessee. Neither any expenditure was claimed towards payment of godown rent nor any income was offered on this account - The transaction of actually paying godown rent was for and on behalf of its customers - It was for these customers to claim deduction for the payment of godown rent etc. in their accounts - Relying upon Expeditors International (India) (P) Ltd. VS. CIT 2008 (8) TMI 399 - ITAT DELHI-F - Decided partly in favour of Assessee.

Issues Involved:
1. Sustenance of addition amounting to Rs. 12,12,484, being 8% of 'Other clearing expenses'.
2. Enhancement of income for a sum of Rs. 4.53 crore representing Godown charges paid and added back to income u/s 40(a)(ia) of the Act.
3. Initiation of reassessment proceedings.

Detailed Analysis:

1. Sustenance of Addition of Rs. 12,12,484 (8% of 'Other Clearing Expenses'):

The primary issue revolves around the addition of Rs. 12,12,484, which is 8% of 'Other clearing expenses'. The assessee, a customs clearing agent, did not offer to tax the amount declared as 'Reimbursement of expenses' totaling Rs. 11,57,42,271, arguing that these were expenses paid on behalf of clients and later reimbursed without any profit markup. The AO, however, treated this amount as containing a profit element and applied an 8% net profit rate based on past years' net profit rates, resulting in an addition of Rs. 92,59,381. The CIT(A) excluded certain items from the gross receipts but upheld the addition of Rs. 12,12,484 on 'Other clearing expenses' due to lack of third-party evidence.

Upon review, it was found that the assessee provided detailed evidence showing that the Rs. 1.51 crore under 'Other clearing expenses' was indeed reimbursement for various services without any profit element. Contracts with clients indicated that reimbursements were made for actual expenses incurred, and the invoices supported the absence of any profit markup. Consequently, it was determined that applying an 8% profit rate on 'Other clearing expenses' was unjustified, leading to the deletion of the Rs. 12,12,484 addition.

2. Enhancement of Income for Rs. 4.53 Crore (Godown Charges) u/s 40(a)(ia):

The second issue pertains to the enhancement of income by Rs. 4.53 crore, representing Godown charges paid by the assessee on behalf of clients, which was added back to income under Section 40(a)(ia) due to non-deduction of tax at source. The AO initially included an 8% profit on this amount, but the CIT(A) held that there was no income element in the payment of godown rent. However, the CIT(A) still enhanced the income by disallowing the godown rent under Section 40(a)(ia) due to non-deduction of TDS.

The tribunal examined whether Section 40(a)(ia) applied to godown rent paid on behalf of clients. It was noted that Section 40(a)(ia) disallows deductions for certain expenses if TDS is not deducted. However, since the godown rent was paid on behalf of clients and not claimed as a deduction by the assessee, it was not the assessee's expenditure. The tribunal cited precedents where intermediary payments did not attract TDS provisions, concluding that the godown rent was not the assessee's expenditure and thus not subject to disallowance under Section 40(a)(ia). Accordingly, the disallowance by the CIT(A) was deleted.

3. Initiation of Reassessment Proceedings:

The third issue regarding the initiation of reassessment proceedings was not pressed by the assessee's representative and thus was dismissed.

Conclusion:

The appeal was partly allowed, with the tribunal ordering the deletion of the Rs. 12,12,484 addition related to 'Other clearing expenses' and the Rs. 4.53 crore enhancement under Section 40(a)(ia) for godown rent. The issue of reassessment proceedings was dismissed as it was not pursued. The judgment emphasized the importance of distinguishing between actual reimbursements and income elements in tax assessments.

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