2017 (6) TMI 1321 - AT - Income Tax

Surplus earned from functioning of PDS Public distribution system on behalf of Government - Taxability as income in the hands of assessee - HELD THAT - Assessee company was set up by the Government of Gujarat under the companies Act 1956. The assessee company manage the public distribution system and other public welfare scheme on behalf of the Government of Gujarat. The Government of Gujarat has been providing handling commission as per the Government of Gujarat (GR) Government Resolution - the surplus which was earned by the assessee for the activities carried out on behalf of the Government of Gujarat belonged to the Government and payable to the Government along with interest after deducting of commission earned by the assessee. We further observed that the commission income earned by the assessee on the activities carried on behalf of the Government and other income from its own activities are taxable in the hand of the assessee. In the earlier assessment year the assessing officer has accepted the similar accounting practices followed in the case of the assessee. We considered that surplus earned on behalf of the Government for carrying out function of Public Distribution System as agent of Government is not taxable in the hand of the assessee. As elaborated in the order of the Ld.CIT(A) and considered that the Ld.CIT(A) is justified in deleting the addition made by the Assessing Officer by stating that surplus earned from functioning of PDS on behalf of Government cannot be taxed in the hand of the assessee. In view of the above stated facts and findings we uphold the order of the Ld.CIT(A). Deduction not found to be justified as the assessee failed to substantiate with relevant supporting evidence that the said amount was offered to tax in the earlier years - We have also gone through the paper book filed by the assessee and noticed that hand-written entry as per page no.126 was not sufficient to prove that such amount was offered to tax in the earlier year therefore we do not find any reason to interfere in the decision of the Ld.CIT(A) on this issue.

Summary

Issues Involved:
1. Deletion of addition to total income by CIT(A).
2. Taxability of the assessee as a separate legal entity.
3. Disallowance of a specific amount as revenue neutral.
4. Consistency in accounting practices.

Detailed Analysis:

1. Deletion of Addition to Total Income by CIT(A):
The Revenue contended that the CIT(A) erred in deleting the addition of ?67,16,76,274 to the total income by holding it as surplus out of activities carried out on behalf of the Government of Gujarat (GoG). The Assessing Officer (AO) had observed that this surplus, shown as payable to the GoG, was claimed as an expenditure by the assessee, which was disallowed by the AO. The CIT(A) found that the assessee, a company set up by the GoG, managed the Public Distribution System (PDS) and other welfare schemes on behalf of the GoG. The resultant surplus from these activities was transferred to the GoG and claimed as an expenditure. The CIT(A) held that the surplus generated from PDS activities was not taxable as income of the assessee since it was carried out on behalf of the GoG, and the surplus was essentially excess subsidy received, which belonged to the GoG. The Tribunal upheld this view, noting that the assessee's accounting practices had been consistently accepted in previous years.

2. Taxability of the Assessee as a Separate Legal Entity:
The Revenue argued that the CIT(A) did not appreciate that the assessee, as a separate legal entity, should have its profits taxed. However, the CIT(A) and the Tribunal noted that the assessee was acting as an agent of the GoG for PDS operations. The handling commission received from the GoG was considered part of the assessee's income, but the surplus from PDS activities was not, as it was transferred to the GoG. The Tribunal emphasized that the assessee retained the surplus on behalf of the GoG and paid interest on it, indicating that it was not the assessee's income.

3. Disallowance of a Specific Amount as Revenue Neutral:
The Revenue contended that the CIT(A) erred in not upholding the disallowance of ?2,87,265, arguing it would be revenue neutral if considered as sales return, as the closing stock would have been enhanced by the corresponding sum. The Tribunal did not find sufficient grounds to interfere with the CIT(A)'s decision on this issue, as the primary contention regarding the surplus had already been decided in favor of the assessee.

4. Consistency in Accounting Practices:
The CIT(A) and the Tribunal noted that the assessee had consistently followed the same accounting practices, which had been accepted by the AO in previous assessment years (2005-06 to 2009-10). The Tribunal upheld the CIT(A)'s view that the AO was not justified in making the addition in the current year when the facts were identical to those of earlier years. The Tribunal also referenced past judicial decisions, including those of the Hon'ble Gujarat High Court, which supported the assessee's position that the surplus from PDS activities, being on behalf of the GoG, was not taxable in the assessee's hands.

Conclusion:
The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal and the assessee's cross-objection. The Tribunal concluded that the surplus earned from PDS activities on behalf of the GoG was not taxable as income in the hands of the assessee, affirming the consistency in accounting practices and the legal principles established in previous judicial decisions.