2023 (3) TMI 1087 - AT - Income Tax

Difference in gross receipts as per Form no. 26AS and books of accounts of the assessee, on the basis of certain additional evidence - HELD THAT - As reasons given by the AO to make additions towards difference in gross receipts appears to be baseless and incorrect, because the assessee can file whatever evidence the AO wants, to prove its financial transactions with their clients, but it is incorrect on the part of the AO to expect the assessee to produce books of accounts of their clients. The only reason for the AO to make additions towards difference in gross receipts is doubt and suspicion on expenses booked by the clients in their books of accounts. AO is miserably failed to understand the concept of accounting, because deduction of TDS on total payments including reimbursement of expenses itself is a sufficient proof that the client have accounted expenses incurred by the assessee on behalf of their clients. The assessee is following the method of accounting as per which it was accounting service charges received from the clients towards rendering various services as their income and reimbursement of expenses is squared off in the parties account. The assessee has filed a party wise reconciliation along with ledger account explaining the difference. As per chart filed by the assessee, the gross receipts towards C F service charges and other income, exactly matches with gross receipts booked by the assessee in their books of accounts. Assessee had also reconciled difference between reimbursement of expenses and as per bills filed by the assessee, amount received from clients towards reimbursement of expenses is more than the amount of difference noticed by the AO from the Form no. 26AS. AO has erred in making additions towards difference in gross receipts as per Form no. 26AS and as per books of accounts of the assessee. Appeal filed by the Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition amounting to Rs. 5,22,80,480/- by CIT(A) on grounds of reimbursement of expenses.
2. Failure of assessee to produce financials and other documents of clients.
3. Consideration of fresh evidence by CIT(A) without a remand report.
4. Reliance on a service tax case by CIT(A) in an income tax matter.

Detailed Analysis:

1. Deletion of Addition Amounting to Rs. 5,22,80,480/- by CIT(A) on Grounds of Reimbursement of Expenses:
The primary issue was whether the amount of Rs. 5,22,80,480/- constituted the assessee's income or was merely a reimbursement of expenses incurred on behalf of clients. The assessee, a partnership firm engaged in distribution and C&F agencies, argued that the discrepancy between the total receipts as per Form 26AS and the declared gross receipts was due to reimbursement of expenses. The CIT(A) agreed with the assessee, noting that the reimbursement of expenses was not included in the profit and loss account, as these were not the assessee's income but rather expenses incurred on behalf of clients. The CIT(A) observed that the clients had deducted TDS on the total billed amount, including the reimbursement of expenses. The CIT(A) further validated the assessee's claim by comparing the profit and loss account with the service tax returns, confirming that the receipts from principals were disclosed in the service tax returns and the reimbursement of expenses was not shown in the profit and loss account.

2. Failure of Assessee to Produce Financials and Other Documents of Clients:
The Assessing Officer (AO) rejected the assessee's explanation because the assessee failed to produce financials and other documents of the clients to prove that the reimbursement expenses credited in the books were not the assessee's income. The CIT(A) found this expectation unreasonable, asserting that the deduction of TDS on total payments, including reimbursement of expenses, was sufficient proof that the clients accounted for these expenses in their books. The AO's demand for the assessee to produce the clients' books of accounts was deemed impractical.

3. Consideration of Fresh Evidence by CIT(A) Without a Remand Report:
The Revenue contended that the CIT(A) considered additional evidence without confronting the AO for comments and rebuttal. The CIT(A), however, reviewed various documents, including agreements, invoices, and reconciliations provided by the assessee, and concluded that the difference in gross receipts was due to reimbursement of expenses. The CIT(A) did not find it necessary to call for a remand report as the evidence sufficiently substantiated the assessee's claims.

4. Reliance on a Service Tax Case by CIT(A) in an Income Tax Matter:
The CIT(A) relied on the jurisdictional High Court's decision in the case of Commissioner of Service Tax Vs. M/s. Sangamitra Services Agency, which dealt with service tax to ascertain the turnover component. The CIT(A) applied the principle that reimbursements made to a C&F agency do not form a component of taxable turnover valuation, which should be restricted to commission or remuneration received. This principle was found applicable to the assessee's case, reinforcing the decision to delete the addition.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal. It concluded that the AO erred in making additions based on the difference in gross receipts as per Form 26AS and the books of accounts without considering the nature of the reimbursements. The Tribunal found the CIT(A)'s detailed analysis and reliance on relevant evidence and legal principles justified, affirming that the reimbursement of expenses did not constitute the assessee's income.

Order Pronounced:
The appeal filed by the Revenue was dismissed, and the order was pronounced in court on 16th November 2022 at Chennai.