2025 (4) TMI 792 - AT - Income Tax

Disallowance of reimbursement of expenses - net of reimbursement accounting adopted by the assessee - difference between the agency charges shown in its profit and loss account and the individual transaction statement (26 AS) showing such receipts - CIT(A) deleted disallowance - HELD THAT - CIT s order we find is based on concrete finding of uncontroverted facts that the assessee consistently following method of accounting its income net of reimbursement of expenses that the expenses reimbursed were duly accounted for in its books of accounts in the Ledger account of the clients and TDS deducted on such expenses wherever applicable. CIT(A) we hold based on these factual findings has rightly recorded the finding of the expenses to have been demonstrated to have been genuinely incurred by the assessee. AO s order disallowing the expenses was based on the finding that the assessee had not demonstrated suitably with evidence the incurrence of such expenses. CIT (A) noted has gone through the complete books of accounts of the assessee confronted the same to the AO and after seeking the report of the AO on the explanation furnished by the assessee coupled with the documentary evidences filed by way of books of accounts and noting no adverse comments to be made by the AO with respect to the same has allowed the assessee s claim of reimbursement of expenses. Decided against revenue.

ISSUES PRESENTED and CONSIDERED

The core legal issue in this case was whether the disallowance of expenses amounting to Rs. 5,34,64,619/- made by the Assessing Officer (AO) was justified. The primary question was whether the assessee, a Custom Clearing Agent, correctly accounted for its income net of reimbursement of expenses, and whether the reimbursement of expenses was genuine and verifiable.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The legal framework involved the interpretation of accounting principles under the Income Tax Act, 1961, specifically related to the treatment of reimbursements in the calculation of gross receipts and income. The Tribunal considered the guidance notes issued by the Institute of Chartered Accountants of India (ICAI) and relevant precedents, such as CIT vs. Virgin Securities & Credits (P) Ltd. and CIT vs. Chandra Kant Chanu Bhai Patel, which addressed the admissibility of additional evidence and the treatment of reimbursements.

Court's Interpretation and Reasoning

The Tribunal found that the assessee had consistently followed a method of accounting that netted reimbursements from expenses since its inception. This method was in line with the ICAI's guidance note, which states that reimbursements should not form part of gross receipts. The Tribunal noted that the AO had accepted this method in the past and had not provided any adverse comments on the documents submitted by the assessee.

Key Evidence and Findings

The assessee provided a reconciliation statement, sales register, and reimbursement ledgers to demonstrate the accounting method used. The evidence showed that the assessee accounted for only the agency charges as income, while reimbursements were recorded in the clients' ledger accounts. The Tribunal noted that the AO had verified these documents and found no discrepancies.

Application of Law to Facts

The Tribunal applied the ICAI guidance and relevant case law to conclude that the accounting method used by the assessee was appropriate. The Tribunal found that the assessee had deducted TDS on 68.57% of the expenses, which supported the genuineness of the reimbursements. The Tribunal also noted that the AO had not identified any issues with the method of accounting or the evidence provided.

Treatment of Competing Arguments

The Revenue argued that the expenses were not verifiable and that the method of accounting was faulty. However, the Tribunal found that the Revenue's arguments were not supported by evidence, as the AO had not raised any specific issues with the documents provided by the assessee. The Tribunal also noted that the Revenue did not dispute the factual findings of the CIT(A) regarding the consistency and genuineness of the accounting method.

Conclusions

The Tribunal concluded that the disallowance of expenses by the AO was not justified. The Tribunal found that the assessee had demonstrated the genuineness of the expenses and had consistently followed an appropriate method of accounting. Therefore, the Tribunal upheld the CIT(A)'s decision to delete the disallowance.

SIGNIFICANT HOLDINGS

The Tribunal held that the method of accounting used by the assessee, which netted reimbursements from expenses, was consistent with the ICAI guidance and was appropriate for calculating income. The Tribunal emphasized that the AO had not provided any adverse comments on the evidence submitted by the assessee, which supported the genuineness of the reimbursements.

The Tribunal also highlighted the importance of consistency in accounting methods and the need for the Revenue to provide specific evidence when challenging the genuineness of expenses. The Tribunal's decision reinforced the principle that reimbursements should not form part of gross receipts if they are genuine and verifiable.

In conclusion, the Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s decision to delete the disallowance of Rs. 5,34,64,619/-. The Tribunal found no reason to interfere with the CIT(A)'s order, as it was based on a thorough examination of the evidence and consistent application of accounting principles.

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