2014 (11) TMI 175 - AT - Income Tax

Validity of reopening of assessment u/s 147 Proceedings u/s 154 Rectification of mistake apparent on record - Held that - Assessee is engaged in transport business as a transport commission agent - the AO issued a notice u/s 154 on 12.1.2009 proposing rectification of a mistake apparent on record - It is well settled that the requirements prescribed under the Act for involving the provision of S.147 have to be fulfilled as decided in CIT vs. Rajesh Jhaveri Stock Brokers P.Ltd. 2007 (5) TMI 197 - SUPREME Court - The word reason in the phrase reason to believe would mean cause or justification. If the AO has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment - a perusal of the Profit and Loss a/c demonstrates that the assessee has not claimed any expenditure on payments made to lorry owners, nor has he shown any income - In fact for AY 2005-06 and AY 2006-07 the total gross receipts disclosed consisting of freight income and commission income besides interest on securities - There is no expenditure claimed on account of freight charges paid - the reopening of assessment is valid for the reason that the AO had material to come to a conclusion that the assessee has under stated its receipts - The assessee has also not furnished any explanation to the AO during the original assessment proceedings on these matters as there is no occasion for doing the same the decision in CIT vs. Usha International Ltd. 2012 (9) TMI 767 - DELHI HIGH COURT is applicable as it cannot be held that there is a presumption of application of mind on this issue when the original assessment order was passed u/s 143(3) of the Act - Pending or disposal of proceedings u/s 154 does not result in the reopening proceedings becoming illegal. Applicability of section 40(a)(ia) Held that - The assessee is a transport commission agent who arranges goods carriers for various parties through truck operators/drivers is not disputed by the Revenue - The parties to whom the assessee arranges trucks, make part payment to the operators/drivers as advance and the balance amount is routed through the assessee - What the assessee gets is only commission - The amount is received by the assessee as a Trustee - The assessee is only a pass through entity - The amount is received on capital account and payment also is made on capital account - The assessee never had the right to receive this amount as its income - Merely because tax has been deducted at source on the amounts received by the assessee, it does not lead to an automatic conclusion that the entire amount is the income of the assessee - The amount is never claimed by the assessee as its income nor was paid by the truck owners as an expense thus, the amount cannot be treated as gross receipts of the assessee on revenue account - as the assessee has not claimed any expenditure on account of freight payments the question of disallowance u/s 40(a)(ia) does not arise Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening the assessment under Section 147/148 of the Income Tax Act.
2. Applicability of Section 40(a)(ia) regarding the disallowance of expenditure for non-deduction of TDS.
3. Whether the amount received by the assessee should be considered as its income.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147/148:
The reopening of assessments for AY 2005-06 and AY 2006-07 was challenged by the assessee on multiple grounds, including the argument that the reopening was based on a "change of opinion," which is not permissible under the law. The assessee also contended that no new material or information had come to the AO's possession to warrant reopening.

The Tribunal upheld the reopening of the assessment, stating that the AO had "reason to believe" that income had escaped assessment based on discrepancies between the gross receipts as per TDS certificates and those disclosed by the assessee. The Tribunal emphasized that at the stage of issuing a notice under Section 148, the AO only needs to have a reasonable belief of income escapement, not conclusive proof. The Tribunal also noted that the reopening was within four years, thus the Proviso to Section 147 did not apply.

2. Applicability of Section 40(a)(ia) Regarding Disallowance of Expenditure:
The AO had disallowed freight expenses under Section 40(a)(ia) for non-deduction of TDS. The assessee argued that it had not claimed any expenditure on freight payments, and hence the disallowance was not applicable.

The Tribunal agreed with the assessee, stating that the assessee acted merely as a commission agent, arranging trucks for various parties and receiving a commission for the service. The Tribunal noted that the assessee was a "pass-through entity," collecting and paying freight charges on behalf of the principal parties. Therefore, the freight payments were not the assessee's expenditure, and the provisions of Section 40(a)(ia) were not applicable.

3. Whether the Amount Received by the Assessee Should be Considered as Its Income:
The AO had treated the entire amount received by the assessee as its income, leading to a significant tax liability. The assessee contended that it only earned a commission and the remaining amount was passed on to the truck operators.

The Tribunal found that the assessee's role was limited to that of a commission agent, and the amounts received were not its income but were collected on behalf of the truck operators. The Tribunal held that merely because TDS was deducted on the amounts received by the assessee, it did not automatically become the assessee's income. Consequently, the Tribunal concluded that the amounts in question could not be treated as the assessee's gross receipts on a revenue account.

Conclusion:
The appeals filed by the assessee were allowed, and the appeals filed by the Revenue were dismissed as infructuous. The Tribunal ruled that the reopening of the assessment was valid, but the disallowance under Section 40(a)(ia) was not applicable as the assessee had not claimed any expenditure on freight payments. The amounts received by the assessee were not considered its income but were passed through to the truck operators.