ITAT Deletes Addition as TDS Deduction Alone Did Not Establish Income Accrual

Goldmine Developers Pvt. Ltd. Vs DCIT (ITAT Delhi)

The Income Tax Appellate Tribunal (ITAT), Delhi decided the assessee’s cross objection after noting that while the Revenue’s appeal for Assessment Year 2011-12 had already been dismissed, the cross objection remained undisposed. The dispute concerned an addition of Rs. 86,69,009 arising from a difference between the Tax Deducted at Source (TDS) credit claimed and the corresponding income disclosed by the assessee.

The Assessing Officer observed that the assessee had claimed TDS credit of Rs. 83,05,951 on receipts of Rs. 8,31,22,127, whereas only Rs. 6,75,95,185 had been credited to the profit and loss account. The assessee explained that receipts from one builder had not been recognised as income because, under its accounting practice, the corresponding commission income had not yet accrued and would be offered to tax in subsequent assessment years. The Assessing Officer rejected this explanation, holding that since the assessee had claimed TDS credit, the corresponding income had to be offered to tax under Section 198 of the Income Tax Act, and accordingly made an addition after reducing service tax from the commission income.

Before the Commissioner (Appeals), the assessee submitted a reconciliation between Form 26AS and the income disclosed in its books of account. The Commissioner (Appeals) observed that the builder had credited brokerage in the assessee’s account and deducted TDS, and that the assessee had also claimed credit for such TDS in its return. Referring to the brokerage agreement, the Commissioner held that the assessee’s right to earn brokerage had crystallised when the builder credited the brokerage amount. The Commissioner therefore upheld the Assessing Officer’s treatment of the brokerage income as taxable in the relevant year. However, accepting the assessee’s submission that the same income had already been offered to tax in Assessment Years 2012-13 and 2013-14, the Commissioner directed the Assessing Officer to rectify those subsequent assessment years under Section 154 to avoid double taxation by reducing the corresponding income from those years.

The assessee challenged this finding before the Tribunal, contending that Sections 198 and 199 did not require inclusion of the entire income merely because TDS had been deducted. The assessee relied upon its consistent accounting policy, under which commission income was recognised only after fulfilment of the relevant conditions, and reiterated that the disputed income had already been offered to tax in the subsequent years.

After considering the rival submissions, the Tribunal found that the assessee was engaged as a real estate agent working through sub-brokers and earned commission only after the builder received payments from flat buyers. The Tribunal noted that the assessee raised commission bills only after receiving confirmation from the builder regarding payments received from buyers. It observed that the accounting policy and the system of income recognition followed by the builder could not automatically determine the accrual of income in the hands of the assessee, as both parties had different obligations. Merely because the builder recognised brokerage expenditure and deducted TDS did not establish that the assessee’s brokerage income had accrued. According to the Tribunal, brokerage income accrued only when the assessee had completed all its obligations, including identification of the buyer, receipt of payment by the builder, and transfer of the property.

The Tribunal also observed that the assessee had already offered the disputed brokerage income to tax in the subsequent years in accordance with its regular accounting method, the Revenue had accepted that treatment, and there was no loss to the Revenue, as the assessee was taxable at the same rate in both years. It held that the accrual of income had to be determined on the basis of the assessee’s regular accounting practices and completion of its services, rather than the accounting treatment adopted by the builder. Consequently, the Tribunal held that the Commissioner (Appeals) had erred in confirming the addition for the relevant year while directing corresponding rectification in subsequent years. The assessee’s cross objection was allowed.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. ITA No. 4976/Del/2015 is filed by the AO for AY 2011-12, which was dismissed by the coordinate bench vide order dated 10.10.2019, however, the cross objection filed by the assessee in CO No. 219/Del/2018 was not disposed off as it was not heard. The assessee has filed cross objection raising following grounds of appeal as mentioned in para No. 11 of form No. 36A:-

“1. On the facts and circumstances of the case the ld CIT(A) has erred in treating the amount of Rs. 86,69,009/- as the income of Assessment Year 2011-12 directing the income tax department that the corresponding income received from M/s. Prateek Realtech which has been offered for tax by the appellant in Assessment Year 2012-13 and Assessment Year 2013-14 be reduced from the computation of the income of the appellant in the subsequent relevant years under section 154.”

2. The fact shows that there was a difference between the tax deduction at source claimed for credit and corresponding income in the return of the assessee. The assessee has shown TDS of Rs. 8305951/- and corresponding receipt on which tax is deducted of Rs. 83122127/-. However, amount credit to the profit and loss account was Rs. 67595185/-. The difference was explained by the assessee that the receipt from Prateek Realtors Pvt. Ltd of Rs. 18561335/- were shown who is paying commission to the assessee and deducted tax thereon. The assessee has taken the TDS sum as income but the balance sum was stated to have been shown as income in subsequent year. The claim of the assessee was that it has not received the income from that particular company. The ld AO rejected the explanation of the assessee stating that the above commission is being claimed as expenses by Prateek Realtors Pvt. Ltd. The ld AO invoked the provisions of section 198 of the Income Tax Act, 1961 holding that if assessee is claiming the credit for tax deduction at source, the corresponding income has to be shown in the return of income. Therefore, after reducing the amount of service tax from the commission income he made an addition of Rs. 8669009/-.

3. The assessee on appeal before the ld CIT(A) filed the detailed submission and the reconciliation of 26AS with the income disclosed in the books of account. The ld CIT(A) held as under:-

“5.2.3 I have carefully considered the facts of the case in the light of the submission made by the appellant and the arguments extended by the Ld. AO in the impugned order. I find that the said builder (M/s Prateek Realtors) had credited the account of the appellant in its books with a provision in respect of brokerage of Rs 1,33,18,840/- and in respect of which, TDS was duly deducted. It is also seen that the appellant had already made the claim for such TDS in its return of income for current year. The appellant was asked to produce a copy of the agreement with the builder, perusal of which shows that the appellant was eligible to earn brokerage income from the builder on conclusion of the transaction of sale of property. Since the builder had held that the sale of property had concluded in respect of certain real Estates in respect of which the appellant had served as a broker, it had credited the account of the appellant to the extent of the agreed amount of the commission for that purpose. It is understood that the appellant’s right to earn the commission income on such transaction had crystallised at the very moment the builder had agreed to pay the appellant the brokerage income in view of the services rendered by it. Whether the client eventually makes full or part payment to the builder, should not be a concern for the appellant, who should be concerned whether, the builder has booked brokerage in its account or not. In appellant’s case, the broker had deducted tax, which has been reflected in 26AS statement which was also claimed by the appellant in its computation of income. Under the circumstances, I find no merit in the plea of the appellant that in terms of its accounting practice, its brokerage income from the builder (Prateek Realtors) had not accrued even though the broker had accounted for the same in its books in the hands of the appellant, and had deducted tax thereon.

5.2.4 The Ld. Counsel pleaded before me that the appellant had eventually offered for tax such income in the subsequent assessment years in terms of its accounting practice followed over last years and has offered for tax an amount of Rs 39,45,251/- in AY 2012-13 and Rs 49,72,352/- in AY 2013-14 In view of this, it was pleaded that disallowance made by the AO tentamounts to double taxation of the same income. On careful consideration of the above facts, I am in agreement with the contention of the appellant that the same income should not be taxed twice! However, as I have upheld in the preceding paragraph that the AO had correctly treated the brokerage income credited by the builder in the current year as appellant’s income for current year, against which even appellant had already claimed the credit of tax deducted by the builder, the AO is directed to ensure that the corresponding income received from M/s Prateek Realtors, which has been offered for tax by the appellant in AY 2012-13 and AY 2013­14, is reduced from the computation of income of the appellant in the subsequent relevant assessment years, in which the same was offered for taxation by the appellant. The AO is directed to carry out rectification under section 154 in AY 2012-13 and 2013-14, on due verification accordingly. In view of this the Ground No. 2 is dismissed.”

4. Aggrieved by this the assessee submitted that provisions of section 198 and 199 does not talk about including the whole of the income. He relied upon the decision of coordinate bench in 303 ITR (AT) 45 as well as 98 ITD 147. He also referred to the accounting policy followed by the assessee. He also reiterated the facts and stated that assessee has accounted for the above income in the next year as per the accounting policy consistently followed by it. He also referred to the details of total payment received and total income shown by the assessee from the above principal. He also referred to the summary of 3 years‟ transaction with the above builder. In the end, he submitted that income of the assessee can only be ascertained on the basis of accounting principles followed by it regularly and not by the fact that the builder has claimed the commission expenses as deductible expenditure. He, therefore, submitted the order of the ld CIT(A) is not sustainable. He further referred to various submissions made before the lower authorities.

5. The ld Departmental Representative vehemently supported the order of the lower authorities.

6. We have carefully considered the rival contentions and perused the orders of the lower authorities. For the impugned year the assessee has shown the gross receipt of Rs. 67595185/- and has claimed tax deduction credit of Rs. 8305951/-. Admittedly, there was a difference between the income declared in form No. 26AS and income shown by the assessee in the profit and loss account. The main reason for such difference stated by the assessee is that the above income has not accrued to the assessee. The assessee has submitted that it is a real estate agent having various chains of sub-brokers. The assessee booked flats with the builders and the income is book of commission on the receipt of payment from the flat allottees by the builders. The details of payment received by the builder from the flat buyers is always with the builder, therefore, on receipt of the confirmation of sum received, the assessee raises bills of commission to the builder. Thus, it is apparent that unless the sum are paid by the buyer, the assessee is not entitled to commission income. During the year the assessee has done business only with Prateek Realtors Ltd and has received total sum of Rs. 18561335/- including TDS and service tax. However, Prateek Realtors as per TDS returns filed by it shown the commission expenses of Rs. 27511128/- and deducted tax thereon of Rs. 2751113/-. The assessee booked the commission income from that party of Rs. 17735127/-. The ld AO and the ld CIT(A) on this difference has made the addition to the total income. The assessee has infact considered the sum of TDS as income of the assessee. The ld CIT(A) also noted the fact that appellant is eligible to earn brokerage income from builder on conclusion of the transaction only on ^„sale of the property‟. Though, according to the builder the transaction of the sale is concluded as and when risk and reward passes to the buyer, but in case of the assessee, who is a service provider, commission accrues only at the time of complete services are rendered including receipt of payment by the builder. In the present case the revenue has concluded that as sale of transaction has taken place in the books of the builder, the commission income accrues to the assessee as a broker. The accounting policy and the system of accrual of income of the other party i.e. builder cannot automatically result into the income of the service provider. Both of them have different obligations to perform. Merely because the brokerage expenditure has been provided as an expense by the builder in its books of account it does not become income of the assessee as brokerage income. It needs to be shown that the assessee has also fulfilled all its obligations with respect to the builder. Even otherwise in the subsequent year, as per the method of accounting regularly followed by the assessee, it has completed its obligation and offered the same for taxation. In fact the lower authorities have failed to understand that irrespective of the client eventually making full or part payment to the builder, cannot be a concern for the appellant who is a broker. In fact the services are completely rendered by the assessee by identifying the buyer, the complete payment made by the buyer to the builder and subsequent transfer of the property from the builder to the buyer. Unless all these actions are complete, the income of brokerage does not accrue to the assessee. Further, it is merely an academic exercise now as in the subsequent years the assessee has offered income of brokerage in dispute, revenue has accepted it and there is no loss to the revenue as the assessee is a company having identical rate of taxes in both the years. Accrual of the income of the assessee has to be tested on the basis of accounting practices followed by it and the completion of its services. In view of the above peculiar facts, we hold that the ld CIT(A) has erred in confirming the addition in this year and directing the ld AO to reduce the income of the subsequent year to the extent of addition. Accordingly, solitary ground raised by the assessee in its cross objection is allowed.

7. In the result cross objection filed by the assessee is allowed.

Order pronounced in the open court on 13/01/2020.