Case Law Details
ACIT Vs Rajiv Nayar (ITAT Delhi)
The AO, based on TDS information, assessed the corresponding professional income, on accrual basis, in the relevant year. Whereas the appellant’s contention is that since he has offered professional receipts for tax on cash/receipt basis as he follows cash system of accounting; therefore, charging of certain professional income on accrual basis amounts to double taxation to the extent of the sum offered on receipt basis in subsequent year. AO is thus not justified in changing the accounting system and charging professional income on accrual basis in the relevant year, particularly when the books of account have not been rejected u/s 145 and the fact that the AO has charged professional income, under scrutiny, in earlier years and subsequent years on cash/receipt basis.
FULL TEXT OF THE ITAT JUDGMENT
1. This appeal is filed by Ld. Assistant Commissioner of Income Tax, Circle-37 (1), New Delhi [The ld AO] against the order of the CIT (Appeals) – XXVI, New Delhi [ the Ld CIT (A)] dated 21.10.2013.
2. The revenue has raised following six grounds of appeal as under:-
1. The Ld. CIT(A) has erred in deleting the addition of Rs. 3,57,87,719/- made by the A.O. on account of professional receipts ignoring the fact that the A. O. has computed the income on the basis of various TDS claims made by the assessee for the year under consideration on the basis of reconciliation filed by the assessee.
2. The Ld. CIT(A) has erred in deleting the addition of Rs. 3,57,87,719/- made by the A.O. by relying on fresh submissions made by the assessee which were never confronted to the A. O.
3. The Ld. CIT(A) has erred in deleting the addition of Rs. 18,09,631/- made by the A.O. on account of rental receipts under the head income from House Property by relying solely on the submissions of the assessee without considering the observation of the A. O. that the assessee had been unable to provide any documentary evidence whatsoever to establish that the rent received was refunded back and if at all then under what terms & conditions.
4. The Ld. CIT(A) has erred in deleting the addition of Rs. 18,09,631/- made by the A. O. on account of rental receipts by holding that the gross receipts include service tax ignoring the terms & condition of license agreement vide which in addition to the license fees the licensee was to pay service tax.
5. The Ld. CIT(A) has erred in deleting the addition of Rs. 18,09,631/- made by the A. O. ignoring the observation of the A.O. that the rental receipts have been calculated as per the 26AS statement.
6. The Ld. CIT(A) has erred is not appreciating that the deduction of service tax payments from the rent receipts is not allowable as per the proviso of section 23(l)(c) of the I.T. Act, 1961.
3. The two issues raised by revenue before us are that whether the ld CIT (A) has correctly deleted following additions:-
(i) addition of Rs. 3,57,87,719/- deleted by the Ld. CIT (Appeals) because of the difference in professional receipts as per the TDS certificates and the professional receipts shown in the books of accounts.
(ii) addition of Rs. 18,09,631/- on account of rental receipts.
4. The brief facts of the case are that appellant is a senior Advocate of Hon’ble Delhi High Court. He filed his return of income on 30.07.2009 at Rs. 10,77,55,060/-. During the course of assessment proceedings it was found by the ld AO that the TDS certificates shows higher gross receipts then what is shown in the return of income and profit and loss account. Because of the difference in the gross receipt between the two documents the Ld. Assessing Officer made an addition of Rs.3,57,87,719/- which was deleted by the Ld. CIT (A) holding that there is no justification for making the above addition. This is challenged by the revenue by ground No.1 of the appeal.
5. The Ld. DR relied upon the order of the Ld. Assessing Officer and submitted that when there is difference between the gross receipt as per books of accounts and the TDS certificates the addition has been correctly made.
6. The Ld. AR relied upon the order of the Ld. CIT (A) and submitted that professional receipts have been correctly shown by the assessee and there are no reasons for Assessing Officer to make the above addition.
7. We have carefully considered the rival contentions. The assessee is a Senior Advocate who is maintaining regular books of accounts. During the year as per the tax Audit Report assessee has disclosed total professional receipt of Rs. 14,76,70,759/- whereas in the audit report the above figure was wrongly typed as Rs 12,96,70,759/-. The above mistake was rectified by the assessee before the Assessing However, the Ld. Assessing Officer noted that assessee has claimed TDS credit of Rs. 2,30,30,005/- for Assessment Year whereas as per form No. 26AS only Rs. 19248205/- is shown. Because of the difference in TDS figure the Assessing Officer made an addition of Rs. 1,28,36,390/-. Further the Ld. Assessing Officer noted that TDS of Rs. 23,39,113 is shown as TDS credit in form No. 26AS and therefore, multiplying the TDS difference at Rs. 10.3% he further made the addition of Rs. 22709834/-. The Ld. CIT (A) has deleted the above addition vide para No. 7 as under :-
117 .1 I have carefully considered the facts of the case and the submissions of the appellant. The AO, based on TDS information, assessed the corresponding professional income, on accrual basis, in the relevant year. Whereas the appellant’s contention is that since he has offered professional receipts for tax on cash/receipt basis as he follows cash system of accounting; therefore, charging of certain professional income on accrual basis amounts to double taxation to the extent of the sum offered on receipt basis in subsequent year. The Ld. AR further argued that the AO is thus not justified in changing the accounting system and charging professional income on accrual basis in the relevant year, particularly when the books of account have not been rejected u/s 145 and the fact that the AO has charged professional income, under scrutiny, in earlier years and subsequent years on cash/receipt basis.
7.2 The entire provisions regarding the method of accounting were contained in section 145. As per that section, the income under the head “Profit and gains of business or profession” or “Income from other sources” shall be computed according with either cash or mercantile system of accounting regularly employed by the assessee. In other words, the Income Tax Act recognizes two system of accounting, cash system of accounting and mercantile system of accounting. The section also provides that the Central Government is authorized to noftfy from time to time the accounting standard to be followed, particularly in the case of any assessee or in respect of any income. The Central Government has notified certain accounting standards. The Accounting Standard-2 clause (a) provides that a change in the accounting policy shall be made only if the adaptation of a different policy is required by the statute or if it is considered that the change would result in a mere appropriate preparation or presentation of the financial statement of an assessee.
7.3 I have perused the audit report submitted along with the Return of Income (ROI). I find force in the argument of the Ld. AR that the appellant has offered gross professional receipts of Rs. 14,76,56,759/- in the AY 2009-10 and Rs. 1,96,78,890/- taxed on accrual basis in the relevant AY by the AO in the AY, 2010-11 on receipt basis. I have perused the e-ROI of the relevant AY and finds that the gross receipts of Rs. 14,76,70,759/- as mentioned in the appellant’s submission is shown in the ROI and not Rs. 12,96,70,759/- as taken by the AO on the basis of the Audit Report. The appellant demonstrated the mistake crept in the Audit Report with the help of the details mentioned in the e-Return and the P &. L account. To which, I am convinced. The AO, as per para 4.1.5 of the impugned order has worked out the total gross receipts Rs. 16,54,68,478/-. In case the AO’s working is correct then the addition of | Rs. 1,77,97,71 9/- (Rs. 16,54,68,478/- minus Rs.14,76,70,759/-) can only be made and not Rs. 3,57,87,719/-, therefore, the addition over and above Rs.1,77,97,719/- is prima-facie wrong. However, the AO’s working, in entirety, is contrary to the ‘provisions of the law and accounting method required to be followed. In view of the above facts and circumstances, I am of the considered view that the AO was required to withdraw the credit of TDS in respect of which the income is not offered/assessed in the relevant AY in view of provisions of section 199(3) and Rule 37BA(3). However, she chose to work out the income on the basis of the TDS claim, which according to me is not justified at all particularly when the AO has accepted the accounting method not only in this year but in preceding and subsequent years under scrutiny.
7.4 The Ld. AR further demonstrated that the appellant has offered, in aggregate, Rs. 16,73,35,649/- (Rs. 14,76,56,759/- in AY 2009-10 plus Rs. 1,96,78,890/- in the AY 2010-11) for tax corresponding to the TDS claims made in the relevant AY and therefore, there is no suppression of professional receipts taken together for both years. The Ld. AR submitted that, alternatively, in case Rs. 1,96,78,890/- including [TDS is taxed in AY 2009-10 on accrual basis, then the consequential relief may be given in the AY 2010-11 to avoid double taxation. I have given a deep thought on the entire issue and came to conclusion that in case the professional income of Rs. 1,96,78,890/- including TDS is charged to tax on accrual basis in this year, then the corresponding professional income offered on receipt basis in subsequent year have to be reduced/revised accordingly. At most, there may be some gain of interest u/s 234B/C with consequential payment of interest u/s 244A. I do not see this exercise resulting substantial revenue gain. Thus, I do not find any justification in changing the accounting method of the appellant. Hence, the submission of the appellant appears convincing, needless to place reliance on various judicial pronouncements on this matter. However, following the ratios laid down in judgments of the Hon’ble Supreme Court in the cases of Excel Industries Ltd. (Date of order 09.10.2013), Radhaswami satsang 193 ITR 321, Parshuram Pottery 106 ITR 1, I hold that there is no need to tax professional income on by applying multiplication factor to the claim of TDS credit contrary to the provisions of section 199(3) and Rule 37BA(3). In another words, there is no justification to tax professional income on accrual basis when the appellant himself has offered the same on receipt basis. Thus, the addition of professional income of Rs. 3,57,87,719/- is deleted. The AO is directed to give consequential relief. However, the AO is directed not to allow the credit of TDS in respect of which the income is not assessed in the relevant year in view of provisions of section 199(3) and Rule 37BA(3). The grounds no. 4 and 5 thus stand allowed.
8. Before us the ld AR has shown that assessee has already offered the income on gross turnover of Rs.14.76 crores following cash system of accounting. According to the method of accounting if the tax deduction at source has been made by the client on or before 31st March but payment is not received till that date, tax deducted at source is included in the income by the assessee. Therefore, according to the method of accounting followed by the assessee, we do not find any infirmity in the order of the ld CT (A) in deleting the addition. Hence, the addition made by the Ld. Assessing Officer of Rs. 3.78 crores is under the accounting treatment incorrect understood by the Assessing Officer. In view of this the ground No. 1 and 2 of the appeal of revenue are dismissed.
9. Ground No.3 to 6 of the appeal are with respect to the addition of Rs. 18,09,631/- made by the Assessing Officer on account of rental receipts under the head ‘income from house property”. During the year assessee has earned rental income of Rs. 2,57,44,579/- from flat in Mumbai. According to the agreement entered into with the tenant ICICI Prudential Life Insurance Company Limited monthly license fee of Rs.30,68,182/- was to be received from 24.06.2008. According to that assessee was due to receive sum of Rs. 28,329,547/- during the year. Against this assessee has shown the income of Rs. 2,57,44,579/-. It resulted into difference of Rs. 25,84,968/-. In form No. 26AS also the total rental income received by assessee was also shown at Rs. 2,81,70,822/-. Therefore, the Assessing Officer made an addition of Rs. 18,09,631/- to the income from house property. The Ld. CIT (A) deleted the above addition for the reason that the rent of one month has been paid back to the tenant through banking channel. Furthermore, the gross rent received from tenant included the service tax amount, which was not to be considered as annual letting value of that particular house.
10. The Ld. DR relied upon the order of the Assessing Officer and the Ld. AR relied upon the order of CIT (A).
11. We have carefully considered the rival contentions. The difference of amount shown in form No. 26AS and annual rent shown by the assessee has been held to be on account of service tax as well as rent of one month returned back to the tenant. The difference has been properly reconciled by the assessee before the Assessing Officer. The ld CIT (A) deleted the addition holding as under :-
8. Vide grounds no. 6 and 7, the appellant challenged the addition of Rs. 18,09,631/- under the head income from the house property. The Ld. AR argued the case by reiterating the content of his submission as under:
(i) “That the appellant, during the year relevant to the assessment year 2009-10, leased his property to the ICICI Prudential Life Insurance Co. Ltd. on a monthly rent of Rs.30,68,182/-.
(ii) That as the property was not fit for occupation, the tenant vide their letter dated 11.08.2008, requested to refund rent for the period from 15.07.2008 to 08.08.2008.
(iii) That the appellant found the averments of the tenant correct while discussions and also did not want to loose the tenant. Therefore he return the amount of 24,54,545/- being the money for above period vide cheque no. 89140 drawn on Societe Generate Bank, Mumbai which was cashed on 14.08.2008.
(iv) That moreover this amount returned to the tenant is in shape of “unrealized rent” to save the tenancy and is legally allowable under the Income Tax Act.
(v) That the case of appellant is covered by clause (c) of sub-section (1) of Section 23 of the Income Tax Act, which provides that “where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable:”. Therefore the net amount received by the appellant to continue the tenancy has to be treated as annual value of the property.
(vi) That had the appellant not returned Rs.24,54,545/- tenancy was to come to an end. And in that case rent for only 2-3 mon tlis would have been received in whole previous year. And in that case the annual value would have been taken at about a little more than 60,00,000/- or so only against the annual value of Rs.2,83,29,547/- now declared by the appellant. Therefore the addition made is erroneous and liable to be deleted.
(vii) That it is also to be noted here that the tenant is limited company and not a private individual person where no one can make any adjustment as thought by the learned Assessing Officer.
(viii) That the Service Tax is not part of the rent and not includible in the annual value of the property. The Service Tax is paid to the Service Tax department. The landlords are simply the facilitator of receiving the Service Tax from the tenant and paying to the Service Tax department. Therefore the amount of Service Tax paid by the tenant to the Service Tax department has wrongly disallowed by the learned Assessing Officer and deserved to be deleted.
(ix) That the copy of the letter dated 03.03.2011 submitted to the learned Assessing Officer reconciling the rent received, copy of ledger account of the books of accounts of the appellant, letter of the tenant ICICI Prudential Life Insurance Co. Ltd. and bank statement of Societe Generate Bank, Mumbai proving the payment of Rs.24,54,545/- to the tenant, were filed on 19.11.2012 for ready reference and marked as ANNEXURE- “E” (Page 28 – 30). From these your honour can also verify the true facts and evidences which were already filed with the learned AO and decide accordingly.
Your honour is, therefore, respectfully prayed to kindly delete the additions of Rs.18,09,631/- made by the learned AO under the head Income from House Property in her assessment order dated 01.06.2011 on the basis of earlier submissions, above submissions, ground, evidences and facts and circumstances of the case.”
8.1 I have carefully considered the facts of the case and the submissions of the appellant. In view of the above facts and submission, the reasons for lesser annual Value appear convincing. The rent of one month has been refunded to the tenant through the banking channel. The decision in the case of ACIT v/s Dr. Prabha Sanghi, 139 ITD 504 supports the case of the appellant. In the case of Dr. Prabha Sanghi, the Hon’ble 1TAT, New Delhi has specifically held that two houses which were earlier let out in preceding years remained vacant wholly during the relevant year. Therefore, the ALV of these two properties which first determined u/s 23(l)(a) becomes NIL after allowing the effect of section 23(l)(c), [in another words vacancy allowance] as there is no dispute on vacancy of these properties for entire year. Thus, the ALV determined u/s 23(l)(a) will become NIL in accordance with the provisions of section 23(l)(c). Here, in the appellant’s case, the property was not fit for occupation for one month after entering into lease agreement and therefore, the rent of one month was refunded. In another words, the property may be considered vacant for one month. Therefore, I am of the considered view that the effect of section 23(l)(c) has to be given in view of such facts and circumstances as mentioned in the appellant’s submission.
8.2 On perusal of lease agreement entered between the appellant and M/s with ICICI Prudential Life Insurance Co. Ltd., I am of the considered view that the gross rent received from the tenant includes the service tax payable on the rent realized by the appellant. Therefore, it is held that the AO has erred in working out the Annual Value of the house property after excluding the service tax payable thereon for computing income from the house property. This finding also finds support from the fact the AO has accepted net annual value after excluding the service tax out of the gross rent receipt for computing the income from the house property in the subsequent AY. Accordingly, the service tax paid and refund of one month rent has to be deducted out of the gross Rent received from M/s with ICICI Prudential Life Insurance Co. Ltd., to arrive the Annual Value of the property. Consequentially, the addition of Rs. 18,09,631/- made under the head income from the house property is deleted. The AO is directed to give relief. The grounds no. 6 and 7 are thus allowed.”
12. The Ld. DR could not show us any infirmity in the order of Ld. CIT (A) in deleting the above addition. According to us the Ld. CIT (A) has correctly deleted the addition of Rs. 18,09,631/- under income from house property. In the result ground No. 3 to 6 of the appeal of revenue are dismissed.
13. In the result appeal of the assessee is dismissed.
14. Order pronounced in the open court on 26.03.2018.
