2025 (6) TMI 1042 - AT - Income Tax

Uncharged Brokerage - Addition as brokerage income earned but not credited to client and offered to tax when no such addition is called for - AR argued that the assessee had losses hence even if brokerage is charged the Revenue would not be in any better position HELD THAT - This is the case where the Revenue is driving the assessee to charge commission on the services rendered. Charging or non-charging of the commission is the prerogative of the assessee unless mandated by the Act where notional income/deemed incomes are chargeable. In this case the Revenue cannot force assessee to charge but the right course would be to disallow the expenses which have been claimed in the P L a/c by the assessee to provide such services to the parties for which no remuneration has been charged. In the instant case by disallowing the expenses the loss claimed by the assessee would be augmented. Hence keeping in view the entire facts of the instant case and the impact on the Revenue the appeal of the assessee is hereby allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered in this appeal is whether the Assessing Officer and the Commissioner of Income-tax (Appeals) were justified in making an addition of Rs. 32,78,055/- to the assessee's income on account of brokerage income not charged to certain clients, treating it as income accrued but not offered to tax. The issue revolves around the applicability of the mercantile system of accounting in recognizing brokerage income and whether the Revenue can compel the assessee to charge brokerage fees on services rendered when the assessee has not done so voluntarily.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Legitimacy of addition of uncharged brokerage income on mercantile basis

Relevant legal framework and precedents: The Income-tax Act, 1961 mandates that income is to be computed on the mercantile system of accounting, where income is recognized when it accrues or arises, regardless of receipt. Generally, if services are rendered, the corresponding income is to be accounted for, even if not actually received. However, the law does not mandate charging clients or recognizing income not earned or not intended to be earned. The principle of independent assessment years and independent assessees is also relevant in determining whether the financial position of the payer or the assessee affects the taxability of income.

Court's interpretation and reasoning: The Assessing Officer (AO) held that since the assessee rendered brokerage services, it was obligated to charge brokerage income on a mercantile basis and offer it to tax, regardless of whether the clients were actually charged. The AO rejected the assessee's contention that charging brokerage was not obligatory and that management discretion governed the practice. The AO further noted that similar disallowances were made in subsequent years, indicating a pattern of non-disclosure.

The Commissioner of Income-tax (Appeals) (CIT(A)) concurred with the AO, emphasizing that the assessee selectively charged brokerage to some clients and not others, including group concerns, without providing any agreement or explanation for such selective non-charging. CIT(A) observed that no evidence was produced to demonstrate that the clients from whom brokerage was not charged received no benefit or that there was any arrangement to waive brokerage. The CIT(A) underscored that the assessee's own admission of earning brokerage income from some clients negated the claim that charging brokerage was discretionary. The CIT(A) concluded that the addition was justified as the income had accrued on a mercantile basis.

Key evidence and findings: The record showed that the assessee acted as a broker for various transactions and charged brokerage to some clients while not charging others, including related group companies. No agreements or explanations were tendered to justify the non-charging. The assessee admitted earning Rs. 15,00,000/- as brokerage income during the year, indicating selective recognition of income. The AO and CIT(A) relied on these facts to infer that income had accrued and was not disclosed.

Application of law to facts: The Revenue applied the mercantile system of accounting to hold that income accrued upon rendering services, regardless of actual receipt. The AO and CIT(A) treated the non-charging of brokerage as concealment of income, warranting addition. The assessee's failure to produce any contractual or documentary evidence to justify non-charging was critical in the Revenue's reasoning.

Treatment of competing arguments: The assessee argued that charging brokerage was not obligatory and was a matter of management discretion. Further, the assessee contended that it incurred substantial losses (Rs. 22,84,86,746/-) and that even if brokerage was charged, the Revenue's position would not improve because the payers would claim the brokerage as expenses, neutralizing the effect. The Revenue countered that each assessee and assessment year is independent, and the financial position of the payer does not affect the taxability of the assessee's income. The Revenue maintained that income accrued and must be taxed accordingly.

Court's final analysis and conclusion: The Tribunal acknowledged that the Revenue was seeking to compel the assessee to charge commission on services rendered. However, it held that charging or non-charging brokerage is at the assessee's discretion unless specifically mandated by the Act or covered under deemed income provisions. The Tribunal reasoned that the correct approach, if the Revenue was dissatisfied, would be to disallow the expenses claimed by the assessee for providing services for which no remuneration was charged, thereby increasing the loss rather than adding income. Since disallowing expenses would have a similar effect on the Revenue's position, the Tribunal found no justification to add the uncharged brokerage as income. Accordingly, the Tribunal allowed the appeal of the assessee.

3. SIGNIFICANT HOLDINGS

"Charging or non-charging of the commission is the prerogative of the assessee unless mandated by the Act where notional income/deemed incomes are chargeable. In this case, the Revenue cannot force assessee to charge but the right course would be to disallow the expenses which have been claimed in the P&L a/c by the assessee to provide such services to the parties for which no remuneration has been charged."

"Considering the entire facts of the instant case and the impact on the Revenue, the appeal of the assessee is hereby allowed."

Core principles established include that under the mercantile system of accounting, income is recognized when accrued; however, the Revenue cannot compel an assessee to charge income not voluntarily charged unless there is a statutory provision to that effect. In cases where services are rendered without charging remuneration, the Revenue's remedy lies in disallowing related expenses rather than adding uncharged income. The independence of assessment years and assessees is reaffirmed, negating cross-effect of losses or income between parties.

The final determination was that the addition of Rs. 32,78,055/- as uncharged brokerage income was not justified and was set aside, allowing the assessee's appeal.