TMI Blog2014 (2) TMI 240X X X X Extracts X X X X X X X X Extracts X X X X ..... realization of the sale proceeds by the seller from the purchaser, as claimed by the assessee and accepted by the CIT(A), assessee is justified in following cash system of accounting, finding it to be appropriate for its business - When the assessee claims to be following that method of accounting consistently, and it has been recognized by the statute, there is no justification for the Assessing Officer to disturb the book results disclosed by the assessee – there was no infirmity in the order of the CIT(A) – Decided against Revenue. Disallowance of insurance charges u/s 37(1) of the Act – Held that:- There is no justification in contesting the orders of the Commissioners (Appeal) on this issue for the assessment years 2002-03 and 2004-05, as they simply followed the reasoning given in the appellate order of the CIT(A) for the assessment year 2003-04 – it was correctly observed by the CIT(A) in the order for assessment year 2003-04, which has been adopted for the other two years, assessee, being a del cre dere agent, is responsible for payment of sale amounts to the sellers, which in turn depends on the safe delivery of goods to the buyers - it may also be in the nature of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e present appellate proceedings, total income of the assessee was determined at Rs.38.05,116. In the said re-assessment proceedings, the Assessing Officer observed that while the brokerage amount receivable as per TDS certificate was Rs.35,96,137, the assessee credited only the brokerage amount of Rs.17,16,359, following the cash system of accounting. The Assessing Officer rejected the cash system of accounting followed by the assessee for the following reasons- (i) As per the provisions of S.199 of the Act, whenever the credit for TDS is claimed, the corresponding income is to be assessed to tax in that year. (ii) As soon as the seller delivers the goods to the buyer, the role of the assessee as broker is complete and the brokerage accrues to him. (iii) The assessee is not a consignment agent and hence is not responsible for collection of amounts from the buyer of goods. (iv) The assessee has shown the interest income on bank deposits on accrual basis. (v) The assessee has not shown the 'brokerage receivable' in its balance sheet. The same is not verifiable from the books of accounts. (vi) The assessee has not shown the brokerage receipts in its books of accounts much ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The interest income of Rs.61,856 on the fixed deposits was offered for tax on receipt basis in this year. ix) The Assessing Officer has assessed the brokerage receipts on accrual basis in assessment year 2002-03 and 2003-04, though the same income was offered on cash basis in assessment year 2004-05 and was also assessed under S.143(1), whereby resulting in double taxation of the same income. x) Brokerage income accrued but not received was offered to tax in subsequent years as and when received. There was no concealment of income. On consideration of the various contentions of the assessee before him, in the light of the case law relied, the CIT(A) held that the cash system of accounting followed by the assessee is an acceptable method of accounting in terms of S.145(1) of the Act, and hence the brokerage income offered for tax on cash system of accounting is alone liable for tax. He also held at the same time that the assessee is eligible to claim the credit for TDS only in respect of income offered to tax in this year. Relevant portion of the order of the CIT(A) in this behalf, reads as follows- "2.3 .....It is an undisputed fact that the appellant is following cash syst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t justified in insisting that the brokerage should be brought to tax on the basis that the service of brokerage is completed anterior to the receipt of the brokerage. This is negation of provisions of S.1456(1) of the Act and amounts to imposition of mercantile system of accounting. Hon'ble ITAT Mumbai in the case of Nana G. Patekar (2009)(27 SOT 8) and Suraj UK Industries Ltd. 2009 (27 SOT 47) held that it is not sufficient for the Assessing Officer to say that the income cannot be deduced from the method of accounting followed by the assessee. In order to invoke the provisions of S.145(3) of the Act, the AO must record a finding that the accounts were incorrect incomplete. Considering all the facts and circumstances of the case, I hold that the cash system of accounting followed by the appellant is an acceptable method of accounting in terms of S.145(1) of the Act. Hence the brokerage income offered for tax on cash system of accounting is alone liable for tax. At the same time, the appellant is eligible to claim the credit for TDS only in respect of income offered for tax in this year." 6. For the other two years also, viz. 2002-03 and 2004-05, but for the amounts involved, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod of accounting of the assessee was shown to be 'mercantile', against which observation the assessee had not filed any appeal. She submitted that the case-law relied upon by the CIT(A) in the impugned orders is not applicable. 9. The learned counsel for the assessee, on the other hand, reiterating the contentions urged before the lower authorities, strongly relied on the order of the CIT(A) and submitted that the assessee, being a del credere agent, is justified in recognizing the income by way of brokerage only on actual receipt basis. He submitted that the Assessing Officer is not justified in observing that the role of the assessee ceased with the delivery of the goods by the seller to the buyer. He submitted that though the amount of brokerage is credited to the account of the assessee in the books of the seller, it is actually paid to the assessee only upon receipt of the sale proceeds by the seller from the purchaser, and as such, the role of the assessee does not cease until the sale proceeds are received by the seller from the purchaser of the goods, upon which event alone assessee actually receives its brokerage. With regard to the impact of the directions of the Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cre dere agent, is not crucial, as the finding of the Commissioners (Appeal) in that behalf, is corroborated by other evidence on record including the method of accounting followed and consistent plea of the assessee in that behalf right from the beginning, which was not controverted. Since cash system of accounting is one of the recognized methods of accounting permitted under S.145(1) of the Act, when the assessee claims to be following the said system both in respect of receipts and payments in its books of account, as correctly observed by the CIT(A), there is no justification for rejecting the book results disclosed by the assessee. Mere crediting of the brokerage due to the assessee in the books of the seller, does not mean that it automatically becomes the income of the assessee. More so, when, as pleaded by the assessee, the amount of brokerage due to the assessee is actually paid on realization of the sale proceeds. This plea of the assessee has been found to be correct by the lower authorities on examination of one of the principals. Further, merely because the principal of the assessee, viz. the seller, credits the amount of brokerage due to the assessee in a particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer to disturb the book results disclosed by the assessee. In this view of the matter, wo do not find any infirmity in the orders of the CIT(A) on this aspect. We accordingly uphold the same, rejecting the grounds of the Revenue on this issue in the appeals for all the three years. 12. The next issue common in appeals for assessment years 2002-03 and 2004-05, viz. ITA No.1860/Hyd/2011 and 1452/Hyd/2010, relates to disallowance made by the Assessing Officer in respect of insurance charges, which has been deleted by the CIT(A). 13. Facts of the case, in brief are that the Assessing Officer disallowed the insurance expenses claimed by the assessee on the ground that the assessee being a broker, is not responsible for delivery of goods to the buyer. He also observed that the assessee has not produced any agreement entered with the sellers or buyers to show that it was assessee's responsibility and the expenses were incurred for the purpose of assessee's business. 14. In both the orders impugned in the appeals for the assessment years 2002-03 and 2004-05, the first appellate authorities simply followed the order of the first appellate authority on this issue for the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance of the Revenue on this issue. Firstly, as noted above, while the detailed/speaking order deleting the addition made by the assessing officer by way of disallowance of insurance charges claimed by the assessee has been passed by the CIT(A) in the appellate order for assessment year 2003-04, for that year no appeal has been filed by the Revenue on this issue, thereby accepting the order of the CIT(A) in that behalf. That being so, there is no justification in contesting the orders of the Commissioners (Appeal) on this issue for the assessment years 2002-03 and 2004-05, as they simply followed the reasoning given in the appellate order of the CIT(A) for the assessment year 2003-04. Further, as correctly observed by the CIT(A) in the order for assessment year 2003-04, which has been adopted for the other two years, assessee, being a del cre dere agent, is responsible for payment of sale amounts to the sellers, which in turn depends on the safe delivery of goods to the buyers. In any event, as further observed by the CIT(A), it may also be in the nature of an incentive provided by the assessee to the buyers and sellers. We accordingly find no infirmity in the impugned orders of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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