ACIT, NCC - 7 (1),, CHENNAI vs. M/S. K.M. TRADE LINK,, CHENNAI

This appeal filed by the Revenue is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-7, Chennai, dated 25.09.2019 and pertains to assessment year 2016-17. 2. The Revenue has raised the following grounds of appeal: The Order of the learned Cornmissioner of Income Tax (Appeals) is contrary to the Law and facts of the case.

The brief facts of the case are that the appellant is a partnership firm and is engaged in the business of distribution and C&F agencies for various companies like Marico Ltd., Bajaj Electricals Ltd., Emami Ltd., Modi Naturals Ltd., etc. The assessee had filed its return of income for the assessment year 2016-17 on 16.10.2016 declaring total income of Rs. 1,00,50,550/-. During the course of assessment proceedings, the Assessing Officer noticed that as per Form no. 26AS, total :-3-: ITA. No: 3316/Chny/2019 receipts of the assessee was at Rs. 8,34,92,458/-, whereas the assessee had declared gross receipts of Rs. 3,12,11,975/- in the books of accounts. Therefore, called upon the assessee to explain the difference of Rs. 5,22,80,480/-. In response, the assessee submitted that difference is due to reimbursement of expenses incurred on behalf of the clients. The assessee being in the business of C&F agent for various companies had incurred certain expenses on behalf of their clients, and subsequently, got reimbursed from them. The clients have deducted TDS on total amount billed by us including reimbursement of expenses. But, the assessee has accounted its service charges and other income in the profit and loss account and excluded reimbursement of expenses. The AO did not accept explanation furnished by the assessee and according to him, the assessee could not prove with sufficient documents that reimbursement of expenses was accounted in the books of clients. Although, assessee has produced ledger account of some of the clients in its books, but does not produce financial and other documents of the clients to prove that the alleged reimbursement of expenses credited in the books of the assessee are not his own income and are :-4-: ITA. No: 3316/Chny/2019 attributable only to the clients. Therefore, rejected arguments of the assessee and made additions of Rs. 5,22,80,480/-.

Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee filed various documents including agreement with various companies for providing C&F agent and also sample copies of invoices to prove billing to its clients towards reimbursement of expenses. The assessee had also filed reconciliation between gross receipts as per Form 26AS and gross receipts accounted in books of accounts. The Ld. CIT(A), after considering relevant submissions of the assessee and also taken note of various evidences filed by the assessee, deleted additions made by the AO by holding that the assessee could able to explain difference between gross receipts as per Form no. 26AS and gross receipts in its books of accounts and such difference are on account of reimbursement of expenses, on which TDS has been deducted by the clients. The relevant findings of the CIT(A) are as under: “7.14 In the appellant's case It a ears that _the entire confusion has started from the fact that the principals have deducted tax at source In res etc of the reimbursement made, as a matter of :-5-: ITA. No: 3316/Chny/2019 abundant caution. For a better understanding of the case, the Service Tax returns of the appellant were called for. These returns have a significant bearing on the Issue at hand since the appellants income on the services it is rendering as a C&F are subject to Service Tax. 7.14.1 A reconciliation table of the profit/loss account Vs Service lax return for the F.Y.2015-16 is also reproduced below-: Profit and loss account vs service tax return reconciliation for the Financial year 2015-16: Particulars Apr’15- Julu’15 – Oct’15 – Jan’15 – Total Jun’15 Sept-15 Dec’15 Mar’15 As per Profit and loss account Service Charges 2090546.08 3760646.72 4167207.32 5738213.08 15756613.25 Admin Expenses 920200.00 1334300.00 1332300.00 1756600.00 5343400.00 Receipt Interest Receipt 9816.33 1014871.10 1024687.43 Investment Subsidy Receipt 101614.00 151421.00 149421.00 199228.00 601684.00 Profit on sale of 5302.00 5302.00 Fixed Assets Rebate Charges 482577.40 668831.70 648168.70 828818.70 2628396.50 Receipt Expenses claim 7483565.12 7483565.12 alc - Surplus Total Amount 3600239.48 5915199.42 6306913.35 17021296.00 328436482.5 in P & L A/c Amount as per Service Tax 3447320.00 4746920.00 5206080.00 6243165.00 19643485.00 Return Excess amount 152919.48 1168279.42 1100833.35 10778131.00 13200163.25 in Profit & Loss 7.15 On verification of service tax returns and an analysis of all the above documents/tables would show that total taxable services liable for service tax amounted to Rs. 1,96,43,485/-, whereas the total amount offered in P/L account is Rs.3,28,43,648/- [which is inclusive of amounts as per service tax returns.] 7.15.1 The receipt of Rs. 1,96,43,485!- from the various principals on behalf of whom the appellant is operating as a C&F Agent, and for which appellant is receiving service changes/remuneration are therefore already disclosed in the service tax returns. 7.15.2 On the other hand, the receipts amounting to Rs. 8,56,48,960/- are on account of reimbursement of expenses :-6-: ITA. No: 3316/Chny/2019 incurred on behalf of the principals. Since these amounts constitute reimbursement, appellant has not shown any item in the profit and loss account. Therefore, after considering the entire gamut of the facts of the nature of appellant's business, the documents, details and case laws before me,. I am of the considered view that there was no justification for adding the said amount of Rs.5,22,80,480/- constituting the difference between the Form 26AS and the returned income as suppressed receipts. The appellant has also furnished copies of debit notes/bills/invoices raised on account of the list of expenses against the clients/principals, who settles the bill amount after deducting TDS. These are duly verified. The adage - "Al] receipts are not income" is therefore squarely applicable to the facts of this case. 7.15.3 As has already been laid down by the Hon'ble Jurisdiction High Court in,the case of Commissioner of Service Tax Vs M/s. Sangamitra Services Agency cited supra in paras 8.4 & 8.5 reimbursements made to a C&F agency will not form a component of the taxable turnover valuation, which is to be restricted to only commission or remuneration received. 7 .15.4 In the light of the detailed discussion made above, the AO is hereby directed to delete the impugned addition made amounting to Rs.5,22,80,480/- and to grant relief to the appellant accordingly.”

The Ld. DR submitted that the Ld. CIT(A) has erred in deleting additions made towards difference in gross receipts as per Form no. 26AS and books of accounts of the assessee, on the basis of certain additional evidence, without confronting those evidences to the Assessing Officer for its comments and rebuttal. The Ld. DR further submitted that, although the assessee claims to have reconciled difference between gross receipts as per books of accounts and gross receipts as per Form no. 26AS, but the assessee could not file necessary evidences including bills/vouchers in support of various :-7-: ITA. No: 3316/Chny/2019 expenses incurred by the assessee for their clients and also proof of accounting said expenses by the clients in their books of accounts. The CIT(A) without considering such facts, simple deleted additions made by the AO.

The Ld. Counsel for the assessee, on the other hand submitted that the assessee has filed a reconciliation and explained difference between gross receipts as per books of accounts and gross receipts as per Form no. 26AS. The assessee had filed sample copies of invoices for their charges and invoices/debit notes issued to clients for reimbursement of expenses. The assessee had also filed sample copies of invoices for various expenses incurred for their clients. Further, the assessee has explained before the CIT(A) that clients have deducted TDS u/s. 194C and 194J of the Income- tax Act, 1961 (hereinafter referred to as “the Act”) on total amount paid to us including reimbursement of expenses, whereas, the assessee had accounted gross receipts in their books of accounts which only includes their charges and income, but does not include reimbursement of expenses. The CIT(A), after considering relevant facts has rightly deleted additions made by the AO and their order should be upheld.

We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The assessee is in the business of clearing and forwarding agent had entered into agreement with various companies for distributing their products, which includes Bajaj Electricals Ltd., Emami Ltd., Hindustan Coca Cola Beverages Pvt Ltd., Kellogg India Pvt Ltd., Marico Ltd. etc. As per fact brought out by the ld. CIT(A) in their order at para no. 3, the assessee had entered into agreement with 16 companies for providing C&F agent service. The facts brought out by the Ld. CIT(A) further clarifies that as per agreement between the assessee and companies, the assessee is providing various services which includes distribution of goods for which the assessee has charged commission and other income etc. The agreement between the parties further specifies various expenses to be incurred by the assessee on behalf of their clients and reimbursement of such expenses by the clients. It is admitted fact in line of C&F business that C&F agents will incur various expenses while rendering services to their clients and the same will be reimbursed by the clients against invoices/debit notes. In this case also, the assessee has :-9-: ITA. No: 3316/Chny/2019 incurred various expenses on behalf of their clients and while billing to their clients for services rendered, a separate bill/debit note has been issued to recover various expenses incurred on behalf of their clients. The assessee in its books of accounts has accounted services charges/commission received from their clients for rendering C&F agent service as their income, but reimbursement of expenses has been squared off in the parties account. On the other hand, the clients have deducted TDS on total payments made to the assessee including reimbursement of expenses. Thus, obviously there will be a difference between total payments made by the clients and TDS deducted thereon as per Form no. 26AS and gross receipts booked by the assessee in their books of accounts. The AO has noted difference of Rs. 5,22,80,480/- in gross receipts as per books of accounts of the assessee and gross receipts as per Form no. 26AS. The assessee has explained difference between gross receipts and claimed that said difference is on account of reimbursement of expenses. The assessee had filed reconciliation explaining difference with party wise service charges received and reimbursement of amount received towards reimbursement of expenses. The AO never disputed these facts, however rejected reconciliation :-10-: ITA. No: 3316/Chny/2019 filed by the assessee only for the reason that the assessee could not prove with sufficient documents that reimbursement of expenses were not accounted in the books of clients.

In our considered view, the reasons given by the AO to make additions towards difference in gross receipts appears to be baseless and incorrect, because the assessee can file whatever evidence the Assessing Officer wants, to prove its financial transactions with their clients, but it is incorrect on the part of the Assessing Officer to expect the assessee to produce books of accounts of their clients. Further, the only reason for the AO to make additions towards difference in gross receipts is doubt and suspicion on expenses booked by the clients in their books of accounts. In our considered view, the AO is miserably failed to understand the concept of accounting, because deduction of TDS on total payments including reimbursement of expenses itself is a sufficient proof that the client have accounted expenses incurred by the assessee on behalf of their clients. In this case, the clients have deducted TDS on total payments including reimbursement of expenses, because of this there is difference between gross receipts as per Form no. 26AS reported by the :-11-: ITA. No: 3316/Chny/2019 clients while deducting TDS u/s. 194J & 194C of the Act, when compared to gross receipts reported in the books of accounts of the assessee. The assessee is following the method of accounting as per which it was accounting service charges received from the clients towards rendering various services as their income and reimbursement of expenses is squared off in the parties account. The assessee has filed a party wise reconciliation along with ledger account explaining the difference. As per chart filed by the assessee, the gross receipts towards C&F service charges and other income, exactly matches with gross receipts booked by the assessee in their books of accounts. The assessee had also reconciled difference between reimbursement of expenses and as per bills filed by the assessee, amount received from clients towards reimbursement of expenses is more than the amount of difference noticed by the AO from the Form no. 26AS. Therefore, we are of the considered view that the AO has erred in making additions towards difference in gross receipts as per Form no. 26AS and as per books of accounts of the assessee. The CIT(A) after considering relevant facts and also by considering reconciliation filed by the assessee has rightly deleted addition made by the AO and thus, we are inclined to :-12-: ITA. No: 3316/Chny/2019 uphold the findings of the Ld. CIT(A) and reject the grounds taken by the Revenue.

In the result, the appeal filed by the Revenue is dismissed.