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Facts
The assessee filed an appeal against the order confirming an addition of Rs. 32,78,055/- made by the Assessing Officer, which was treated as uncharged brokerage income. The AO's action was based on the mercantile system of accounting, despite the assessee claiming it was not obligatory to charge brokerage from all clients.
Held
The Tribunal held that charging or non-charging of commission is the prerogative of the assessee, unless mandated by the Act. The Revenue cannot force an assessee to charge commission. However, the appropriate course of action would be to disallow expenses claimed for services for which no remuneration was charged, thereby augmenting the assessee's loss.
Key Issues
Whether the AO can add back brokerage income not charged by the assessee as per its discretion, and if not, what is the correct course of action for the Revenue?
Sections Cited
250, 148, 271(1)(c)
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Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: DR. B.R.R. KUMAR, VICE-SHRI T.R. SENTHIL KUMAR
PER DR. B.R.R. KUMAR, VICE-PRESIDENT :
This appeal has been filed by the assessee against the order of the Ld. Commissioner of Income-tax (Appeals)-11, Ahmedabad (hereinafter referred to as "CIT(A)" for short) dated 22.06.2022, passed u/s 250 of the Income-tax Act, 1961, (hereinafter referred to as "the Act" for short) for the Assessment Year (AY) 2013-14.
The solitary grievance raised by the assessee in this appeal is as follows:-
“In law, facts and circumstances of the Appellant’s case, the learned CIT(Appeals) erred in confirming the addition made by the Assessing Officer of Rs.32,78,055/- considering the same as brokerage income earned but not credited to client and offered to tax when no such addition is called for.”
The assessee filed its return of income on 11.04.2018 in response to the notice u/s 148 of the Act issued.
N.K. Proteins Ltd Vs. ACIT Asst. Year : 2013-14 - 2– Uncharged Brokerage :-
The facts relating to this issue are that the Assessing Officer observed that the assessee had “not charged any brokerage” from certain clients. The assessee before the Assessing Officer has claimed that it was not obligatory to receive such charges from its all the clients. This contention of the assessee was not accepted by the Assessing Officer on the ground that once the assessee has rendered the service and hence charges are required to be accounted on mercantile basis. Holding thus the Assessing Officer has made addition of Rs.32,78,055/- being brokerage income not charged to client and offered to tax. For the ready reference, the entire order of the Assessing Officer on this issue is reproduced hereunder:
“6.2 As regards, non-charging of brokerage from its clients, it is stated to have discontinued business transactions with connection parties & transactions charges could not been recovered. Further, it is stated that it is no manner obligatory to recover such charges and it is up to the management to decide what practice to follows. Explanation/contention made by the assessee is not acceptable. As required by the provisions of law, the assessee ought to have charged brokerage from its clients, recovery of the said charges is not a material & also subsequent events. The assessee has rendered the services, therefore, charges are required to be accounted for & offered for taxation. Further, similar disallowances is also disallowed in the subsequent, assessment year i.e. 2014-15 & therefore, amount is not allowable & required to added to the total income accordingly, an amount of Rs.32,78,055/-, not charged during the year is added to the total income of the assessee. Penal action u/s 271(1)(c) of the Act are initiated against the assessee for concealment of income for the year under consideration.”
Aggrieved by the order of the Assessing Officer, the assessee filed appeal before the Ld. CIT(A) who confirmed the addition made by the Assessing Officer, by observing as under:- “7.3 So far as addition of Rs.32,78,055/- is concerned, the AO has observed that Appellant has not charged any brokerage from certain clients. The Appellant before AO has claimed that there is no manner obligatory to recover such charges from its clients as management has to decide what practice it needs to be followed. This contention of Appellant was not accepted by AO on the ground that once Appellant N.K. Proteins Ltd Vs. ACIT Asst. Year : 2013-14 - 3–
has rendered the service, charges are required to be accounted on mercantile basis. Considering this fact, the AO has made addition of Rs.32,78,055/- being brokerage income not charged to client and offered to tax. 7.3.1 On perusal of relevant facts on record, it is undisputed fact that Appellant has acted as broker for various transactions carried out on exchange. The Appellant has charged brokerage on certain clients and not charged brokerage on certain clients, for which no explanation was provided It is observed that appellant has not charged any brokerage for transactions carried out on behalf of group concern being Tirupati Retail Limited which also prove that appellant is selectively charging brokerage and selectively not charging brokerage income as per its own discretion and even in group concern referred supra, it has not charged any brokerage which clearly suggest that appellant has not shown income even if such income is accrued to appellant. The Appellant has not brought on record any evidences or agreement entered with the parties wherein it has been decided that no brokerage would be charged. Even otherwise, when Appellant is acting as a broker for transactions to be carried out on exchange, its brokerage income has accrued. No prudent person would carry out the business without any intention to earn the income. The contention of Appellant that it is upto the management to decide whether to charge brokerage or not cannot be accepted as Appellant has not brought on record any cogent material or reasoning for not charging such brokerage to certain clients. There is no evidence on record which can suggest that there was no other benefit which was passed on to such entities from whom brokerage is not charged. On the contrary Appellant itself has stated that it has earned brokerage income of Rs. 15,00,000/-in current year which means that it is charging brokerage to few clients and Appellant cannot recognise income as per its own will. As Appellant is following mercantile system of accounting and considering the fact that Appellant is. carrying out a business, it ought to have charged brokerage from clients on whose behalf it has made transactions. Considering these facts, addition made by AO for Rs.32,78,055/- is confirmed.”
We have heard the rival contentions and perused the material available on record. Before us, Ld. AR argued that the assessee had losses to the tune of Rs.22,84,86,746/-. Hence, even if brokerage is charged, the Revenue would not be in any better position. And the payer would also claim the same amount in their P&L and net results would have a neutralizing effect. On the other hand, Ld. DR argued that every assessee is independent assessee and every assessment year is independent assessment N.K. Proteins Ltd Vs. ACIT Asst. Year : 2013-14 - 4– year; hence the financials of the assessee would not have any cross-over effect on the payer.
We have examined the matter. 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.
In the result, the appeal of the assessee is allowed. The order is pronounced in the open Court on 06.05.2025