2023 (8) TMI 812 - AT - Income Tax

Tax Tribunal upholds deletion of substantial addition due to income mismatch; recognizes business model.

DCIT, Circle- 9 (2) (2) Versus M/s Connect Residuary Pvt. Ltd. (Vice Versa)

The Tribunal upheld the decision of the Commissioner Of Income Tax (Appeals) to delete the substantial addition of Rs. 37,86,70,325/- due to a mismatch ... Undisclosed income - Mismatch between the income reported under form number 26AS and income recorded in the books of accounts - Form no 26 AS showed huge Rental income on which TDS is made and claimed as tax Credit by assessee and Assessee’s financial statements did not show any rental income - HELD THAT:- Naturally when lease rents are paid, tax is required to be deducted by the customer. If lease rent is paid after deducting tax at source, assessee is supposed to reimburse to the extent of tax deduction at source to the financer. The customer issues tax deduction at source certificate in the name of the assessee because master rent agreement was between assessee and the customer. On completion of the tenure of the lease, assets are returned. Those assets are sold at the end of the tenure to the respective purchaser of those assets. The assessee offers investment in unguaranteed residuary account upfront. Therefore naturally, the income of the assessee is not the rental income but the income earned in the business of acquiring and dealing in unguaranteed residuary interest in assets rented to the customers. Thus, the income offered by the assessee is such income and not the rental income appearing in form number 26AS. This AY is the only year in which LD AO has taken such a view and made addition. On Similar facts in earlier years and subsequent years, the LD AO has not made such addition. Perhaps for this year the addition has been made on account of failure on the part of him to understand the business model of the assessee. Therefore, we confirm the order of the LD CIT (A) deleting the addition for this year. Appeal of revenue is dismissed. Issues involved:The issues involved in this case are (1) Whether the Commissioner Of Income Tax (Appeals) was justified in deleting the addition without appreciating the mismatch in 26AS, and (2) Whether the Assessing Officer correctly made the addition based on the discrepancy between the income reported in 26AS and the income recorded in the books of accounts.Issue 1: Addition of Rs. 37,86,70,325/-:The appeal was filed by The Deputy Commissioner Of Income Tax against the appellate order passed by The Commissioner Of Income Tax (Appeals). The case involved a substantial addition due to a mismatch between the income reported under form 26AS and the income recorded in the books of accounts. The Assessing Officer found discrepancies in the tax deduction at source claimed by the assessee, leading to a verification process.Issue 2: Business Model Explanation:The assessee, engaged in equipment renting based on Residual management capabilities, clarified its business model during the assessment proceedings. The assessee explained that it is involved in acquiring and dealing in the guarantee residuary interest in assets rented to customers. The business operates by entering into Master Rental Agreements with customers and finding funding agencies to accept rentals. The revenue recognized by the assessee is from the difference between the amount received from the funding agency and the cost of the asset, classified as packaging income or investment in unwarranted residual.Decision:After considering the contentions and orders of the lower authorities, the Tribunal understood the business model of the assessee. It was clarified that the income offered by the assessee is not rental income but income earned in acquiring and dealing in unguaranteed residuary interest in assets rented to customers. The Tribunal confirmed the decision of the Commissioner Of Income Tax (Appeals) to delete the addition for the year in question, emphasizing the failure of the Assessing Officer to comprehend the business model. The appeal of the Assessing Officer was dismissed, and the consequential order filed by the assessee was also dismissed as infructuous.Separate Judgement:No separate judgment was delivered by the judges in this case.