ITAT Delhi Rules on TDS Credit vs. Actual Accrual of Brokerage Income

Background of the Dispute

Goldmine Developers Pvt. Ltd. vs DCIT came up before the ITAT Delhi in the form of a cross objection filed by the assessee for Assessment Year (AY) 2011-12. While the Revenue’s appeal in ITA No. 4976/Del/2015 for this year had already been dismissed earlier (order dated 10.10.2019), the cross objection in CO No. 219/Del/2018 remained pending and was taken up separately.

The controversy focused on whether an amount of Rs. 86,69,009 could be treated as brokerage income accruing in AY 2011-12 merely because Tax Deducted at Source (TDS) had been deducted and claimed as credit, even though, as per the assessee’s regular accounting method, the relevant commission was recognised and taxed in subsequent assessment years.

The core legal issue was the interaction between:

• Section 198 of the Income Tax Act 1961 (regarding TDS deemed to be income received), and
• the concept of “accrual” of income under the mercantile system of accounting, particularly for commission/brokerage activities.

Facts Leading to the Addition

Discrepancy Between TDS Credit and Income Shown

During assessment proceedings for AY 2011-12, the Assessing Officer (AO) noticed a mismatch between:

• TDS credit claimed by the assessee: Rs. 83,05,951 on receipts of Rs. 8,31,22,127 (as per Form 26AS), and
• Income credited to the Profit & Loss account: Rs. 6,75,95,185.

This resulted in a difference of Rs. 1,55,26,942 at the gross receipts level and, after certain adjustments, an addition of Rs. 86,69,009 as alleged undisclosed income.

The AO observed that a significant portion of the receipts related to transactions with M/s. Prateek Realtors Pvt. Ltd. (also referred to as M/s. Prateek Realtech / M/s Prateek Realtors in the appellate order), which had deducted TDS on brokerage/commission and reported the same in its TDS returns.

Assessee’s Explanation Before AO

The assessee, a real estate commission agent operating through a network of sub-brokers, clarified that:

• It had dealings substantially with Prateek Realtors Ltd during the year.
• The builder had booked brokerage/commission in its books and deducted TDS thereon.
• The assessee had claimed the TDS as credit in its return.
• However, the assessee’s own accounting policy recognised commission income only when:
  • the builder actually received payments from flat buyers, and
  • the assessee’s services in relation to the transaction were fully completed.

In this specific year:

• As per TDS data, Prateek Realtors Ltd had claimed commission expense of Rs. 2,75,11,128 and deducted TDS of Rs. 27,51,113.
• The assessee, as per its books, had recognised commission income from this builder only to the extent of Rs. 1,77,35,127.
• A part of the builder’s booked brokerage remained unrecognised in the assessee’s accounts and was instead offered to tax in AYs 2012-13 and 2013-14, in line with its regular method of accounting.

The assessee contended that income does not accrue merely because the payer has recognised an expense and deducted TDS. Accrual must be determined based on when the assessee’s right to receive income actually arises under its contractual and factual circumstances.

AO’s Stand and Addition

The AO rejected the assessee’s stand on the following reasoning:

• Once the assessee has claimed TDS credit, the corresponding gross receipts must be treated as income of that year.
• Reliance was placed on Section 198, suggesting that TDS deducted is deemed income in the hands of the person from whose income it is deducted.
• Since Prateek Realtors Pvt. Ltd. had debited commission expenditure and deducted TDS, and the assessee claimed such TDS, the AO held that the entire brokerage corresponding to such TDS must be taxable in AY 2011-12.

After reducing service tax from the commission component, the AO made an addition of Rs. 86,69,009 to the income for AY 2011-12.

Proceedings Before the Commissioner (Appeals)

Reconciliation and Assessee’s Arguments

In appeal, the assessee filed: