Business Model Explains Mismatch Between Form 26AS And Actual Income: ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has deleted the addition on the grounds that the business model explains the mismatch between Form 26AS and actual income.

The bench of Sandeep Singh Karhail (Judicial Member) and Prashant Maharishi (Accountant Member) has observed that 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 not the rental income appearing in Form 26AS.

The assessee is in the business of equipment renting based on Residual management capabilities. It filed its return of income, declaring a total income. This return was picked up for scrutiny by an issue of notice. The assessment order under Section 143 (3) was passed, determining total income. A substantial addition was made on account of a mismatch between the income reported under Form 26AS and the 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 the assessee, and the assessee’s financial statements did not show any rental income.

During the course of assessment proceedings, it was found that the assessee has claimed tax deduction at source, whereas AO was of the view that the assessee has offered income tax, which is attributable to tax deducted at source. Therefore, verification was made.

The Assessee explained its business and stated that it is engaged in the business of restitution. The assessee is approached by customers who want to use the equipment for their business on rent. The assessee enters into the master Rental Agreement. The assessee, in turn, finds a lender who can pay the seller for the equipment. To the lender, the assessee sells the outstanding rent receivable on a discounted basis. Gross rental receivables are discounted with various lenders on a non-recourse basis. Customers pay the Rental to the lender.

As the master Rental agreement is with the assessee, tax is deducted on such rental income paid to the financial lender, but TDS is in the name of the Assessee. Rental income does not constitute income for the assessee. Therefore, the assessee has offered the correct income.

The assessing officer disbelieved the explanation of the assessee and found that the receipt stated in Form 26AS and the income shown in the profit and loss account had wide variances, so he made an addition.

The assessee explained in detail, through a diagrammatic presentation, the business model of the assessee and the respective accounting entries to be passed. In past assessment years and subsequent assessment years, the accounting of the assessee was accepted by revenue. It is disturbed only in this assessment year. The business of the company, its revenue stream, its transaction trail, and its accounting impact The assessee is not in the business of renting equipment but in the business of reselling it. The assessee referred to the annual accounts submitted and said that the income shown by the assessee was accepted correctly.

The tribunal observed that to reach a conclusion about whether the assessee has offered the correct income or not, it is necessary to understand the assessee's business model.

The ITAT noted that any customer who would like to have certain equipment will contact the assessee for the purchase of those assets. Based on the requirement, a lease of assets is entered into between the customer and assessee by a Master Rental Agreement fixing rental schedules. The assessee solicits a financier who can finance the purchase of the assets to be rented out. Such a financier subsequently pays the assessee, and in turn, the assessee assigns the lease rentals receivable from the customer to the financier.

The tribunal stated that from the financier, the assessee receives a discounted value for lease rentals. Based on this, the assessee pays the purchase price to the vendor from whom the equipment or assets were purchased. The customer directly makes payment of lease rentals to the Financier because the lease rentals receivable by the assessee are already assigned to the financier. 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, the assessee is supposed to reimburse the financer to the extent of the tax deduction at source. The customer issues a tax deduction at source certificate in the name of the assessee because the master rent agreement was between the 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 purchasers of those assets. The assessee offers investment in an unguaranteed residuary account upfront.

Case Title: DCIT Versus M/s Connect Residuary Pvt. Ltd.

Case No.: ITA No. 6451/MUM/2019

Date: 26.06.2023

Counsel For Appellant: Yogesh Thar

Counsel For Respondent: Manish Sareen

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