2010 (5) TMI 513 - AT - Income Tax

Disallowance u/s 40A(3) - Freight Charges - The Assessing Officer had noticed from the LRs that each payment has made is more than Rs. 20,000 in cash in violation of provisions of section 40A(3) of the Act - Accordingly, the Assessing Officer has disallowed 20 per cent of the total freight - Held that - since the assessee had not claimed any expenditure in respect of payment to lorry owners, either as lorry hire charges or under any other head of account, the provisions of section 40A(3) cannot be made applicable by artificially holding that the said payments are debitable to profit and loss a/c. In view of the above, after considering the totality of the facts and circumstances of the case, the disallowance made under section 40A(3) of the Act for the assessment year under consideration cannot be sustained. Hence the addition made on this account is to be deleted. - since the assessee had not claimed any expenditure in respect of payment to lorry owners, either as lorry hire charges or under any other head of account, the provisions of section 40A(3) cannot be made applicable by artificially holding that the said payments are debitable to profit and loss a/c. In view of the above, after considering the totality of the facts and circumstances of the case, the disallowance made under section 40A(3) of the Act for the assessment year under consideration cannot be sustained. Hence the addition made on this account is to be deleted. Turnover for the purpose of Sec. 44AB - Income on the basis of TDS certificate - where the receipts consisted on two accounts on account of assessee s own trucks as well as on account of trucks owned by others but hired by the assessee, the whole of the receipts computed on the basis of TDS certificates could not be attributed as receipt on account of plying of trucks on assessee s own account and the total receipts computed on the basis of TDS certificates could not be considered as assessee s own receipts for the purpose of section 44AB of the Income-tax Act. The other issue raised in this appeal is with regard to disallowance of telephone expenses of Rs. 25,840 - this issue was not considered by the CIT(A) in his order - matter remanded back for this issue.

Summary

Issues Involved:
1. Disallowance under section 40A(3) of the Income Tax Act.
2. Disallowance of telephone expenses.
3. Method of accounting and principles of consistency.

Detailed Analysis:

1. Disallowance under Section 40A(3) of the Income Tax Act:
The primary issue revolves around the disallowance of Rs. 68,04,832 under section 40A(3) of the Income Tax Act, 1961. The assessee-firm, engaged in arranging transport vehicles for Beedi Manufacturers, declared a net income of Rs. 2,12,990 for the assessment year 2005-06. The Assessing Officer (AO) noticed that payments exceeding Rs. 20,000 were made in cash, violating section 40A(3). Consequently, 20% of the total freight amount paid (Rs. 3,40,24,164) was disallowed and brought to tax. The CIT(A) upheld this disallowance, prompting the assessee to appeal.

The assessee contended that it has been in business since 1986, consistently maintaining proper books of account and following accounting principles. The firm acted as a commission agent, not a transport operator, collecting a 3% commission on freight. The assessee argued that payments to lorry owners were not business expenses but reimbursements, and thus not subject to section 40A(3). The Tribunal found that the assessee-firm consistently followed its accounting method for over two decades, indicating that freight payments and receipts were not business transactions but reimbursements. The Tribunal concluded that the assessee was primarily a commission agent, and the disallowance under section 40A(3) was not applicable. Consequently, the addition was deleted, and the appeals of the revenue for assessment years 2003-04 and 2004-05 were dismissed.

2. Disallowance of Telephone Expenses:
The second issue concerns the disallowance of Rs. 25,840 towards telephone expenses for personal usage. The AO disallowed 10% of the telephone expenditure, which was upheld by the CIT(A). However, the Tribunal noted that this issue was not considered by the CIT(A) in his order. Therefore, the Tribunal remitted this issue back to the CIT(A) for reconsideration.

3. Method of Accounting and Principles of Consistency:
The assessee argued that the method of accounting regularly followed was accepted by the Department for over two decades without deviation. The Tribunal acknowledged that the assessee-firm had consistently followed its accounting method for over two decades, and the Department had accepted this method in previous assessments. The Tribunal emphasized the importance of consistency in tax proceedings, even though the principle of res judicata does not apply to income-tax proceedings. The Tribunal found that the assessee's method of accounting was correct and should be accepted.

Conclusion:
In conclusion, the Tribunal allowed the appeal of the assessee regarding the disallowance under section 40A(3) and dismissed the revenue's appeals for the assessment years 2003-04 and 2004-05. The issue of telephone expenses was remitted back to the CIT(A) for reconsideration. The Tribunal emphasized the importance of consistency in the method of accounting followed by the assessee.