2015 (6) TMI 388 - AT - Income Tax

Disallowance of freight expenditure - Held that - Income of assessee has not been estimated by rejecting the books of account, rather a particular item of expenditure claimed by assessee was found to be not allowable due to lack of supporting evidence and also for violation of provisions contained u/s 194C read with section 40A(3) and 40(a)(ia) of the Act. In these circumstances, assessee s contention that once books of account are rejected, net income has to be estimated and no disallowance u/s 40(a)(ia) and 40A(3) is to be made, is not acceptable. For this very reason, decision of ITAT in case of M/s Hycons Infrastructure (India) Ltd. (2013 (12) TMI 56 - ITAT HYDERABAD) is not applicable to the facts of the present case. Considering the fact that assessee was in transport business and the entire business activity could not have been carried out through his own vehicles but he must have engaged vehicles of third parties payment of freight charges is believable. However, since the expenditure is not supported by bills and vouchers and since possibility of inflating the expenditure cannot be totally ruled out, it will be reasonable to allow 80% of the freight expenditure in respect of which assessee could not produce any evidence, subject to condition that such expenditure is not hit by section 40(a)(ia) and 40A(3) of the Act. As far as balance freight expenditure of ₹ 52,86,145 is concerned, though, it is supported by bills and vouchers but ld. CIT(A) on the basis of remand report of Addl. CIT disallowed an amount of ₹ 34,29,875 u/s 40(a)(ia), which also includes the amount of ₹ 14.92,500 representing cash payments exceeding ₹ 20,000 made in violation of section 40A(3). It is the contention of ld. AR before us since the entire payment was made during the relevant PY and nothing remained payable, no disallowance can be made u/s 40(a)(ia). It appears, this argument has not been advanced by assessee before the Departmental authorities. However, keeping in view the principle laid down by the ITAT Special Bench in case of Merlyn Shipping Transport and others (2012 (4) TMI 290 - ITAT VISAKHAPATNAM ), we direct Assessing Officer to verify this aspect and if it is found that the entire payment was made during the relevant PY and nothing remained payable at the end of PY, no disallowance u/s 40(a)(ia) can be made. As far as violation of section 40A(3) is concerned, we remit this issue back to the file of Assessing Officer for affording an opportunity to assessee to explain as to whether the payments come within the exception provided under Rule 6DD. - Decided partly in favour of assessee for statistical purposes.

Summary

Issues:
Disallowance of freight expenditure claimed by the assessee.

Analysis:
1. The assessee, a transportation company, filed its return for AY 2008-09 but failed to comply with notices from the AO, leading to an ex-parte assessment under section 144 of the Act.
2. The AO disallowed the entire claimed freight expenditure of Rs. 1,06,45,936 due to lack of details and non-deduction of TDS, resulting in an increased total income of Rs. 1,06,58,548.
3. The assessee challenged the disallowance before the CIT(A), providing some evidence during the appeal process.
4. The CIT(A) allowed Rs. 18,56,270 of the expenditure while disallowing the balance of Rs. 87,89,666, based on reports from the AO and Addl. CIT.
5. The AR argued that in the absence of proper maintenance of accounts and supporting evidence, the income should be estimated rather than making separate disallowances under sections 40(a)(ia) and 40A(3).
6. The DR contended that the disallowance was justified due to lack of evidence and violations of tax provisions.
7. The Tribunal found that the AO did not reject the books of account but disallowed the expenditure for lack of evidence and tax violations, rejecting the AR's argument.
8. Considering the evidence produced and the balance amount without proof, the Tribunal allowed 80% of the unsupported expenditure, subject to tax compliance, and directed verification of the disallowed amount under sections 40(a)(ia) and 40A(3).
9. The Tribunal partially allowed the appeal for statistical purposes, directing further examination of tax compliance issues related to the disallowed amount.

This detailed analysis covers the issues involved in the judgment regarding the disallowance of freight expenditure by the assessee and the subsequent decisions made by the authorities and the Tribunal.