2018 (8) TMI 2089 - AT - Income Tax

Disallowance of transport expenditure - AO disallowed assessee s expenditure claim and Applied section 40(a)(ia) - HELD THAT - We find no merit in either of these submissions. The fact remains that the Assessing Officer had himself accepted and assessed assessee s total turnover to have been derived from transport business. He thereafter disallowed its corresponding transport expenditure to be not proved as genuine. DR fails to dispute the clinching fact that this assessee is in transport commission agent business rather than owning vehicles of its own. That being the case, it was very much necessary for the tax payer to engage other lorries for transportation of goods. This is therefore a case of accepting correctness of the entire receipts as income and disallowing the entire expenditure claim which is not permissible in our considered opinion. CIT(A) has estimated assessee s profit @12% these peculiar circumstances only by exercising his co-terminus powers as well as to that of the AO the first appellate jurisdiction as well. Needless to say, the assessee s books admittedly stood rejected. The CIT(A) has correctly appreciated the entire facts thereafter in holding that section 40(a)(ia) pre-supposes genuine business expenditure which cannot go side by side to an instance involving rejection of books. We thus affirm CIT(A) s well reasoned findings. The Revenue fails in all of its three folded grounds.

Summary

Issues Involved:
- Disallowance of transport expenses claimed by the appellant
- Application of section 40(a)(ia) of the Income Tax Act
- Assessment of the appellant's profit based on the transport business

Analysis:

Issue 1: Disallowance of Transport Expenses
The Revenue appealed against the CIT(A)'s order directing the Assessing Officer to restrict the addition of Rs.7,84,28,827 to Rs.13,60,158, estimating the taxpayer's profit at 12%. The AO found the appellant's transport expenditure to be non-genuine due to lack of supporting documents and infrastructure for transport services. The CIT(A) considered the appellant's argument that without owning trucks, hiring was necessary to conduct the transport business. The CIT(A) concluded that disallowance under section 40(a)(ia) was not applicable as the expenses were not genuine. The CIT(A) rejected the AO's assessment of the entire receipts as income, emphasizing that tax should be determined on income, not turnover. Ultimately, the CIT(A) estimated the profit at 12% due to the lack of reliable books of account and directed the AO to make a reduced addition of Rs.13,60,158.

Issue 2: Application of Section 40(a)(ia)
The Departmental Representative argued that the AO rightly disallowed the appellant's expenditure claim and applied section 40(a)(ia) of the Act. However, the Tribunal found no merit in this argument. The AO had accepted the total turnover derived from transport business but disallowed the corresponding transport expenditure as not genuine. The Tribunal noted that the appellant operated as a transport commission agent and needed to engage other lorries for transportation, making it unreasonable to disallow the entire expenditure claim alongside accepting the entire receipts as income. The Tribunal affirmed the CIT(A)'s decision that section 40(a)(ia) presupposes genuine business expenditure, which cannot coexist with rejected books of account.

Issue 3: Assessment of Appellant's Profit
The CIT(A) estimated the appellant's profit at 12% in light of the rejected books of account and the nature of the transport business. The Tribunal upheld the CIT(A)'s decision, emphasizing that the CIT(A) correctly exercised his powers in estimating the profit under the circumstances. The Revenue's appeal was dismissed, affirming the CIT(A)'s well-reasoned findings and the estimated profit calculation.

In conclusion, the Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal and affirming the estimation of the appellant's profit at 12% based on the unique circumstances of the transport business and the lack of genuine expenses.