2017 (5) TMI 1821 - AT - Income Tax

Disallowance of speed money expenditure - allowable business expenditure or not? - The assessee firm claim, that this speed money was paid out of business expediency - assessee is a partnership firm engaged in the business of clearing and forwarding agent and transport contractor - CIT(A) restricted the disallowance to 1.6% of the total payment - HELD THAT - It is not the case of the AO that the speed money is not allowable in principle. The AO had not even doubted the genuineness of the expenditure. Having regard to the nature of the evidence produced before him, the AO has come to the conclusion that a part of the expenditure was not allowable as he felt that there was no evidence available except the self made vouchers and the expenditure incurred in cash. It is trite to law that no expenditure can be disallowed without rejecting the books of accounts and reliance in this regard can be made on the decision of Hon'ble Karnataka High Court in case of Anil Kumar Co. Vs CIT 2016 (3) TMI 184 - KARNATAKA HIGH COURT The assessee firm is not on appeal against the order of the CIT(A); keeping in view the above principle, we sustain the order of the CIT(A) and appeals filed by the revenue are dismissed. Assessment u/s 153A - Addition of speed money as illegal payment - as found during the course of search and seizure operations certain incriminating material suggesting illegal payment to the officials of port was found therefore he inferred that out of the total speed money claimed the speed money paid in excess of Rs. 26/- per tone was treated as inflated expenditure - HELD THAT - The law is settled to the extent that the additions in the assessments u/s. 153A can be made only based on the material facts as a result of the incriminated materials found. From the perusal of the assessment order it is clear that during the course of survey and seizure operations the department had seized a loose sheet indicating payment to the certain officials of the port trust. Based on this information the AO as well as the CIT(A) has disallowed the payment to the extent of 10% of the speed money as illegal payment. Mere perusal of the loose sheet it is clear that about 10% of the cash payments was made to the officials of the port trust. Therefore in our considered opinion the disallowance to the extent of 10% is just and proper and therefore we do not want to interfere.

Issues Involved:
1. Disallowance of speed money.
2. Enhancement of income by the CIT(A).
3. Validity of the Tribunal's previous order.
4. Legitimacy of payments to sub-contractors.
5. Assessment of illegal payments during search and seizure operations.

Detailed Analysis:

1. Disallowance of Speed Money:
The core issue revolves around the disallowance of speed money claimed by the assessee. The assessee, a partnership firm engaged in clearing and forwarding, claimed Rs. 1,17,59,931 as speed money, arguing it was paid out of business expediency to complete work on time and avoid charges from ship owners. The Assessing Officer (AO) disallowed 20% of this expenditure, citing lack of evidence other than self-made vouchers and cash payments. The CIT(A) later restricted this disallowance to 1.6% of the total payment, which was confirmed by the Tribunal. The Tribunal noted that the AO did not doubt the genuineness of the expenditure and emphasized that no expenditure can be disallowed without rejecting the books of accounts, referencing the Karnataka High Court decision in Anil Kumar & Co. Vs CIT (386 ITR 702).

2. Enhancement of Income by the CIT(A):
The CIT(A) had issued a show cause notice for enhancement of tax liability and subsequently enhanced the tax liability by disallowing payments made to sub-contractors through cheques amounting to Rs. 2,70,70,745. The Appellate Tribunal initially reduced this addition to Rs. 15,00,000, but the High Court found the Tribunal's order lacked a judicious application of mind and remanded the matter for fresh adjudication.

3. Validity of the Tribunal's Previous Order:
The High Court set aside the Tribunal's order dated 30th April 2009, citing that the Tribunal did not judiciously address the major points decided by the CIT(A). The High Court emphasized that the Tribunal's order was not sustainable as it failed to apply its mind to the facts and circumstances of the case, necessitating a fresh disposal in accordance with law.

4. Legitimacy of Payments to Sub-Contractors:
The CIT(A) found the vouchers issued to sub-contractors and the payments made to them suspicious. Summons under Section 131 of the Income Tax Act revealed that sub-contractors did not maintain any records regarding the laborers engaged. The payments were made through computer-generated bills without service tax registration numbers or other identifiers, and the amounts were withdrawn in cash immediately after cheque deposits. The Tribunal's casual approach in sustaining the AO's order was criticized by the High Court, which highlighted the need for a thorough examination of the facts.

5. Assessment of Illegal Payments During Search and Seizure Operations:
For assessment years 2006-07 to 2011-12, the AO inferred from seized materials that 10% of the speed money was inflated and treated it as illegal expenditure. The CIT(A) upheld this disallowance. The Tribunal agreed that the disallowance was justified based on the seized loose sheets indicating payments to port officials, thereby dismissing the revenue's appeals.

Conclusion:
The Tribunal upheld the CIT(A)'s restriction of disallowance to 1.6% of the total wages for the assessment year 2002-03, dismissing the revenue's appeals. For the assessment years 2006-07 to 2011-12, the Tribunal confirmed the disallowance of 10% of the speed money as illegal payments. The appeal filed by the assessee challenging the enhancement notice was allowed, negating the need for enhancement of addition on the speed money issue. The High Court's remand order necessitates a fresh adjudication by the Tribunal, ensuring a judicious application of mind to the facts and circumstances of the case.

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