2020 (5) TMI 372 - AT - Income Tax

Disallowance of certain expenses - HELD THAT - As seen as an admitted position that all the expenses were not properly vouched. Some of the expenses were recorded even on the basis of information provided orally by the drivers, for which there was no material to back the same. It cannot be said that all the expenses were properly vouched and there was no infirmity in the claim. Taking into consideration the peculiarity of the facts and circumstances obtaining in the instant case, disallowance at 10% as sustained in the first appeal is in order, which does not call for any further interference. This ground is not allowed. Disallowance u/s. 40A(2) - excess freight of ₹ 25/- per ton was paid to related parties - HELD THAT - Vehicles were dedicated specifically to the assessee in contrast to the outsiders, who were providing vehicles only on request and sometimes such a request was not acceded to as well. Since the vehicles of the related parties remained available round the clock and were dedicated specifically to the assessee, the rate charged by the third party transporters cannot constitute a good base for comparison with the rate of freight paid to the related parties. It is further a matter of fact that all the recipients furnished their returns by including the amount of freight received from the assessee and offered the same to tax - disallowance u/s.40A(2) has been wrongly made and sustained.Therefore, order to delete the addition.

Summary

Issues:
1. Disallowance of certain expenses amounting to ?11,65,629.
2. Disallowance under section 40A(2) of ?11,73,794.

Analysis:

Issue 1: Disallowance of Certain Expenses
The appeal pertains to the disallowance of expenses totaling ?11,65,629 by the Assessing Officer (AO), which was sustained at 10% across the board by the CIT(A). The expenses in question included Hamali, Commission, Miscellaneous expenses, and Allowance claimed under "Truck expenses." The AO disallowed a percentage of these expenses due to lack of proper vouching and substantiation. The appellant argued that the expenses were based on information provided orally by the drivers, but the AO found this insufficient. The ITAT, after considering the facts, upheld the 10% disallowance, noting that not all expenses were properly vouched. The ITAT concluded that the disallowance was justified given the lack of proper substantiation, and therefore, dismissed this ground of appeal.

Issue 2: Disallowance under Section 40A(2)
The second ground of appeal concerned the disallowance of ?11,73,794 under section 40A(2) of the Income Tax Act. The AO disallowed this amount as excessive payments made by the assessee to related parties compared to third parties for freight services. The appellant contended that the excess payment was justified as the related parties provided dedicated vehicles, unlike third parties who operated on a request basis. The ITAT observed that the related parties' vehicles were available round the clock and specifically dedicated to the assessee, justifying the higher payment. Moreover, all recipients had declared the received amounts for taxation. Considering these facts, the ITAT held that the disallowance under section 40A(2) was unwarranted and ordered the deletion of the addition. Consequently, the ITAT partially allowed the appeal on this ground.

In conclusion, the ITAT upheld the 10% disallowance of certain expenses due to lack of proper vouching, while ruling in favor of the assessee regarding the disallowance under section 40A(2) based on the specific circumstances and justifications provided.