2021 (9) TMI 221 - AT - Income Tax

Disallowance of expenditure on transportation - whether assessee had genuinely incurred the Transportation expenses? - as per AO increase in sales during the year when compared to last year is only 27% whereas freight outward is increased by 210% - CIT-A deleted the addition - HELD THAT - All the payments made to APK Road Lines are through account payee cheques only. Also TDS has been deducted and paid on the amounts paid to APK Road Carriers by the assessee, and the same is also reflected in the Form 26AS of APK Road Carriers produced before me. Further, receipt of the transportation amount is confirmed by APK Road Carriers and the same is reflected in its income as confirmed by it and the income tax return filed by it, a copy of which is on record. On perusal of the CIT(A)'s order, the CIT(A) has addressed each and every grievance raised by the A.O. in his order as well as in the remand report and came to the conclusion that the expenditure incurred by the assessee on transport is genuine. Therefore, we do not find any infirmity in the order of the CIT(A) in directing the A.O. to delete the disallowance made by the A.O. on account of expenditure on transportation. Accordingly, we dismiss the grounds raised by the revenue on this issue. Addition based on the various loose papers impounded during the Survey proceeding conducted in the business premises of assessee - clandestine removal and unaccounted sales - CIT-A deleted the addition - HELD THAT - CIT(A)'s categorical finding is that the A.O. during the survey proceedings of the assessee company's business premises have not collected any material from assessee company which indicate unaccounted sales and the loose papers impounded from business premises of M/s. B.S. Transcomm belong to them and assessee company cannot be held responsible for the other company's record and their statement - No reason to interfere with the order of CIT(A) in deleting the addition made by the A.O. on account of unaccounted sales. Revenue ground dismissed. Addition u/s. 40A(2)(a) (b) - appellant company had made purchases both from related party and unrelated party - AO compared the price of purchase from related party and unrelated party and disallowed as excess payment as provisions of Section 40A(2)(a) (b) - CIT(A) deleted the addition - HELD THAT - CIT(A)'s categorical findings are that the assessing officer erred by comparing prices of two different quality product supplied by M/s. Agarwal Foundries and unrelated parties. AO has not tried to find out the fair market value of the product. The appellant company has also produced the details of sale price of finished product manufactured using higher grade material which fetch extra margins to company. Furthermore, both M/s. Agarwal Foundries and Appellant Company are taxed at maximum rate of tax. Therefore, we do not find any infirmity in the order of the CIT(A) in deleting disallowance u/s. 40A(2)(a) (b) - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of transportation expenditure.
2. Unaccounted sales and clandestine removal of goods.
3. Disallowance under Section 40A(2)(a) & (b) of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Transportation Expenditure:
The Revenue contested the deletion of disallowance of ?3,70,35,199/- towards transportation expenses by the CIT(A). The Assessing Officer (A.O.) had disallowed this expenditure, suspecting it to be inflated and non-genuine, primarily due to a significant increase in freight charges compared to the previous year and the concentration of these expenses in the last three months of the financial year. The A.O. also doubted the authenticity of transactions with APK Road Carriers.

Upon appeal, the CIT(A) scrutinized the evidence, including sales invoices and ledger accounts, and found that the transportation expenses were genuinely incurred. The CIT(A) noted that the payments were made through account payee cheques, TDS was deducted, and the transportation charges were reflected in the income of APK Road Carriers. The CIT(A) also addressed the A.O.'s concerns about the timing and recording of expenses, confirming that the transportation services were rendered throughout the year. Consequently, the CIT(A) directed the deletion of the disallowance.

The ITAT upheld the CIT(A)'s decision, finding no infirmity in the CIT(A)'s detailed examination and conclusion that the transportation expenses were genuine.

2. Unaccounted Sales and Clandestine Removal of Goods:
The Revenue challenged the CIT(A)'s decision to reduce the addition of ?68,77,022/- for unaccounted sales to ?3,83,050/-, representing the gross profit portion, and the deletion of ?1,25,18,030/- added for unaccounted sales to M/s. BS Transcom Ltd.

The A.O. had based the additions on loose papers and a statement recorded under the Central Excise Act, indicating unaccounted purchases and sales. The CIT(A) observed that no material evidence was collected from the assessee's premises indicating unaccounted sales, and the loose papers belonged to M/s. BS Transcom Ltd., not the assessee. The CIT(A) applied judicial precedents, asserting that only the gross profit from unaccounted sales could be added to income, not the entire sales proceeds.

The ITAT agreed with the CIT(A)'s findings, emphasizing the absence of direct evidence from the assessee's records and the reliance on third-party documents and statements. The ITAT upheld the CIT(A)'s decision to reduce the addition to the gross profit portion and delete the addition for unaccounted sales to M/s. BS Transcom Ltd.

3. Disallowance under Section 40A(2)(a) & (b):
The A.O. disallowed ?1,30,80,016/- under Section 40A(2)(a) & (b), alleging that the appellant company made excess payments to a related party (Agarwal Foundries) for purchases compared to unrelated parties. The CIT(A) found that the A.O. erred by comparing prices of different quality products without determining the fair market value. The CIT(A) accepted the appellant's explanation that the higher grade material purchased from the related party resulted in higher quality finished products and better margins, and both entities were taxed at the maximum rate, negating tax avoidance.

The ITAT concurred with the CIT(A)'s findings, noting the lack of effort by the A.O. to ascertain the fair market value and the valid business rationale provided by the appellant. The ITAT upheld the deletion of the disallowance under Section 40A(2)(a) & (b).

Conclusion:
The ITAT dismissed the Revenue's appeals, upholding the CIT(A)'s decisions on all issues, including the deletion of disallowances and additions related to transportation expenses, unaccounted sales, and excess payments to related parties. The judgments were pronounced in the open court on 24th August 2021.