2023 (1) TMI 1232 - AT - Income Tax

Disallowance of transport expenses - HELD THAT - We may clarify that while the law provides for disallowance u/s. 37(1) even if an expenditure, though incurred, is not wholly and exclusively for the purpose of the assessee s business, the disallowance in the instant case is for the reason of it having not been incurred, i.e., to that extent. We may here also add that a disallowance would be sustainable on the assessee being unable to prove an expenditure, and it is not necessary for the Revenue to actually disprove the same. That we have found the same as, besides being unsubstantiated, grossly inflated and, further, in examining its genuineness, considered it from various angles, including its quantum, inasmuch the two were found inter-related, would not make it any less a disallowance s.37(1). And, further, not convert it into a case of estimation of income, i.e., merely because the same works to a tidy sum in relation to sales. The disallowance u/s. 37(1), as indeed an addition u/s. 41(1) or u/s. 68, is a specific adjustment/s (to the returned income), and would not for that reason make it a case of estimation of income. As explained by the Hon'ble Apex Court in Kale Khan Mohd. Hanif vs. CIT 1963 (2) TMI 33 - SUPREME COURT ; CIT v. (M.) Ganpathi Mudaliar 1964 (4) TMI 22 - SUPREME COURT ; and CIT vs. Devi Prasad Vishwanath Prasad 1968 (8) TMI 5 - SUPREME COURT , there is nothing in law that prevents the assessing authority in taxing both, the cash credit, the nature and source of which is not satisfactorily explained, and the business income estimated by him after rejecting the books of account as unreliable. It would be a different matter though where the cash credit is explained in terms of secreted profit of the business for the current or a preceding year, so that relief is allowed on that basis, i.e., of the same income being subject to tax twice (also see Anantharam Veerasinghaiah Co. 1980 (4) TMI 2 - SUPREME COURT One thing to say that the operating result as derived for one year, for which books stand properly scrutinised and income assessed making specific adjustment/s to the returned income, is, on the premise of the same representing a normative profit, applied to another, subsequent, year, for which the book-results, though similarly disclosed; the books of account having not been produced in assessment, income has to be estimated, and quite another to do just the opposite, i.e., applying the results for the second (subsequent) year, liable to be estimated, to the first year. That would be putting the cart before the horse . There has been clearly no adjudication by the ld. CIT(A) qua the disallowance of transport expenditure, made by the AO u/s. 37(1). Disallowance being u/s. 37(1), inasmuch as the same bears no element of artificial disallowance (as u/ss. 40A(3), 40(a)(ia)), and is on account of genuineness of expenditure - Yes, we do find to state that the profit element upon disallowance of transportation works to 81.56%, i.e., too huge to be accepted. Without doubt, the disallowance being u/s. 37(1), inasmuch as the same bears no element of artificial disallowance (as u/ss. 40A(3), 40(a)(ia)), and is on account of genuineness of expenditure, the extent thereof, which is to be reasonable, is a relevant consideration. No basis for the said calculation (81.56%) has though been given, nor was argued/furnished before us. The same is clearly incorrect . The total transportation and loading charges is at Rs. 888.34 lacs, and the expenditure allowed, Rs. 400 lacs (see paras 2.5, 3.2), so that profit works to Rs. 488.34 lacs, or at 55% (of the receipt). There is however no separate income corresponding to the transportation expenditure incurred other than for transporting bauxite from the mine head to the railway siding. Labour expenditure on breaking, sorting, and screening of the ore - HELD THAT - As mentioned that the return for AY 2011-12 was not subject to scrutiny, while that for the two preceding years were without any appraisal of evidence/s and, consequently, any finding/s, subject only to token disallowances. The same is itself not valid in law, as explained in Asst. CIT v. Arthur Anderson Co. 2004 (12) TMI 637 - ITAT MUMBAI , relied upon by the assessee before the ld. CIT(A). The disallowance, as being confirmed by us, i.e., on the touch-stone of whether the assessee has been able to, in the conspectus of the case, prove the amount claimed (Rs. 361.19 lacs) as incurred wholly and exclusively for business purposes, the two indicating quantum and the purpose of the expenditure respectively, i.e., prove the expenditure in the sum claimed, and to which the answer is clearly in the negative, further finding the disallowance as made, i.e., Rs. 8.89 PMT (160.53 151.64), reasonable. No basis for reduction has been stated by the ld. CIT(A). Here it may be clarified that reference to the cost for the preceding year, as indeed to that of the comparable case, is only toward the reasonability of the disallowance made. Disallowance u/s. 40A(3) qua transport expenses - Quantum of disallowance u/s. 40A(3) and s.40(a)(ia), which could again overlap, shall be with reference to the total amount allowed, i.e., excluding, from the sum claimed the amount held as not allowable and confirmed for disallowance u/s. 37(1). NP estimation - CIT-A reducing the net profit by estimating the net profit of the assessee @2.57% of sale of bauxite - determine whether various activities constitute the same or separate business no single test can be devised as universal and conclusive - HELD THAT - A case for retention of profit rate at 33% on the mining receipt, and revision thereof to 8% for the transport (and loading) receipt. We are conscious that decline in the transport receipt by Rs. 75 PMT (Rs. 354 Rs. 279) is compensated to some extent by the increase of Rs. 36 PMT in ore sale realisation, so that there has been a net decline by only Rs. 39 PMT. We, however, are inclined to regard the two receipts, though arising from and forming part of the same business, separately for the purpose of estimation of profit incident thereon. This is as, as already noted, the cost dynamics of the two are different and which perhaps has led to the two being billed separately to the buyer. Two, and equally important, we had found the profit rate on the transport receipt for AY 2012-13 as largely on account of exorbitant rate of Rs. 320 PMT. It is, this, that led to our finding of the profit rate thereon as matching the profit rate on the ore sale and, thus, corroborating the average profit rate of 33%. This, however, does not obtain for the current year, bringing down the profit margin thereon, and which has been found as conservatively reasonably estimated at 8%. As in view of the differences that obtain between the two years, approve of the applied rate of 8% in respect of transport activity for the current year. As regards the mining activity, the same clearly shows an upswing in terms of unit realization. The assessee has infact claimed even higher per unit charges than even the immediately preceding year. Under the circumstances, therefore, we find the applied rate of 32%, which is marginally lower than the average profit of 33% for the said year, as reasonable. Though, strictly speaking, the figures for AY 2013-14 (PB pgs. 71-92); the books of account having not been produced, ought not to be considered, the gross receipt and the quantity shipped and sold are not in dispute for any year, so that the same could be taken note of and factored into, the purport of an estimation exercise, which places a heavy onus on the authority estimating it, is to be as reasonable as the circumstances admit, looking at the matter from all angles. Addition in respect of profit of the mining business - CIT(A) being estimated @ 2.57% on the mining turnover (i.e., sale of bauxite and other minerals) - HELD THAT - Inasmuch as the profit rate of the preceding year was also in reckoning, being subject to disallowance/s are equally relevant. Our adjudication thereof would thus cover the assessee s said ground as well. Likewise, for Gd. 2, which contests the application of profit rate of 8% on the transport and loading charges receipt, found by us as very reasonably estimated. The two issues being interrelated, the foregoing adjudication would thus cover the said Ground as well. Our adjudication of the Revenue s appeal would govern the assessee s CO as well. We cannot help here recording our appreciation for the discretion and circumspection exercised by the AO in determining and applying the estimates. Rather, as apparent from the foregoing, but for the sharp, though unexplained decline in the transport receipt, i.e., by 25% thereof; the two issues being interrelated, we might as well have restored the matter back to the AO for consideration on the lines suggested inasmuch as the Tribunal is to decide on the basis of findings of fact, based on material on record. The assessee s CO is accordingly held as without merit. We decide accordingly. Addition of bogus creditors - HELD THAT - We confirm the disallowance for Rs. 121.68 lacs, i.e., corresponding to the 8 creditors in whose cases no payment stands made. For the balance 2, to whom payments for Rs. 25 lacs in aggregate stand made during the year, the matter is restored back to the file of the AO to allow the assessee an opportunity to show as to why, in the face of the finding of the expenditure being bogus and not genuine, should the disallowance in its respect be restricted to the sum outstanding in its respect as at the year-end, or Rs. 60.19 lacs, i.e., as against Rs. 67.94 lacs for which sum transport bills stand booked and expense claimed. The same would decrease the allowance marginally to Rs. 647 PMT. This restoration is apart from and independent of that may be required qua the whole or part of the disallowance toward application of s. 40(a)(ia), for which reference may be made to Shree Choudhary Transport Co. 2020 (8) TMI 23 - SUPREME COURT Addition of bogus creditors u/s.41(1)(b) - HELD THAT - As what was sought to be brought home by us in the preceding para that neither payment nor outstanding would have any bearing on the quantum of a disallowance of any expenditure found bogus or non-genuine. CIT(A) has allowed relief on the basis of an addition u/s. 41(1)(b) being impermissible under the circumstance of an opening balance not written back in the assessee's accounts. His order, though in result in agreement with our order, cannot have our approval inasmuch as he has on facts not confirmed the relevant disallowance (Rs.654.87 lacs), but approved of the assessee having incurred a cost of 92% of the transport receipt (Rs.802.91 lacs) for that year, i.e., at Rs.738.68 lacs. He also does not define the transport business . This becomes relevant as the assessee, apart from the transport of ore from mine head to siding, also incurs transport cost on removal of overburden and transfer of mined ore from deep mine to the surface, and the cost incurred and claimed by him is for all the three different works. Unless, therefore, his order is accompanied by a finding, either express or by necessary implication, as to disallowance of the impugned sum as not genuine, the stated reason will not apply to his orders. The addition is confirmed for deletion, and the Revenue fails on its Gd. 1(vi). Disallowance at 5% toward inflation of expenditure - HELD THAT - As in every case a question of fact whether the expenditure was incurred wholly and exclusively for the purpose of trade or business of the assessee, which is to be decided based on evidence. We do not, in the facts of the case, find this positive and definite test as satisfied, i.e., of assessee having proved the expenditure in terms of s. 37(1). It is permissible for the tax authorities to consider disallowing the sum estimated as incurred in excess (Swadeshi Cotton Mills Co. Ltd. v. CIT 1966 (9) TMI 30 - SUPREME COURT ; Lakshmiratan Cotton Mills Co. Ltd. 1968 (9) TMI 13 - SUPREME COURT ; Lachminarayan Madan Lal 1972 (9) TMI 4 - SUPREME COURT ) - The AO has, accordingly, made an estimate of the expenditure liable for disallowance, which we find as reasonable. We, accordingly, uphold the disallowance as made. Addition of interest component disallowed by the AO regarding it as the penalty under the sales-tax law - HELD THAT - The basis of the relief (to the extent of Rs.3800) by the ld. CIT(A) is on the basis of the detail furnished by the assessee before him, claiming the amount impugned to be interest and not penalty. Before us, it was the admitted position that the penalty component cannot be allowed as a deduction inasmuch as infraction of law cannot be regarded as an incident of business. And that the matter may be remitted to the file of the AO. Surprisingly, the assessee has, neither before ld. CIT(A) nor before us, furnished any evidence toward penalty being at Rs.3,800, and the pleading for restoring the matter to the AO is an admission of same. The tax audit report u/s. 44AB for the relevant year reports the penalty at Rs.5808. Under the circumstances, we consider it appropriate to rely thereon and, accordingly, confirm the disallowance at Rs.5,808, so that the balance Rs. 6800 is to be allowed. Addition u/s. 56(2)(vii) - difference in valuation of property - HELD THAT - The primary facts, as indeed the valuation, are not in dispute, and s.56(2)(vii)(b) is clearly attracted in principle in the instant case. The said provision, however, stands coopted on the statue-book w.e.f. 01.4.2014, i.e., AY 2014-15 onwards, so that it shall apply to a transaction during the relevant previous year, i.e., fy 2013-14. The transaction was in the instant case completed on 10.3.2013 and, therefore, the difference cannot be assessed u/s. 56(2)(vii) for AY 2014-15; the genuineness of the purchase transaction having not been doubted. Doubts were during hearing raised as to of there has been a typing mistake in the recording the purchase date as 10.3.2013 , i.e., instead of 10.3.2014 , which the parties were called upon to clarify, and which they did not. The balance-sheets for the relevant years stand also perused, to observe no addition in the landed property, except agricultural land Subject therefore to the verification of an addition of an immovable property at Indira Gandhi Ward, Katni during fy 2012-13, and not fy 2013-14, we confirm the deletion on account of non-applicability of 56(2)(viii), which shall otherwise hold. We decide accordingly. Disallowance toward transport expenditure - same having not been proved on the anvil of s.37(1), with, in fact, its genuineness being in serious doubt, rather, to our mind, disproved - payment in violation of s. 40A(3) - HELD THAT - As disallowances of transportation expenses, effected for AYs. 2012-13 and 2014-15 respectively by the AO, and confirmed by us, is only u/s. 37(1). The same, as afore-stated, bears no element of any artificial disallowance, as u/s. 40A(3) (r.w.s. 40A(3A)) or s. 40(a)(ia), even as the same has been found to be applicable in principle. This is for the reason that the question of manner of payment or the non-deduction of tax at source, which triggers the said disallowances, become irrelevant where the expenditure itself is regarded as not genuine and, besides, would amount to a double disallowance. Where, however, the said disallowance/s, i.e., as confirmed, is reversed in further appeal, in whole or in part, i.e., on the expenditure being regarded as genuine to that extent, the same would become liable to be effected. The same would though require the assessee being heard on quantification, and may have a bearing in the assessment of a subsequent year/s as well The exercise for identifying the payment in violation of s. 40A(3) or, as the case may be, s.40A(3A), as indeed u/s. 40(a)(ia), would thus extend to the entire sum. Finally, we here also clarify that the disallowance u/s. 40A(3A), would, where so, stand to be made only in respect of the sums allowed u/s. 37(1) for AYs 2012-13 and 2014-15, and cannot extend to sums already allowed for preceding year, but liable to be disallowed in assessment for any of the three years under reference inasmuch as the same do not qualify as the subject matter of appeal.

Summary

Issues Involved:

1. Disallowance of transportation expenditure.
2. Disallowance of labour expenditure.
3. Disallowance under section 40A(3) and section 40(a)(ia).
4. Addition of unconfirmed transport credits.
5. Addition under section 41(1)(b).
6. Estimation of income for AY 2013-14.
7. Disallowance of various expenses for AY 2014-15.
8. Addition under section 56(2)(vii).

Detailed Analysis:

1. Disallowance of Transportation Expenditure:
The Assessing Officer (AO) disallowed Rs.654.87 lacs for AY 2012-13 due to unverifiable transportation expenses. The assessee failed to produce confirmations for significant creditors, and payments were made through self-cheques. The AO found discrepancies in the transportation cost claimed and the actual cost based on the quantity shipped. The Income Tax Appellate Tribunal (ITAT) confirmed the disallowance, finding the expenditure not genuine. For AY 2014-15, the AO disallowed Rs.189.62 lacs for unconfirmed transport credits, which was partly confirmed by the CIT(A) and ITAT based on the evidence on record.

2. Disallowance of Labour Expenditure:
For AY 2012-13, the AO disallowed Rs.20 lacs out of Rs.361.19 lacs claimed for labour expenditure due to unverifiable vouchers. The CIT(A) reduced the disallowance to Rs.2 lacs, but ITAT restored the AO's disallowance, finding the expenditure not properly vouched and unverifiable.

3. Disallowance under Section 40A(3) and Section 40(a)(ia):
The AO did not make a separate disallowance under section 40A(3) for payments exceeding the prescribed limit as it would amount to double disallowance. ITAT upheld this approach, stating that the disallowance under section 37(1) already covered the non-genuine expenditure. However, ITAT noted that if the disallowance under section 37(1) is reversed in further appeal, the provisions of section 40A(3) and section 40(a)(ia) would apply.

4. Addition of Unconfirmed Transport Credits:
For AY 2014-15, the AO added Rs.189.62 lacs for unconfirmed transport credits. The CIT(A) confirmed the addition for Rs.31.49 lacs and deleted the rest. ITAT confirmed the addition based on the evidence, noting that the creditors were not traceable, and the confirmations were not reliable.

5. Addition under Section 41(1)(b):
The AO added Rs.15.82 lacs under section 41(1)(b) for long-standing credits. The CIT(A) deleted the addition, but ITAT confirmed it, finding the creditors' statements denying any dues from the assessee as credible. ITAT noted that the disallowance would be applicable under section 41(1)(b) or section 68, depending on whether the liability existed or was discharged.

6. Estimation of Income for AY 2013-14:
The AO estimated the income for AY 2013-14 by applying a net profit rate of 32% on bauxite sales and 8% on transport and loading charges. The CIT(A) modified the estimation, applying a net profit rate of 2.57% on bauxite sales and 8% on transport charges. ITAT found the estimation method flawed and upheld the AO's approach, noting that the derived results from AY 2012-13 should be applied consistently.

7. Disallowance of Various Expenses for AY 2014-15:
The AO disallowed 5% of labour, poclain, and loader expenses due to unverifiable vouchers. The CIT(A) deleted the disallowance, but ITAT restored it, finding the AO's estimation reasonable based on the evidence.

8. Addition under Section 56(2)(vii):
The AO added Rs.4.30 lacs under section 56(2)(vii) for the difference between the purchase price and market value of an immovable property. The CIT(A) confirmed the addition. ITAT deleted the addition, noting that the provision was applicable from AY 2014-15, and the transaction occurred in the previous year.

Conclusion:
The ITAT upheld the AO's disallowances and additions where the expenditure was found non-genuine and unverifiable. The Tribunal emphasized the need for proper evidence and documentation to support the claims made by the assessee. The estimation of income for AY 2013-14 was upheld based on consistent application of derived results from previous years. The addition under section 56(2)(vii) was deleted due to the non-applicability of the provision for the relevant year.