Un-necessary litigation before High Court on petty matters ignoring ground realities when CIT(A) and Tribunal had concurrently allowed relief to assessee.

[CA DEV KUMAR KOTHARI]

Evidence of payments and expenses must be considered in light of factual matrix:

Evidence of payments and expenses incurred by an assessee must be considered in the light of factual matrix of the case. The following facts are important to consider:

1. Nature and size of payment,
2. Nature and size of recipient,
3. Place of payment,
4. Timing of payments,
5. Urgency of payment,
6. Amount paid,
7. Petty cash payments in totality of all payments and expenses
8. Nature of internal check and control exercised by assessee.

Businessman need to control his expenses in competitive business:

A businessman needs to control his expenses so as to maintain cost effectiveness. For this purpose major expenses are controlled vigorously, whereas small payments cannot be controlled so vigorously.   Applying the same method of control on all payments will be very costly and will render control ineffective. Therefore expenses are also divided into  some categories and different standards for control are adopted to have a balance control within a reasonable cost of such controls.

Major payments and minor payments:

In case of organized assesses major payments are made by A/c payee cheques against proper evidences and after proper verification. The organization has reasonable system of internal check and control, verification and then audit of expenses. The businessman is primarily concerned to save his costs therefore, discretion of businessman must be respected.

In cases of large organization most of payments (more than 90 -95 %) are made by banking channels and after TDS. Most of recipients of such expenses are organized and are assessed to tax.

In such circumstances, making adhock disallowances out of petty expenses is not at all proper.

Assessing officers must try to understand business aspects:

The assessing Officers must try to understand business aspects and ground realities. Just for making some additions or disallowances, and for making high pitched assessments  additions and disallowances should not be made.

Experience shows that even in case of large organizations like manufacturers, banks , large traders who have reasonable system of checking, verification and control Assessing Officers make some disallowances on adhock and estimated basis.  For small disallowances, the assessee may not be in a position to bear cost of litigation and has to suffer tax burden. In case of appeals some of appellate authorities allow full relief however, some authorities allow partial relief.

Surprisingly revenue also prefer to indulge into litigation on petty matters and prefer appeals before Tribunal, High court and the Supreme Court. This involves un-necessary litigation, unnecessary brain drain and expenditure of revenue and tax payer both.

Case of transporters:

In case of small, unorganized transporters, usually presumptive taxation is accepted by operators. However, in case of organized transporters where they have many branches, franchises, local offices and have substantial business, they have to maintain proper system of internal check and control. The accounts are also audited. In such cases a major part of expenses are by banking channels and are also subject to TDS. They are verifiable by internal and external evidences.

Petty payments made to drivers for wages, fooding, travelling , dress  making laundering, etc. are made of voucher forms. The payments are verified by concerned officer or staff of assessee. The payments can be correlated with work done also. Therefore in such cases also adhock and estimated disallowance  is not at all proper.

Case of CIT Versus Swaminarayan Vijay Carry Trade (P.) Ltd. 2013 (6) TMI 50 (Guj.)

In this cases certain disallowances were deleted by CIT(A) and Tribunal confirmed his order. The revenue preferred appeal before Gujarat High Court.

The AO disputed genuineness of expenses. His  reason was that sample vouchers given by assessee were not bearing any signature of recipient & most of payments were in cash on account of   freight & transportation expenses .

The honorable High Court considered orders of AO, CIT(A) and Tribunal and records. On being satisfied that there was cogent material available on the record to sustain the say of the assessee and in absence of any reason to disallow such claim when both (CIT(A) and ITAT) of them concurrently held such an issue in favour of the assessee, we see no reason to interfere.

High Court held that the entire issue is based on factual matrix with no perversity in the findings of these authorities. - No question of law much less any substantial question of law arises. Hence High Court confirmed orders of CIT(A) and Tribunal and decided  issue against the revenue.

Regarding payment to drivers and helpers also the High Court  held that the  CIT(A) and  the Tribunal have dealt with the issue of disallowance of 10% daily allowance given to the drivers appropriately on the basis of substantive material available in support thereof. It can also further be noted that the Tribunal was right in holding that it is next to impossible to expect these drivers and helpers to maintain supporting evidences and vouchers in respect of their food and miscellaneous expenses. Again with nothing on record to hold such expenses as non-genuine or not for the business, both the authorities have is also rightly concluded.

Hence the High Court confirmed orders of CIT(A) and Tribunal and decided  issue against the revenue.

Regarding clearing and forwarding expenditures also the High Court allowed issue in favor of assessee and against the revenue. The High Court observed that with regard to the clearing and forwarding expenses and general labour charges, the truck association fees, etc. were not required to be recovered from the end-users. Expenses  which were paid towards clearing and forwarding charges, were necessarily recovered from the end-users.

Thus, eloquently, the facts vindicated the stand taken by both the CIT (Appeals) and the Tribunal in setting aside the conclusion of the Assessing Officer.

High Court found  no reason to interfere with as both the authorities have given cogent reasoning while concluding the said issue. Thus the High Court decided against the revenue.

Let us hope that the revenue will not prefer appeal before the Supreme Court:

Let us hope that the revenue will not prefer appeal against order of  Gujarat High Court before the Supreme Court  to avoid unnecessary litigation, brain drain and wastage of public money.

Without such litigation revenue will  be gainer:

If revenue refrains from such litigation, in long term revenue will be gainer for the following reasons:

1. The tax payer will have more time to think for earning more instead of wasting time on unnecessary litigation to which he is forced by revenue,
2. The tax payer will earn more so he will pay more tax in future,
3. The expenses on litigation will be reduced so income will increase so the tax will increase,
4. Revenue will save direct and indirect expenses on such litigation,
5. Revenue authorities will have more time to devote on administration, assessment, and collection of tax.
6. The authorities will also not have frustration which they might  have in their soul and mind by making unnecessary additions and disallowances just to show performance, knowingly well that most of such additions and disallowances are likely to be  deleted in first appeal itself.
7. There will be more objectivity and result orientation leading to more satisfaction of the AO and higher authorities in doing productive work.

There should be no stigma if a clean assessment is made:

The ground reality is that many of officers are afraid of allegations and finger raising if they act promptly and do make assessment perfectly as per law without making any addition or disallowances.  Many  have fear  feeling in  mind that a clean assessment may lead to enquiry against them of giving clean chit and favor to assessee. Author have come across very few officers who dared to make a clean scrutiny assessment on  real facts. Though big disallowances and additions on disputed legal issues were made but any estimated disallowances were not made. But generally officers make additions and disallowances fully knowing that they will be deleted.

There should not be stigma of favoring assessee or not working properly, if the Assessing Officers make clean assessment without any uncalled for additions or disallowances. The officers must not have fear of initiation of enquiry in such cases.