2017 (3) TMI 141 - AT - Income Tax

Addition of minor traffic violations and Distribution Charges - Held that - It is clear from the statutory provisions of the MV Act payments made for any purpose which is an offence or which is prohibited by law and which are not compensatory in nature cannot be allowed as a deduction u/s.37(1) read with Explanation thereto. Perusal of the various statutory provisions of the MV Act under which the payment in question were made were for offences committed by the employees of the Assessee for which the Assessee was vicariously liable. These payments were not compensatory in nature. Therefore these sums cannot be allowed as a deduction. We uphold the order of the CIT(A) to this extent. Admittedly the sample vouchers in which the AO found defects had registered vehicle numbers that were hired by the assessee for carriage of goods. This provided enough information for the AO to make further enquiries. In the circumstances under which the carriage was hired by the assesee it is not possible to insist on all details being given in the voucher. The explanation of the assessee has not been found to be incorrect by the AO or CIT(A). We therefore direct that the addition sustained by CIT(A) to the extent it relates to disallowance of 10% of total expenditure of ₹ 17,07,826/- excluding the sums paid by way of penalty, be deleted. Addition under the head Cash Destroyed by Fire - Held that - As in connection with the assessee s right to enter the warehouse after the incident of fire that the assessee has clearly set out the fact that it had kept cash collections also in the godown that suffered fire accident though the writ petition had been filed by the assessee in the month of July, 2010. In the given circumstances the best evidence that the AO could have obtained regarding the correctness of the claim of the assessee for destruction of cash in fire would have been to make enquiries from the persons from whom the assessee claimed to have received cash. Admittedly the AO did not take recourse to such an action but merely rejected the explanation offered by the assessee. This approach of the AO in our view was not proper. The entry relating to the loss of cash having been made in the books of account of the assessee only on 31.03.2010, in our view, is not a very vital circumstance. Thus the claim of the assessee for loss on account of cash destroyed by fire ought to have been allowed as deduction - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of distribution charges.
2. Disallowance of cash destroyed by fire.

Issue-wise Detailed Analysis:

1. Disallowance of Distribution Charges:

The assessee, a company engaged in trading and acting as acquiring and forwarding agents, claimed ?17,07,826/- as distribution charges. The AO, upon test-checking vouchers amounting to ?75,000/-, found discrepancies in four vouchers totaling ?32,180/-. Based on this, the AO disallowed ?7,32,771/- of the total distribution charges, assuming similar discrepancies in the remaining vouchers. The CIT(A) reduced this disallowance to 10% of the total distribution charges, amounting to ?1,70,780/-.

The Tribunal upheld the disallowance of ?3,000/- for minor traffic violations, citing that such payments were penalties and not allowable under Sec.37(1) of the Income Tax Act. However, the Tribunal found the remaining disallowance by CIT(A) to be unjustified as the sample vouchers had enough information for further verification, and the assessee's explanation was not disproved by the AO or CIT(A). Hence, the Tribunal directed the deletion of the disallowance of 10% of the total distribution charges, excluding the penalty amount.

2. Disallowance of Cash Destroyed by Fire:

The assessee claimed a deduction of ?5,17,093/- for cash allegedly destroyed in a fire at its warehouse. The AO disallowed this claim, citing lack of documentary evidence and the delayed entry of the loss in the cash book. The CIT(A) upheld this disallowance, noting that the appellant failed to prove the loss with sufficient evidence.

The Tribunal, however, found that the assessee had provided the names of customers and the amounts received in cash, which were destroyed in the fire. It noted that the cash book entry delay was due to communication lag between the warehouse and the head office. The Tribunal criticized the AO for not verifying the claim with the customers and found the writ petition filed by the assessee as corroborative evidence of the cash destruction. Consequently, the Tribunal directed the AO to allow the deduction for the cash destroyed by fire.

Conclusion:

The appeal by the assessee was allowed, with the Tribunal directing the deletion of the disallowance related to distribution charges (excluding the penalty) and the allowance of the deduction for cash destroyed by fire.