2022 (4) TMI 957 - AT - Income Tax

Disallowance of expenses - whether the AO should have been afforded an opportunity of examination? - HELD THAT - Certain decisive facts were not adjudicated upon by CIT(A) in the remand proceedings viz. the correct proportionate amount of expenditure relatable to the impugned assessment year i.e. AY 2008-09, and the corresponding amount which needs to be allowed for this year in subsequent year and the quantum which is relatable to preceding financial year 2007-08. Neither has the issue of bifurcation of income between AY 2007-08 and AY 2008-09 been discussed with CIT(A) in his order. The assessee placed additional evidences and supporting documents in support of its claim of expenditure before the CIT(Appeals) for the first time, in respect of which no opportunity was given to Ld. AO for verification. CIT-A(A) disallowed the entire expenditure though the AR of the assessee has averred before us that part of the expenses could not been disallowed since they did not pertain to the instant year. Therefore, in our view, since certain important aspects have not been dealt with by Ld. CIT(A) in his order and respectfully following the decision of the Hon'ble Gujarat High Court in the case of Pradyuman Patel 2013 (9) TMI 1286 - GUJARAT HIGH COURT in the interests of justice, we are restoring the matter to the file of CIT(A) on the limited point to verify the correct quantum of expenditure Disallowance of amount actually expended carrying out work for FCI - HELD THAT - Expenditure proportionate to impugned AY 2008-09 i.e. the year for consideration before us be allowed in the year FCI has finally rejected the claim of the assessee. For this purpose, the CIT(A) may carry out necessary verification as to ascertain the precise year when the claim has been finally rejected by FCI and allow deduction of proportionate expenses pertaining to AY 2008-09 in the year, when the claim has been finally rejected by FCI. On the connected issue regarding the quantum of expenditure which would be deductible in the year in which claim is finally rejected by FCI, the Ld. AR of the assessee himself has submitted that only part of the expenses of ₹ 2,51,59,561/- pertain to AY 2008-09. Therefore, in our view, once the CIT(A) after giving due opportunity to Ld. AO has arrived at the correct amount of expenditure relatable to this year, respectfully following the directions of Hon'ble ITAT in the assessee's case vide order dated 25/02/2014 for AY 2008-09, the proportionate expenditure incurred in AY 2008-09 be allowed in the year when the claim has been finally rejected by FCI. Bogus Sundry Creditors - HELD THAT - Since the assessee did not furnish any details in respect of balance creditors before the ld. CIT(A), in our view, the ld. CIT(A) has not erred in confirming the addition in respect of balance sundry creditors with respect to whom details have not been furnished by the assessee. In the result, the cross objection of the assessee is dismissed. Disallowance of Demurrage Charges Disallowance on account of Rail Transit Loss - HELD THAT - As decided in MAHALAXMI SUGAR MILLS COMPANY LIMITED VERSUS COMMISSIONER OF INCOME-TAX 1984 (5) TMI 6 - DELHI HIGH COURT demurrage is a charge by way of compensation and includes amount chargeable for failure to storage and transport goods by contractor for its delayed clearance. It is not a fine paid to the port authorities for any criminal act but is a compensation for the use of port facilities beyond the free period allowed under the rules. Demurrage charges are charged not for any infraction or violation of law but on account of commercial failure of the contractor. In the case of Ripley Co. Ltd. 2017 (4) TMI 164 - ITAT KOLKATA held that demurrage paid by assessee for its failure to complete work within prescribed time allotted by principal was allowable deduction u/s 37(1) - we are of the considered view that ld. CIT(A) has not erred in law and in facts in deleting the addition on account of demurrage/wharfage charges and deletion on account of rail transit loss since the same are not penal in nature. Regarding the second issue in relation to whether the assessee has correctly netted off the charges waived by the relevant rail/port authorities, we observe that the assessee produced relevant copies of ledger accounts and supporting before Ld. CIT(A) for his perusal, who after analyzing the same concluded that on perusal of materials on record it is observed that assessee has charged demurrage/wharfage on net basis after adjusting for waiver by relevant port authorities. In the result, we find no infirmity in the order of Ld. CIT(A) while adjudicating on this issue in favour of the assessee. Disallowance of labour charges - HELD THAT - We are of the view that ld. CIT(A) has not erred in law or in fact in restricting the disallowance to 10% of the labour charges, especially looking into the facts that assessee employs labour for work at Railway Head, PF and ESI laws are not applicable to daily wage labour and further the ld. A.O. has also not found any material error of irregularity in the copies of ledger accounts and wages register maintained by the assessee. Disallowance u/s. 40(a)(ia) - assessee did not give names of various parties viz. transporters and their PAN Nos. and also did not furnish details of payments made to them - HELD THAT - On the facts of the case, it is observed that the ld. CIT(A) in orders passed u/s. 271C of the Act and u/s. 201(1)/201(1A) of the Act for A.Y. 2012-13 has granted complete relief on the same set of facts. The facts of the case for the instant year have been analyzed in detail while allowing relief to the assessee for this year. Accordingly, in our view, there is no infirmity in the order of ld. CIT(A) while granting relief for disallowance u/s. 40(a)(ia) of the Act. Restricting disallowance in respect of transportation payment @ 10% of total expenses - HELD THAT - The Mumbai Tribunal in the case of Parsoli Corporation Ltd. 2019 (1) TMI 933 - ITAT MUMBAI restricted the disallowance to 10% in respect of self-made vouchers as being fair and reasonable. Again, the ITAT Ahmedabad in the case of DCIT v. M/s. Unique Metropolis 2022 (3) TMI 891 - ITAT AHMEDABAD held that in view of the facts of the instant case, in the absence of supporting evidences, genuineness of payment made in cash is not established and therefore disallowance upheld by the ld. CIT(A) at 10% of total cash expenses is found to be quite reasonable and justified. In our view the ld. CIT(A) has not erred in disallowing a sum of 10% of total cash expenses. In our view, looking into the nature of business of the assessee where expenses constitutes a vital part of expenses in this line, the necessity of payment in cash purpose of carrying out the business, the ld. CIT(A) has not erred in law or in fact in restricting the disallowance to 10% of the expenditure.

Summary

Issues Involved:

1. Deletion of addition of ?8.25 crores made by the Assessing Officer (AO).
2. Disallowance of expenses of ?2.51 crores against the claim of ?5.98 crores.
3. Deletion of disallowance of ?40,41,034/- for sundry creditors.
4. Deletion of addition of ?3.00 crores as supplementary claim income.
5. Disallowance of ?31,64,676/- expenses incurred for claims lodged against FCI.
6. Disallowance of ?1,11,523/- depreciation claimed on fixed assets.
7. Disallowance of demurrage/wharfage charges of ?58,11,850/- and ?16,06,089/- on account of rail transit loss.
8. Restriction of disallowance in respect of labour charges and transportation payments.
9. Deletion of disallowance u/s. 40(a)(ia) of the I.T. Act.
10. Levy of interest u/s. 234A, 234B & 234C and initiation of penalty proceedings u/s. 271 (1)(c) of the Act.

Detailed Analysis:

1. Deletion of Addition of ?8.25 Crores:

The CIT(A) deleted the addition of ?8.25 crores made by the AO, which was based on the mercantile system of accounting. The CIT(A) held that the income did not accrue in the year under consideration as the supplementary claim was not accepted by FCI. The ITAT noted that the deletion of ?8.25 crores as income of the current year by CIT(A) was not challenged by the Department, thus attaining finality. Consequently, Ground No. 1 of the Departmental Appeal was dismissed as not pressed.

2. Disallowance of Expenses of ?2.51 Crores:

The CIT(A) did not provide an opportunity to the AO to verify the expenses of ?2.51 crores. The ITAT restored the matter to the file of CIT(A) for fresh adjudication and verification of the correct quantum of expenditure relatable to AY 2008-09 after affording the AO an opportunity for verification. Ground No. 2 of the Departmental appeal was allowed, and the matter was restored to the file of CIT(A).

3. Deletion of Disallowance of ?40,41,034/- for Sundry Creditors:

The CIT(A) deleted the additions in respect of two creditors amounting to ?40,41,034/- after verifying the transactions and continuous dealings with the assessee. The ITAT found no infirmity in the order of CIT(A) and dismissed Ground No. 1(i) of the Department's appeal. However, the CIT(A) confirmed the addition in respect of balance sundry creditors where details were not furnished by the assessee.

4. Deletion of Addition of ?3.00 Crores as Supplementary Claim Income:

The CIT(A) deleted the notional income of ?3 crores as it was dependent upon claims being accepted by FCI. The ITAT noted that similar facts were not pressed by the Department for the preceding year, and thus Ground No. 1(ii)(a) of the Department's appeal was dismissed as not pressed.

5. Disallowance of ?31,64,676/- Expenses Incurred for Claims Lodged Against FCI:

The CIT(A) added ?31,64,676/- to the income of the assessee with a direction to allow deduction thereof in the year the supplementary claim is received from FCI. The ITAT remanded the case back to the file of CIT(A) to verify the claim after giving due opportunity to the AO. The Cross Objection No. 3 of the assessee was allowed as per directions.

6. Disallowance of ?1,11,523/- Depreciation Claimed on Fixed Assets:

The assessee did not press Cross Objection No. 2 relating to the disallowance of depreciation claimed on fixed assets. Accordingly, the same was dismissed as not pressed.

7. Disallowance of Demurrage/Wharfage Charges of ?58,11,850/- and ?16,06,089/- on Account of Rail Transit Loss:

The CIT(A) held that demurrage/wharfage charges are in the nature of compensation for non-performance of contract and not penal in nature. The ITAT upheld the CIT(A)'s decision, noting that these charges are not for any infraction of law but are compensatory. Ground No. 1 of the Revenue's appeal was dismissed.

8. Restriction of Disallowance in Respect of Labour Charges and Transportation Payments:

The CIT(A) restricted the disallowance to 10% of the expenses, considering the necessity of cash payments in the assessee's line of business and the lack of material error in the books maintained. The ITAT found no infirmity in the CIT(A)'s decision and dismissed Ground No. 2 and Ground No. 4 of the Revenue's appeal.

9. Deletion of Disallowance u/s. 40(a)(ia) of the I.T. Act:

The CIT(A) deleted the disallowance u/s. 40(a)(ia) based on the CIT(A)'s order in the assessee's own case for AY 2012-13, where it was held that the assessee was not liable to deduct tax at source u/s. 194C. The ITAT found no infirmity in the CIT(A)'s order and dismissed Ground No. 3 of the Revenue's appeal.

10. Levy of Interest u/s. 234A, 234B & 234C and Initiation of Penalty Proceedings u/s. 271 (1)(c) of the Act:

The Cross Objection No. 4 and 5 of the assessee relating to levy of interest and initiation of penalty proceedings were general in nature and did not require specific adjudication.

Conclusion:

In ITA 1650/Ahd/2015 A.Y. 2008-09, the appeal of the Revenue was partly allowed, and the Cross objection of the assessee was allowed. In ITA No. 1115/Ahd/2015 AY 2009-10, the appeal of the Revenue was partly allowed, and the Cross objection of the assessee was partly allowed. In ITA No. 3525/Ahd/2016 AY 2012-03, the appeal of the Revenue was dismissed.