DHANAWADE TRANSPORT SERVICE,MUMBAI vs. INCOME TAX OFFICER 28(1)(1), MUMBAI

Brief facts are that the assessee is a partnership firm engaged in the business of providing transport services on a contractual basis. It filed its return of income on 19.10.2016 declaring a total income of ₹13,35,480. The case was selected for limited scrutiny under CASS for examining whether the contract receipts reflected in Form 26AS had been correctly accounted for in the books of account and offered to tax. During the assessment proceedings, the Assessing Officer noticed that the assessee had claimed credit for tax deducted at source of ₹12,98,469 in respect of contract receipts of ₹6,49,21,962 from M/s Tata Chemicals Ltd., whereas the revenue from operations disclosed in its profit and loss account was only ₹2,35,81,839. To ascertain the correct factual position, the Assessing Officer issued a notice under section 133(6) to M/s Tata Chemicals Ltd., which, in its response dated 30.11.2018, confirmed that it had availed transport services from the assessee and furnished a copy of the assessee’s ledger account together with details of the

In response to the show-cause notice, the assessee submitted that it had actually received only ₹2,35,81,839 from M/s Tata Chemicals Ltd. in its disclosed bank account. The balance receipts were alleged to have been diverted by one of its partners, Shri Mohan Laxman Dhanawade, to two other bank accounts opened and operated by him without the knowledge or consent of the other partners. It was further alleged that the said partner had used the name and PAN of the assessee-firm for an unauthorised or forged partnership firm and proprietary concern and, therefore, the corresponding receipts did not belong to the assessee. The Assessing Officer, however, observed that despite a specific opportunity, the assessee did not furnish any contemporaneous correspondence with M/s Tata Chemicals Ltd., the returns of income of the concerned partner or the alleged other concerns, or any other reliable material to

The assessee’s first appeal before the learned CIT(A) was dismissed on the ground of delay without adjudication on merits. On further appeal, the Tribunal, vide order dated 30.09.2024, restored the matter to the learned CIT(A) with a direction to condone the delay and decide the appeal afresh on merits. Pursuant to the said direction, notices were issued by the NFAC on 15.06.2025, 24.07.2025 and 22.08.2025. The assessee filed only a preliminary response seeking further time on the ground that the receipts had been misappropriated by one of the partners, but no substantive evidence was furnished to rebut either the information received directly from M/s Tata Chemicals Ltd. or the findings recorded by the Assessing Officer. The learned CIT(A), therefore, held that the assessee had failed to discharge the onus of establishing that the receipts reflected in Form 26AS

Before us, the learned counsel reiterated that the assessee had accounted for the amount of ₹2,35,81,839 actually received in its disclosed bank account and that the remaining amount had been diverted by the errant partner by opening and operating separate bank accounts through concerns created by him. It was submitted that merely because the assessee’s PAN had been used for deduction of tax, the corresponding receipts could not be regarded as the income of the assessee when the amounts had neither been received by it nor accrued for its benefit. The learned DR, on the other hand, strongly relied upon the orders of the authorities below and submitted that the explanation concerning the alleged diversion of receipts had remained wholly unsubstantiated. He pointed out that M/s Tata Chemicals Ltd. had specifically confirmed the transactions with the assessee and that the assessee itself had claimed the entire corresponding TDS credit. Thus, there was no reliable basis for excluding the differential receipts from its turnover.

We have heard the rival submissions and carefully examined the material placed on record. The fact that the transactions were recorded by M/s Tata Chemicals Ltd. in the name of the assessee is borne out by its direct confirmation

However, the further conclusion of the Assessing Officer that the entire differential turnover constitutes the taxable income of the assessee cannot be sustained. There is a fundamental distinction between gross business receipts and income embedded therein. The amount of ₹4,84,82,721 represents the differential contract turnover arising from the business of transportation; it does not represent an amount received without any corresponding business activity or expenditure. Transport operations, by their very nature, entail substantial outgoings towards freight charges, fuel, vehicle hire, payments to drivers and subcontractors, tolls, repairs and other incidental operating expenses. Once the source and character of the amount are found to be business receipts, the entire gross turnover cannot be placed on the pedestal of taxable profit merely because the same was not disclosed in the regular books. The omission to record the turnover may justify estimation of the income embedded therein, but it does not extinguish the expenditure necessarily incurred for earning such receipts.

At the same time, the assessee cannot seek computation of income from the undisclosed receipts at the same margin as that disclosed in its books as a matter of right. The declared results relate only to the recorded transactions, whereas the circumstances in which the differential receipts remained

Considering the nature of the transport business, the profit disclosed on the accounted turnover, the absence of verifiable details of the expenditure pertaining to the differential receipts and the entirety of the surrounding circumstances, we are of the considered opinion that estimation of net profit at 8% of the differential turnover would strike a fair and judicious balance. Such estimation recognises that only the real business income embedded in the receipts can be brought to tax, while at the same time it does not permit the assessee to derive an advantage from its inability to substantiate either the alleged diversion or the expenses

In the result, the appeal of the assessee is partly allowed.