SARAH AGENCIES PVT. LTD.,CHENNAI vs. ITO, CORP. WARD-6(1), CHENNAI

The nature of business of the assessee is such that while it earns commission income for its agency services, it also incurs direct expenses on behalf of its clients for clearing goods at ports such as freight charges, transport charges, handling charges, harbour dues, customs bill assessment charges, and sundry port-related expenses and recovers the same from its clients by way of reimbursement. The assessee’s billing structure therefore comprises two components: (i) Agency Commission of Rs.7,25,000/- and (ii) Expense reimbursement claims of Rs.1,91,50,831/-, aggregating to a gross billing of Rs.1,98,75,831/-. The direct expenses incurred and reimbursed totalled Rs.1,15,47,596/-, leaving a net surplus of Rs.76,03,235/- on reimbursement. This surplus, together with the agency commission of Rs.7,25,000/-, aggregated to Rs.83,28,235/-, which was duly returned as ‘Revenue from Operations’ in the return of income filed. The assessee’s treatment was in conformity with Accounting Standard-9 on Revenue Recognition issued by ICAI.

During the course of assessment proceedings, the AO failed to appreciate the business model of the assessee and proceeded on the erroneous premise that Rs.1,15,47,596/- represented reimbursement receipts received from clients (as opposed to direct expenses incurred). The AO sought sample third-party bills to verify whether the reimbursement claims carried out

Aggrieved by the said assessment order, the assessee preferred an appeal before the ld.CIT(A)-15, Chennai. During the appellate proceedings in 2019, the assessee submitted detailed factual explanations and exhibits. The Ld.CIT(A)-15 remanded the matter to the AO with a specific direction to examine the break-up of the reimbursement expenditure claimed and to comment on the genuineness of such expenditure. Pursuant to the remand, the AO conducted a fresh enquiry and, in his Remand Report dated 17.07.2020, noted that out of total direct expenses of Rs.1,15,47,596/-, a sum of Rs.74,43,173/- had been incurred through banking channels, cross-verified with party ledgers and sample invoices and found to be correct and proved. The remaining balance of Rs.41,04,423/- had been incurred by way of cash payments, supported by self-vouchers signed by the employees and approved by the Director of the Company.

The AO’s Remand Report, while noting the said cash vouchers, observed that since third-party confirmation was absent in the self-vouchers, the expenses of Rs.41,04,423/- could not be said to be fully substantiated, and recommended that the ld.CIT(A) hold the entire cash expenditure of Rs.41,04,423/- as not proved. The assessee submitted its reply to the Remand Report, substantiating the genuineness of cash payments by pointing out the

Subsequently, the appeal was migrated to the National Faceless Appeal Centre (NFAC). The NFAC passed an order u/s.250 of the Act on 10.02.2021, dismissing the assessee’s appeal by recording that the assessee had opted for the Vivad Se Vishwas Scheme an order that was patently erroneous, as the assessee had opted for the VSV Scheme only in respect of a penalty appeal (u/s.271B of the Act), and not in respect of the quantum appeal against the assessment order u/s.143(3) of the Act. Aggrieved, the assessee filed rectification applications before the ld.CIT(A) bringing this mistake apparent from the record to its notice. Upon consideration of the rectification petition, the ld.CIT(A), Delhi, vide the impugned order dated 26.03.2025 u/s.154 r.w.s. 250 of the Act, partly allowed the appeal, directing the AO to restrict the addition to Rs.41,04,423/- (i.e.the cash expenditure) in place of the original addition of Rs.55,60,681/-, while holding that the assessee had failed to substantiate the cash expenses with adequate supporting documents.

Aggrieved by the restriction of the addition to Rs.41,04,423/- (instead of complete deletion), the assessee has filed the present appeal before us raising the following grounds of appeal: 1. The order of the NFAC, Delhi dated 26.03.2025 vide DIN & Order No. ITBA/NFAC/F/154/2024-25/1075045462(1) is contrary to law, facts and in circumstances of the case.

The Ld.AR appearing on behalf of the assessee made the following submissions before us: (i) The nature of the assessee’s business as a Clearing and Forwarding (C&F) agent inherently involves cash disbursements at ports, customs houses, and in the clearing ecosystem. Payments towards transport charges, freight, harbour dues, handling charges and sundry port-related expenses are customarily made in cash, as it is practically difficult to obtain signed receipts from all persons receiving cash at ports and customs locations. This is an industry norm well-recognised in the trade. (ii) The self-vouchers produced by the Appellant were internally approved by the Managing Director, Mr.J.Dhinakaradoss, who maintained strict control over such expenses ensuring they were within the pre-approved quotations accepted by the assessee’s clients. The Director's approval lends internal sanctity and genuineness to these vouchers.

The Ld.DR for the Revenue supported the impugned order and submitted that the assessee had failed to produce third-party bills or independent evidence corroborating the cash disbursements of Rs.41,04,423/-. It was contended that the self-vouchers, being signed only by the employees of the assessee themselves without any external confirmation, could not be treated as reliable evidence of expenditure actually incurred. The Ld.DR further submitted that the ld.CIT(A) had already provided significant relief by reducing the addition from Rs.55,60,681/- to Rs.41,04,423/- by accepting the bank-paid expenses, and the remaining disallowance was well-founded.

We have carefully considered the rival submissions, perused the orders of the lower authorities and examined the material available on record along with the paper book filed by the assessee. The undisputed facts emerging from the record are that the assessee is engaged in the business of Clearing and Forwarding (C&F) Agency and, in the course of such business, incurs various expenses towards freight, transport, handling charges, harbour dues, customs- related charges and other incidental expenses on behalf of its clients. During the remand proceedings, the AO verified the expenditure claimed by the assessee and accepted expenses aggregating to Rs.74,43,173/- which were incurred through banking channels and supported by third-party evidence. However, the balance expenditure of Rs.41,04,423/- was claimed to have been incurred in cash and was supported only by self-made vouchers prepared by employees of the assessee and approved internally by the Director of the company.

It is a settled proposition of law that the burden to establish the genuineness and business nexus of expenditure claimed under the Act rests primarily upon the assessee. While commercial expediency of an expenditure is to be judged from the perspective of the businessman, the assessee is nevertheless required to substantiate the claim with credible evidence. Mere entries in the books of account or internally generated vouchers cannot, by themselves, constitute conclusive proof of expenditure, particularly where substantial amounts are claimed to have been paid in cash.

In the present case, we find that despite being afforded adequate opportunity during assessment proceedings, remand proceedings and appellate proceedings, the assessee has failed to produce any independent third-party evidence in support of the cash expenditure of Rs.41,04,423/-. Admittedly, the entire claim rests upon self-vouchers signed by employees of

The contention of the assessee that cash payments are a normal feature in the Clearing and Forwarding industry cannot be accepted in its entirety so as to dispense with the statutory requirement of substantiation. Though certain business exigencies may warrant cash payments, the assessee cannot be absolved of the obligation to maintain reasonable supporting evidence to establish the genuineness of such claims. The existence of self-vouchers may indicate that some expenditure was incurred; however, such vouchers do not possess the same evidentiary value as third-party documents and therefore cannot be accepted at face value for the entire amount claimed.

At the same time, we also note that the Revenue has not brought any material on record to demonstrate that the entire expenditure represented by the cash vouchers is fictitious or non-genuine. The nature of the assessee's business does indicate that certain cash outgoings are inevitable in the ordinary course of operations. Therefore, complete disallowance of the entire expenditure merely on account of inadequacy of supporting evidence would also not be justified. Considering the totality of facts and circumstances, the nature of business carried on by the assessee, the absence of independent supporting evidence for the cash expenditure and the fact that the claim is supported only by self-made vouchers, we are of the considered opinion that the ends of justice would be met by sustaining a reasonable disallowance out of such expenditure. In our view, disallowance at the rate of 10% of the cash- voucher expenditure of Rs.41,04,423/- would adequately address the possibility of inflation or unverifiable elements in the expenditure while at the same time recognising that the business itself necessitates incurring such expenses. Accordingly, we direct the AO to restrict the addition to 10% of Rs.41,04,423/-,

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