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Facts
A search and seizure operation was conducted at the assessee's premises, leading to assessment proceedings under Section 153A. During a survey at the Palakkad branch, a discrepancy in cash balance was noted. The assessee made cash payments for transportation charges, which the AO disallowed under Section 40A(3).
Held
The Tribunal held that the disallowance under Section 40A(3) was made based on material gathered during assessment proceedings, not during the search, making the assumption of jurisdiction under Section 153A questionable. The Tribunal also noted issues with the extrapolation of disallowance and the violation of natural justice.
Key Issues
Whether the assumption of jurisdiction under Section 153A was valid in the absence of incriminating material found during search, and whether disallowances under Section 40A(3) were justified based on extrapolated figures and without proper natural justice.
Sections Cited
40A(3), 133A, 153A, 132, 40(a)(ia), 6DD, 139(1), 234B, 234C
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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI. LAXMI PRASAD SAHUANDSHRI. SOUNDARARAJAN K
Per Laxmi Prasad Sahu, Accountant Member :
1. All these appeals filed by the assessee against the Order passed by CIT(A) – 2, Bangalore, against order dated 28.09.2023 with separate DIN . The grounds taken on the following grounds of appeal:
1) The appellate order passed by the learned Commissioner of Income- tax (Appeals), in the facts and under the circumstances, is grossly opposed to facts and law. 2) The learned Commissioner of Income-tax (Appeals) has grossly erred in confirming the additions to the returned income under Sec.40A(3) of the Act, in respect of the transportation charges to 950/Bang/2023 Page 2 of 23 incurred by the Appellant, in the absence of any incriminating seized material purporting violation of the provisions of Sec.40A(3). 3) Without prejudice, it should have been appreciated by the learned Commissioner of Income-tax (Appeals) that the material relating to the payment of transportation charges in cash was unearthed during the course of survey proceedings under Sec.133A at its Palakkad branch albeit contemporaneous with the search proceedings at its Bangalore office, and not during any search proceedings itself. 4) Without prejudice, the information alleged to be incriminating, that was unearthed during the course of survey proceedings at the Palakkad branch, actually pertained only to a difference in the actual cash balance at the Palakkad branch and the cash as per books, which was eminently explained to the satisfaction of the investigating authority, and was not the material on the basis of which an opinion was formed regarding the alleged contravention of the provisions of Sec.40A(3). 5) The learned Commissioner of Income-tax (Appeals) has grossly erred in confirming the extrapolation of the disallowance under Sec.40A(3) by relying on a few instances of alleged violation of the said provision. 6) The impugned order passed by the learned Commissioner of Income-tax (Appeals) records a perverse finding in so far as it states in paragraph 7.6 thereof that the disallowances have been worked out on actual basis, whereas the disallowances, as confirmed by the learned assessing office in the impugned order of assessment itself, have been arrived at by extrapolating a few alleged violations. 7) The learned Commissioner of Income-tax (Appeals) in the facts and under the circumstances has grossly erred in failing to note that there was violation of the principles of natural justice in so far as the sum disallowed under Sec.40A(3) was never put forth to the appellant for its rebuttal either in the show cause notice or at any time during the assessment proceedings. 8) The learned Commissioner of Income-tax (Appeals) has grossly erred in law in failing to note that there is no finding in the impugned order of assessment or in any record forming part of the assessment proceedings as to how the sum disallowed under Sec.40A(3) has been arrived at. to 950/Bang/2023 Page 3 of 23 9) Without prejudice, the learned Commissioner of Income-tax (Appeals) has grossly failed to appreciate that factually there was no violation of the provisions of Sec.40A(3) warranting any disallowance. 10) The learned Commissioner of Income-tax (Appeals) has grossly failed to note that though the signature of the recipient namely the union leaders / representatives was the same on a few vouchers on the same day, the vehicle registration number was different, and therefore the truck driver who was the actual beneficiary of the payment was different, consequently obviating any disallowance under Sec.40A(3). 11) The learned Commissioner of Income-tax (Appeals) ought to have observed that the disallowance, if any, under Sec.40A(3) ought to have been determined by reckoning the ultimate beneficiary in respect of the payments towards transportation charges, namely the respective truck drivers and not the union leaders / representatives who merely accepted the payments on behalf of the truck drivers, a practice that is widely prevalent in the driver unions in the State of Kerala. 12) Without prejudice, even assuming without accepting that the cash payments were made to the union leaders / representatives and not to the individual truck drivers themselves, learned Commissioner of Income-tax (Appeals) ought to have held that the said union leaders / representatives were merely acting as agents, and therefore the payment fell squarely within the purview of the exception contained in sub-rule (k) of Rule 6DD of the Income-tax Rules.
13) The appellant craves for leave to add to, to delete from and to amend the grounds of appeal.
Assessee has also filed additional grounds of appeal which is as under:
The above named appellant craves for leave to adopt the following additional ground of appeal: “14. In the absence of any incriminating material unearthed during the search proceedings under Sec.132 at the premises of the appellant company, the assumption of jurisdiction under Sec.153A by the learned assessing officer itself is illegal and the appellant denies itself liable to be assessed under Sec.153A, and to 950/Bang/2023 Page 4 of 23 therefore the impugned order of reassessment under Sec. 153A deserves to be set aside.
15. It should have been appreciated that the additional income relating to sales promotion admitted by the appellant was only as a result of the sworn statement obtained from its director under Sec.132(4), which itself, as upheld by various courts while dealing with the subject, does not constitute incriminating material to justify assumption of jurisdiction under Sec. 153A.
16. Without prejudice, the only sum that could have been disallowed under Sec.40(A)(3) was the payment in excess of Rs.35,000/- per payment, and not the aggregate of payments exceeding Rs.35,000/- itself, and in the absence of the particulars of the payment sought to be disallowed, there is no way for the appellant to determine the correctness of the disallowance, and under the circumstances, the addition under Sec.40A(3) itself deserves to be deleted.”
2. It is respectfully submitted that the failure to adopt these grounds in the original appeal filed was neither deliberate nor wilful. It is also submitted that the additional grounds adduced herewith go to the root of the matter and no new facts are being brought on record. It is submitted that admission of these grounds will serve the ends of justice and that non-admission of the same will cause grave and irreparable damage to the appellant and result in miscarriage of justice. That under such circumstances, the validity of the admission of additional grounds has been upheld by the decisions of the Hon’ble Supreme Court in National Thermal Power Company Ltd. (229 ITR 383) and the Hon’ble Delhi High Court in Gedore Tools Pvt. Ltd. (238 ITR 268).
3. Hence, it is prayed that the above grounds may be admitted and taken up for adjudication in accordance with law.
3. In the additional grounds, assessee has raised legal issue challenging proceedings the assumption of jurisdiction u/s 153A in pursuance of search conducted u/s 132 of the I. T. Act in absence of incriminating materials found during the course of search for the AY 2015-16 & 2016-17 which is placed on record. The issue raised by the assessee in the additional ground is a legal issue. The additional ground is admitted for adjudication relying on the to 950/Bang/2023 Page 5 of 23 judgement of Hon’ble Apex Court in the case of National Thermal Power Corporation Ltd. vs CIT reported in 229 ITR 383 (SC) , the additional ground raised by the assessee is accepted for adjudication. On going through the grounds and additional grounds raised by the assessee, the issue involved are common for all the three years. Therefore, we are deciding the appeal together and we are taking first appeal in and decision taken in ITA No.948/Bang/2023 shall apply mutatis mutandis to appeals in ITA Nos.949, 950/Bang/2023.
Briefly stated, the facts of the case are that a search and seizure under section 132 of the Act was conducted in the case of the assessee on 03.11.2016 and the survey was also conducted at the factory premise of the assessee. Subsequently, the case was centralized to Central Circle. Accordingly, notice under section 153A of the Act was issued on 29.06.2017 which was served to the assessee on 05.07.2017 requiring it to file the return of income within 15 days from the date of receipt of notice. The assessee sought extension of time to file return of income and it was extended till 31.08.2017 and the assessee filed return of income u/s 153A of the Act , declaring total income of Rs.24,66,77,460/-. The assessee filed return of income under section 139(1) of the Act on 29.09.2015 declaring total income of Rs.19,92,03,920/-. Subsequently, the statutory notice was issued to the assessee. The assessee was given opportunity to photocopy the seized material vide Office Order dated 04.07.2018 and the assessee has not opted for photocopying as the assessee was already having copy of the seized documents. During the course of search and seizure action, self-certified vouchers for sales and promotion expenses were found to inflate the expenditure and assessee had entered in its books of substantial amount under this head and these facts were confronted with Shri. Neelakanta Rao, Chairman of the company on 04.11.2016 and his statement was recorded wherein he has accepted that there was only a minimum requirement for promotion expenses in distillery sector and he also to 950/Bang/2023 Page 6 of 23 accepted that some component of sales and promotion expenses cannot be substantiated by them and the statements recorded are as follows:
From the above statement, the Chairman Shri. Neelakanta Rao admitted to further substantiated component of sales and promotion expenses to the tune of Rs.14,08,27,182/- from Assessment Years 2014-15 to 2016-17. Accordingly, for Assessment Year 2015-16 a sum of Rs.4,74,73,539/- was admitted by the assessee and the same was offered for taxation in the return of income and it was accepted by the AO. Further, during the course of survey proceedings under section 133A of the Act at the manufacturing unit of the assessee at Chullimada, Pampampallam, Palakkad, Kerala, it was noticed that the cash balance as per the cash book was Rs.46,65,247/- and whereas the physical cash found in the premises was Rs.9,31,980/-. The difference in the cash was confronted with Sri Prathapan, Manager (Materials) who was maintaining cash book said that the cash is given to Shri Sasikumar TV who is the freight manager and amount is kept in suspense. The amount is given to Shri. Sasikumar for making advance payments to truck operators for transport of liquor and statement was also recorded. The AO also observed from the statement recorded during survey which is as under:
During the course of survey proceedings, various vouchers were also obtained and it is scanned in the Assessment Order. the AO noted that the driver’s name mentioned in the vouchers are different from the person who is in receipt of the cash. From the vouchers, the AO observed that all the cash payments were not made on single day to a single person was not accepted and applied section 40(A)3 of the Act and the AO has also noted that the amount which are liable for TDS as per the TDS provision for payment to transporters were also not made by the assessee. Therefore, he also applied the provision of section 40a(ia) of the Act. Accordingly, a show cause notice was issued to the assessee. The assessee submitted reply and submitted that there is no seized material warranting any addition of income and relied on the various case laws. It was further submitted that the liquor has to reach various delivery points in the state of Kerala and Karnataka especially in the state of Kerala, the lorry transporters are an organized society coming to course under different to 950/Bang/2023 Page 9 of 23 party trade unions. In such of those cases there is a possibility of a single person signing the receipt for different cash vouchers of lorries / truck drivers of the same union. The AO considered the submissions and found that during the course of survey in the Palakkad Manufacturing Unit of the assessee petty cash book for Financial Year 20161-7 was found and impounded and on the basis of material available the Assessment Order for Assessment Years 2015- 16 and 2016-17 was also verified and concluded. The AO relied on the judgment of CKK Catering Services Vs. ACIT 2012 346 ITR 92 (Kar). He also relied on the judgment of Harish Textile Engrs. Ltd Vs. DCIT 2015 63 taxmann.com 66 (Bom). The AO made addition under section 40A(3) of the Act of Rs.47,34,080/- and completed assessment under section 153A r.w.s. 143(3) r.w.s. 153D of the Act.
Aggrieved from the above Order, assessee file appeal before the First Appellate Authority and made detailed written submissions. The CIT(A), after considering the submissions and relying on case laws, dismissed the appeal of the assessee.
Aggrieved from the above Order, assessee filed written synopsis for all the three years which are as under:
This appeal before this Hon’ble Tribunal is against the consolidated appellate order passed by the learned Commissioner of Income Tax (Appeals)-11, Bangalore dated 25-09-2023 for the Assessment Years 2015-16, 2016-17 and 2017-18. However, in these submissions, we shall deal with the appellate order only in so far as it relates to the AY 2015-16.
2. The appellant is a Private Limited company carrying on the business of manufacture and sale of IMFL and other alcoholic beverages for human consumption. A search and seizure action under Sec.132 of the Act was carried out at the premises of the appellant company on 03-11-2016, along with other distilleries, subsequent to which the assessment proceedings u/s. 153A was to 950/Bang/2023 Page 10 of 23 initiated by the issuance of notice u/s. 153A dated 25-06-2017 which culminated the order of re-assessment u/s. 153A r.w.s. 143(3) and 153D dated 31-12-2018 passed by the Deputy Commissioner of Income-tax, Central Circle – 1(1), Bangalore. Pursuant to an admission made by the then Chairman of the appellant company, Shri. Neelakanta Rao during the course of the search proceedings, to offer the alleged unsubstantiated component of sales and promotion expenses to the tune of Rs. 14,08,27,182/- for the AY 2014-15 to AY 2016-17, a sum of Rs. 4,74,73,539/- was declared by the appellant for the AY 2015-16 vide the return of income filed by it in response to the notice issued u/s. 153A, over and above what was declared in the return originally filed by it. Notwithstanding that the said admission was made without any evidence in the possession of the Department substantiating such addition, it is submitted that the said income returned by the appellant has been so assessed and there is no dispute on the said front.
Contemporaneous with the search proceedings conducted by the income tax department at the premises of the appellant company in Bangalore, survey proceedings of u/s. 133A of the Act were conducted at the manufacturing unit of the appellant Chullimada, Pampampallam, Palakkad, Kerala, during the course of which it was noticed that whereas the cash balance as per the cash books was Rs. 46,65,247/- the physical cash found in the premises was only in a sum of Rs. 9,31,980/-. When the Manager (Materials) Shri. Prathapan, who was in-charge of maintaining the cash book at the Palakkad premises of the appellant was confronted with the apparent discrepancy between the balance as per the cash book and the actual cash balance on hand, he had submitted the difference represents that the amount kept in suspense upon payment of advance to the various truck drivers through their respective unions for the purpose of freight and transportation charges to be incurred by the appellant company in the course of its business. It was explained to the investigating authority that all payments of freight and transportation charges towards lorries that were hired for the purpose of transportation of IMFL and beer were only through the five unions in the market which were recognized for the purpose of supplying IMFL & Beer from Palakkad District. It was also explained that it was the practice of the company to make an advance payment at a lump sum to Shri. Sasikumar, who was the Freight Manager at the factory premises who in turn would pay the advance to respective drivers through the concerned union from such lumpsum amount, towards various charges such as freight charges, toll fees, unloading expenses, factory halt, depo halt etc., Thereafter, upon receipt of payment, the union officials would place to 950/Bang/2023 Page 11 of 23 the market trucks as per the requirement of the appellant. Once the driver or representative completed the trip, it was the practice to submitdelivery acknowledgements along with the cash receipt upon receipt of which the said Shri. Sasikumar, Freight Manager would prepare a payment voucher for the whole transport expenses and pay the balance payment (expense amount less advance paid), if any, and obtain the signature of the receiver who invariably would be a representative of the truck union from which the said truck was to be sourced. Thereafter, a consolidated statement would be prepared and recommended for approval by Shri. Ambili Ambat, GM (P&A), and forwarded to the Head Office along with all receipts for the approval to Shri. Ravindran (Senior Vice President- Sales and Marketing). Ultimately, the approved statement received from the Head Office would be adjusted and reconciled with the suspense account maintained by the aforesaid Shri. Prathapan and would be accounted in the books of accounts through the petty cash. Finally, the approved bill sand payment vouchers signed by said Shri. Prathapan duly accounted through petty cash would be filed at the Head Office Accounts Department to be entered into the computerized accounting software maintained at the Head Office.
4. Though the apparent difference in the balance as per the cash book and the actual physical cash value in the Palakkad premises was duly explained during the course of the survey proceedings u/s. 133A, the Learned Assessing Officer had referred to some of the payment vouchers obtained by him during the course of the survey proceedings wherein, payments in excess of the limits specified u/s.40A(3) i.e. Rs. 35,000/- per day were made to the same person in the aggregate against different vouchers in the same day to allege that there has been a violation of the provision of Section 40A(3) inviting disallowance under the said provision in respect of the payments made in excess of the said limit to a single person in a day. The Learned Assessing Officer, in doing this, had ignored the fact that though the recipients’ signatures in the payment voucher were the same, the vehicle registration number of the respective truck was also stated in the payment voucher was different and therefore the said payments were to be construed as having been made to the respective union leaders on behalf of the truck drivers, and not to the union leaders themselves.
5. Thereafter, the Learned Assessing Officer, during the course of the assessment proceedings u/s 153A r.w. Section 143(3) for the AY 2015-16, has proceeded to issue a show cause notice dated 21-12- 2018 for the disallowance u/s 40A(3) and 40(a)(ia) in respect of the transport expenses incurred at Palakkad for the Assessment Year to 950/Bang/2023 Page 12 of 23 2015-16. A copy of the said show cause notice is enclosed as Annexure - 1.
1. It may be observed from the said show cause notice that the sum paid towards transportation charges to the truck operators for transport of liquor has been alleged to be in a sum of Rs. 6,63,02,767/- for the AY 2015-16 to AY 2017-18. It is not clear though as to how the said amount has been arrived at. The learned assessing officer has further referred to the consolidated statement dated 23-03-2015, 02-05-2015 and 25-10-2016 along with sample vouchers filed therewith, to allege that sums were paid in contravention of the provisions of Sec.40A(3) of the Act. It is also to be noted that no year wise break-up was furnished to the appellant regarding the sum proposed to be disallowed in the show cause notice, or for that matter in any preceding communication during the assessment proceedings.
6. In response to this, the appellant filed a letter dated 26-12-2018, submitting that there was no contravention of the provisions of Section 40A(3) of the Act whatsoever and that the total payment in a day to a single person even if it exceeded the permissible limit, represented various charges like diesel, halting charges, unloading charges etc., and that payments were made to the representatives of the various trade unions who in turn would make the payment to the drivers and that this was done as a measure of commercial/ business expediency and that therefore no disallowance u/s. 40A(3) or section 40(a)(ia) was warranted. Copy of the said letter is enclosed as Annexure – 2. The appellant also submitted that material on the basis of which disallowance was proposed under Sec.40A(3) / Sec.40(a)(ia) relating to payments towards transportation charges exceeding the limits specified u/s. 40A(3), was not incriminating material unearthed during the search proceedings and consequently no assessment u/s. 153A could be sustained on the basis of such material.
7. Ignoring pleas of the appellant, the Learned Assessing Officer has proceeded to make an addition in a sum of Rs. 47,34,080/- said to be the payments made in excess of the prescribed limit under Sec.40A(3) in cash and has accordingly taxed the same and levied u/s. 234B and 234C, vide the order of assessment u/s. 153A r.w.s 143(3) and Section 153D dated 31-12-2018.
8. Aggrieved by this, the appellant preferred an appeal before the Commissioner of Income Tax (Appeals)-11, Bangalore who had conducted various hearings during which, the appellant, without prejudice to its contention that there was no violation of the provisions u/s. 40A(3) whatsoever, also submitted that there was no to 950/Bang/2023 Page 13 of 23 incriminating material unearthed during the search proceedings with regard to the disallowance u/s. 40A(3) and therefore no addition could be made on the basis of the sworn statement recorded during the survey proceedings at the Palakkad branch of the appellant. The appellant also brought to the notice of the Learned Commissioner, decision of the Supreme Court in Pr. CIT vs. Abhisar Buildwell (P) Ltd.(332 CTR 385), wherein the Hon’ble Apex Court laid down the salutary principles with regard to the validity of assessmentsmade u/s. 153A on the basis of the material not unearthed during the search proceedings.The Learned Commissioner of Income Tax (Appeals), however has ignored the submissions of the appellant, to hold that the additions made to the returned income by the Learned Assessing Officer u/s. 40A(3) in respect of the transportation charges said to have been incurred by the appellant in excess of the statutorily permissible daily limit of Rs. 35,000/- per person were justified, and has dismissed the appeal of the appellant. Aggrieved by this, the appellant is in appeal before this Hon’ble Bench.
9. On the issue of whether the additions made under Sec.40A(3) are sustainable despite the material relating to the same not being unearthed during the search proceedings conducted at the premises of the appellant in Bangalore, a fact which is not controverted either by the learned Assessing Officer, or the learned CIT (Appeals), it is necessary to examine the salutary principles laid down by the Hon’ble Supreme Court in Pr. CIT vs. Abhisar Buildwell (P) Ltd. (332 CTR 385), upon a consideration of the decision of the Hon’ble Delhi High Court in CIT vs. Kabul Chawla (2015) 281 CTR (Del) 45 as well as the Hon’ble Gujarat High Court in Principal CIT vs. Saumya Construction (P) Ltd. (2017) 297 CTR (Guj) 387. Reference is invited to paragraph 14 of the aforesaid judgement (emphasis supplied): “14. In view of the above and for the reasons stated above, it is concluded as under: (i) that in case of search under s. 132 or requisition under s. 132A, the AO assumes the jurisdiction for block assessment under s. 153A; (ii) all pending assessments/reassessments shall stand abated; (iii) in case any incriminating material is found/unearthed, even, in case of unabated/completed assessments, the AO would assume the jurisdiction to assess or reassess the ‘total income’ taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns; and (iv) in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material to 950/Bang/2023 Page 14 of 23 in respect of completed assessments/unabated assessments. Meaning thereby, in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under s. 132 or requisition under s. 132A of the Act, 1961. However, the completed/unabated assessments can be re-opened by the AO in exercise of powers under ss. 147/148 of the Act, subject to fulfilment of the conditions as envisaged/mentioned under ss. 147/148 of the Act and those powers are saved.”
It is manifest from the law laid down by the Hon’ble Supreme Court in paragraph 14(iv) of the judgement that “in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments.” The other material referred to herein, it is submitted, includes material or evidence gathered during survey proceedings and the assessment proceedings. It is submitted that material unearthed during survey proceedings albeit contemporaneous with the search proceedings in question itself, especially sworn statements, which, in the absence of corroborative evidence lack evidentiary value, can never be equated with incriminating material unearthed during search proceedings to justify an assessment under Sec.153A. Please see the decisions in CIT vs. S. Khadar Khan Son (2008) 300 ITR 157 (Mad.), Paul Mathews and Sons v. CIT [2003] 263 ITR 101 (Kerala), CIT vs. M.P. Scrap Traders [2015] 60 taxmann.com 205 (Gujarat),AlankarJewellers vs. DCIT (ITAT Indore in ITA No.992/Ind/2019).Similarly, even material gathered during the assessment proceedings cannot be equated with incriminating material unearthed during search.
11. It is not in dispute herein that the material relating to the transportation charges allegedly incurred in cash in excess of the limits specified under Sec.40A(3), was gathered during the assessment proceedings. This is evident from the averments contained in paragraph 3 of the Show Cause Notice dated 21-12- 2018 itself. Further, even during the search / survey proceedings, as the sworn statements obtained from Shri. Ambili Ambat, GM (P&A) dt. 03-11-2016 and Sri. P. B. Lakshmanan dt. 07-03-2017, the relevant extracts of which are enclosed as Annexure – 3A and 3B, will indicate, the only material gathered during the survey proceedings related to the difference in cash between what was recorded in the books of accounts at the Palakkad branch and the physical cash lying on hand at the said branch, which was eminently explained to the satisfaction of the investigating authority, and the material on the basis of which the disallowance to 950/Bang/2023 Page 15 of 23 under Sec.40A(3) was proposed, namely the cash payment vouchers and the consolidated statements dated 23-03-2015, 02-05-2015 and 25-10-2016, was only gathered by the learned assessing officer during the 153A assessment proceedings. In the circumstances, without prejudice to the contention that there is no violation of the provisions of Sec.40A(3) whatsoever, it is submitted that the additions cannot be sustained in respect of completed assessments/unabated assessments i.e. AY 2015-16 and AY 2016- 17.
12. Even arguing against ourselves, if it were to be assumed without admitting that the material unearthed during the survey proceedings that were contemporaneous with the search proceedings at Bangalore were incriminating, it is submitted that the only material unearthed during the survey proceedings namely sworn statements obtained from Shri. Ambili Ambat and Shri. P. B. Lakshmanan referred above, dealt with the alleged discrepancy in the cash balance as observed between the books of accounts and the actual physical cash balance at hand and was duly explained to the satisfaction of the investigation officer and no mention was made at the time of surveywith regard to the possibility of disallowance u/s 40A(3) of the Act. It is submitted that the proposition to make disallowances u/s 40A(3) on the allegations that payments in excess of the prescribed limit were made to the same person in a day, was only an after-thought andwas arrived at only upon an examination of the consolidated statements and vouchers relating to the transportation charges furnished by the appellant during the course of the assessment proceedings, and could never be equated or ascribed with the character of evidence obtained during the search proceedings conducted only at Bangalore. It is respectfully submitted therefore, that this is an attempt by the Learned Assessing Officer to improve the order of assessment by an ascribing the material gathered during the assessment proceedings with the nature of incriminating material gathered during the search/ survey proceedings. It is absolutely essential that a distinction been drawn out in respect of the two as the gathering of the incriminating material goes to the root of jurisdiction u/s. 153A and does not permit of any dilution.
13. It is further submitted that the learned Commissioner of Income Tax (Appeals) has grossly erred in confirming the extrapolation by the Learned Assessing Officer of a few instances of the alleged violation/s. 40A(3) to arrive at an arbitrary sum of Rs. 47,34,080/- said to be the amount disallowable under the said provision on account of contravention. The only instances, without prejudice to to 950/Bang/2023 Page 16 of 23 the contention that there is no contravention of the provisions of Section 40A(3)in respect of such instances too, observed by the Learned Assessing Officer to contend that there is a payment in excess of the prescribed limit, were those instances that were detailed in the impugned order of assessment, the particulars of which are detailed hereunder: Date Voucher No. Amount paid (Rs.) 02-03-2015 418 13,028/- 02-03-2015 419 10,831/- 02-03-2015 420 14,321/- 02-03-2015 421 12,795/- 02-03-2015 422 12,165/- TOTAL 63,140/- Date Voucher No. Amount paid (Rs.) 16-03-2015 506 21,129/- 16-03-2015 507 4,535/- 16-03-2015 508 12,805/- 16-03-2015 509 12,045/- 16-03-2015 510 4,535/- TOTAL 55,409/- Date Voucher No. Amount paid (Rs.) 09-03-2015 464 13,875/- 09-03-2015 465 9,244/- 09-03-2015 466 12,045/- TOTAL 35,164/- The particulars of these instances were also gathered was based on the consolidated statement as well as the corresponding payment vouchers furnished during the course of assessment proceedings. As submitted earlier, it is reiterated that the basis of arriving at the said sum of Rs. 47,34,080/- which has been disallowed u/s. 40A(3) has not been made known to the appellant during the course of the assessment proceedings or at any time prior thereto. The reliance of the Assessment Officer, on the decision of the Karnataka High Court in CKK Catering Services Vs. ACIT (346 ITR 92) and Harish Textiles Vs. DCIT (63 Taxmann.com 66) itself indicates his attempt to justify this extrapolation of the few instances observed during the course of the assessment proceedings to the payments made by the appellant during the entire year. Even ignoring the fact that the said sum proposed to be disallowed was never put forth to the appellant to 950/Bang/2023 Page 17 of 23 for its rebuttal, it is submitted that the sheer act of extrapolation of the alleged contraventions to arrive at the disallowance under Section 40A(3) is arbitrary, excessive and unreasonable and therefore must struck down.
14. Reference is invited to the consolidated show cause notice dated 21- 12-2018 issued for the Assessment Years 2015-16 to 2017-18 enclosed as Annexure - 1 supra, specifically paragraph 1 thereof, wherein the Learned Assessing Officer has averred that a sum of Rs. 6,63,02,767/- was paid in excess of Rs. 35,000/-. Here itself, we may note that it is unknown as to how the said sum has been arrived at by the Learned Assessing Officer, as the said sum did not figure in the particulars furnished by the appellant during the course of the assessment proceedings. The manner or the basis of arriving at such sum has also not been detailed by the Learned Assessing Officer whether in the show cause notice or in any other correspondence prior to the issuance of the show cause notice during the assessment proceedings. Thereafter, the Learned Assessing Officer refers to three consolidated statements dated 23- 03-2015, 02-05-2015 and 25-10-2016, presumably one relating to each of the Assessment Years 2015-16, 2016-17 and 2017-18 as well as the payment vouchers corresponding to such consolidated statements furnished during the assessment proceedings to arrive at a disallowance u/s. 40A(3) in a sum of Rs. 47,34,080/- for the AY 2015-16. A perusal of the assessment order will also reveal that it is unknown as to how the said sum of Rs. 47,34,080/- has been derived from the consolidated sum of Rs. 6,63,02,767/- stated in paragraph 1 of the show cause notice dated 21-12-2018. Further, it is submitted that till the passing of the impugned order of assessment, the said disallowance of a sum of Rs. 47,34,080/- was never put forth to the appellant for its rebuttal nor was the basis of arriving at such sum was made known to the appellant at any point in time and therefore it is submitted that the impugned order of assessment and by its extension the appellate order passed by the Learned Commissioner of Income Tax (Appeals) insofar as he confirms the said addition, suffers from the fatal infirmity of being in gross violation of the principles of natural justice. It is therefore submitted that the impugned appellate order deserves to be set aside and expunged on this ground alone.
Even on merits, it is submitted that the Learned Commissioner of Income Tax (Appeals) has grossly failed to appreciate that factually there was no contravention of Section 40A(3) whatsoever warranting disallowance under the said provision. As submitted earlier, there are 5 unions in the marker for supplying trucks for IMFL and beer transport from Palakkad District, namely:
a. Palakkad District Lorry Owners Association b. BMS Kanjikode Lorry Unit c. Palakkad District Lorry Transporting Agents Association d. Palakkad District Lorry Owners Organisation e. Malampuzha Lorry Owners & Drivers Association It is submitted that these unions hold the authority to fix and revise the basic freight & halting charges for IMFL / Beer despatched from Palakkad district to all the KSBC depots in Kerala. We enclose herewith as Annexure – 4A, 4B and 4C, memorandums signed by the authorised representatives of all the truck union fixing the fright rates between various destinations within Palakkad District. In order to maintain transparency and accountability within the union, the payments are mostly collected by the union representatives on behalf of the drivers. The manner of payment of advances and the subsequent adjustments against the final bills submitted is detailed in paragraph 3 supra.A close examination of the payment vouchers relied upon by the Learned Assessing Officer to contend that payments in excess of the prescribed limit of 35,000/- were made to the same person during a day, will reveal that, notwithstanding that the same person’s signature was obtained on different payment vouchers in the same day, the vehicle registration numberof each of the trucks that was stated on the respective payment vouchers was different indicating that the ultimate beneficiaries of the payments were not the person signing the payment vouchers but indeed the truck driversthemselves. As submitted earlier, it was in order to adhere to the practice prevailing in the State of Kerela and the District of Palakkad as dictated by the five major truck unions operating within the District which required the payments to be routed through the representatives of the unions that payments were made to the truck drivers through such representatives. It is submitted that such payment must not be reckoned as having been made to a transport contractor requiring the deduction of tax u/s. 194C but instead the representatives of the truck unions who were acting as agents of the appellant company to avail of the services provided by the truck drivers. So reckoned, it is submitted that in no instance has the payments to the truck drivers themselves exceeded the daily limit of Rs.35,000/- per person prescribed under Sec.40A(3). It is therefore submitted that the said arrangementwas not only was undertaken as a measure of commercial and business expediency but also to adhere with the prevailing trade practices, and therefore fell squarely within the exception contained in sub rule (k)of Rule 6DD read with the first proviso to Sec.40A(3) which provides for the exceptions where no disallowance under Sec.40A(3) should be made despite cash payments. Reliance is placed on the decision of the Hon’ble Supreme Court in Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667 (SC), which was also cited by the Hon’ble Rajasthan High Court in to 950/Bang/2023 Page 19 of 23 CIT vs. The Solution (382 ITR 337), where their Lordships, cited the observations of the Hon’ble Supreme Court observed thus: "The terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business trans- actions." The said decision of the Hon’ble Supreme Court was also cited by the Mumbai Bench of the ITAT in Arihant Traders vs. ACIT (ITA No. 442/Mum/2019) where their Honours, even in a case where the payments made to the individual truck drivers exceeded the threshold limit of Rs.35,000/- observed as follows: “In the present case, the payment made by the assessee to the individual truck driver has not been disputed. It is not the case of Department that the payments made by the assessee are not genuine or the payees are not identifiable. The assessee has sufficiently explained the circumstances under which the payments have been made to the truck drivers in cash. The assessing officer made disallowance by taking a pedantic view of the cash transactions. Where cash payments are made under bona fide conditions and no doubt is raised over genuineness of the payments and the payees are identifiable; no disallowances under section 40A(3) is warranted. Thus, in view of the facts of case and various decisions discussed above, we do not find any error in the findings of Commissioner (Appeals) in deleting disallowances of Rs. 60,73,403 made by the assessing officer under section 40A(3) of the Act. We concur with the findings of Commissioner (Appeals). Accordingly, ground Nos. 1 and 2 raised by the Department in appeal are dismissed.” In the present case too, the genuineness of the payments have not been called into question, but the allegation is merely that the payments were made to the same person in the same day, for which reasons have been assigned in detail. In the circumstances, it is prayed that no disallowance under Sec.40A(3) be sustained.
Without prejudice, it is submitted that in the absence of the transaction wise particulars of the payments in respect of which disallowance has been made under Sec.40A(3), it is submitted that it is not possible for the appellant to ascertain whether the entire payments have been subjected to the disallowance or only the excess over and above the threshold limit of Rs.35,000/- per person per day, as is well settled by the decisions of the Hon’ble Supreme Court in Shankar S Koliwad [ITA 5040/2009] Karnataka High Court and M G Pictures (Madras) Ltd 2015-TIOL-37-SC-IT.
It is further submitted that in terms of the arrangement explained in paragraph 3 above, proper records have been maintained at each stageto evidence that the actual beneficiary of every sum of money paid towards transportation charges notwithstanding the person to whom such payments were made and it is submitted such beneficiaries alone ought to be reckoned in order to determine to whether there was a contravention of the provision of Section 40A(3) warrantingany disallowance or not. Though the said information and documents were available during the course of the assessment proceedings, in the light of the fact that no figure was put forth to the appellant company for its rebuttal with regard to the proposed disallowance, and the fact that the Learned Assessing Officer had arrived at the disallowance by extrapolating a few instances observed by him on the basis of consolidated statement and corresponding payment vouchers filed during the assessment proceedings, there was no occasion for the appellant to contend that there was no contravention by adducing the necessary evidence.
In the light of what is submitted herein above, it is prayed that the impugned appellate order passed by the Commissioner of Income Tax (Appeals) be set aside and the disallowance of the aforesaid sum of Rs.47,34,080/- u/s 40A(3) be deleted in accordance with law. 19. Accordingly, it is prayed
In addition to the above written synopsis, the learned Counsel for the assessee vehemently argued his case.
10. The learned DR relied on the Order of the lower authorities and submitted that during the course of search proceedings, various incriminating documents were found and in regard to the inflation of expenses entered in the to 950/Bang/2023 Page 21 of 23 books of accounts and it was confronted to the Managing Director Shri. N J N Radhakrishna Rao Jagdale admitted in the statements recorded during the course of search proceedings and it was not substantiated with cogent materials, therefore it was accepted as income for the relevant Assessment Years and it has been offered as income for the respective Assessment Years. The learned DR relied on the judgment of the Hon’ble Apex Court in the case of PCIT vs Roshan Lal Sancheti reported in 92023) 150 taxmann.com 227 (Rajasthan) (30.10.2018), against the order of the Hon’ble High Court the SLP filed by the assessee has been dismissed by the Apex Court reported in (2023) 150 taxmann.com 228 (SC). In which it has been held that the statements recorded and accepted as undisclosed income and supported by the corroborating materials then the statement given under section 132(4) of the Act has a very great evidential value and admitted addition is to be treated as income of the assessee. Here in this case during the course of search, incriminating documents were found in the form of sales promotion expenses. Therefore, the notice issued by the AO under section 153A of the Act is justified. Consequent to the search, survey was also conducted in the manufacturing unit at Palakkad under section 133A of the Act. Therefore, the survey conducted is part and parcel of the search proceedings and various incriminating materials were also found. There is a difference in the physical cash balance found from the actual books of accounts. This also shows that there is incriminating document found. Therefore, the AO has correctly issued notice under section 153A of the Act and made addition on the basis of the incriminating documents. Therefore, the arguments advanced by the learned Counsel that there was not incriminating document found and no notice can be issued under section 153A of the Act are completely wrong. He further submitted that addition made under section 40A(3) of the Act that there is difference in the signatures, the assessee has not submitted confirmation from the recipient of transport charges that whether they are owner of less than or more than 10 vehicles . There is no evidence of the union traders. He further to 950/Bang/2023 Page 22 of 23 submitted that how the AO has quantified the amount for disallowance u/s 40A(3) all the three years are not clear.
The learned DR requested that the matter may be sent back to the AO for verification that whether the recipient of the transport charges to verify whether the recipients are having 10 vehicles or not. The confirmation has not been provided. The genuineness of signatures from union traders and how much amount is covered under the TDS provisions. It means whether they have been paid more than Rs.35,000/- and the assessee has not complied with the TDS provisions.
Considering the rival submissions, there is search conducted and documents were found which is clear from the order of Revenue authorities. Accordingly, assessee has accepted to offer the unsubstantiated component of sales and promotion expenses to the tune of Rs.14,08,27,182/- for the three Assessment Years and it was admitted as income in its return of income. The CIT(A) has also observed in para 4 that based on incriminating materials admitted undisclosed income by the Chairman of the company for the relevant Assessment Years during the course of search it was found that the assessee has inflated the sales and promotion expenses and during the course of survey, cash payments to truck owners/drivers were found. During the course of statement recorded under section 132(4) of the Act, the Managing Director could not substantiate with corroborating evidence. Therefore, he has accepted as income which is clear from the statements of the Director noted supra. Therefore, we reject the contention of the learned AR of the assessee as during the course of search proceedings, there was no incriminating material found and notice issued under section 153A of the Act is wrong. The judgment relied by the ld. DR in the case of Roshan Lal Sancheti noted supra is applicable in this case, therefore respectfully following the above judgement we dismiss this ground. During the course of argument, the learned AR relied to 950/Bang/2023 Page 23 of 23 on the judgments are not supporting to the case of the assessee, since the facts are distinguishable
However, in the case of addition under section 40(A)3 of the Act, considering the prayer of the ld. DR that this issue may be sent back to the AO for fresh consideration and decision as per law. Therefore, this issue is remitted back to the AO for fresh consideration and decide the issue as per law and needless to say that reasonable opportunity of being heard may be granted to the assessee to represent its case.
In the result, appeals filed by the assessee are treated as allowed for statistical purposes.
Pronounced in the court on the date mentioned on the caption page.