THE ACIT., VIJAYAWADA vs. M/S. KRNTI ROAD TRANSPORT PVT. LTD., VIJAYAWADA

आदेश / O R D E R

PER D.S. SUNDER SINGH, Accountant Member:

This appeal filed by the revenue is directed against order of the

Commissioner of Income Tax (Appeals) {CIT(A)}, Vijayawada vide ITA

No.78/CIT(A)/VJA/2015-16 dated 28.3.2016 for the assessment year

2009-10.

ITA No.375/Vizag/2016 M/s. Kranti Road Transport Pvt. Ltd., Vijayawada 2. The assessee is a Private Limited company carrying on the

business in transportation of goods by engaging/hiring vehicles from

several persons including the Directors, relatives of Directors and others.

The assessee filed its return of income for the A.Y. 2009-10 admitting

total income of ` 85,57,730/-. Assessment u/s 143(3) of the Income

Tax Act, 1961 (hereinafter called as 'the Act') was completed assessing

on total income of ` 99,64,837/-. By rectification order, the total income

was revised at ` 1,03,39,880/- after disallowing the excess claim of

depreciation of ` 3,75,038/-. Subsequently, the case was reopened u/s

147 of the Act for the reason that the assessee had shown the same

vehicles in the chart of leased vehicles and own vehicles and claimed

lease rent. The A.O. also observed that the payment is covered by

section 40A(2)(b) of the Act. The reassessment proceedings were

completed by the A.O. u/s 143(3) r.w.s. 147 of the Act after making the

disallowance of ` 14,16,600/- on account of lease rent paid to the

directors and disallowance of ` 2,12,64,270/- u/s 40A(2)(b) of the Act.

paid, the A.O. noticed that the assessee had claimed the expense

of lease rent to the extent of Rs.14,16,600/- on vehicles owned by

the company. In this regard, the assessee submitted during the

assessment proceedings that it had sold the own vehicles to its 2

ITA No.375/Vizag/2016 M/s. Kranti Road Transport Pvt. Ltd., Vijayawada Directors on 31.12.2008 and taken the same vehicles on lease,

hence, they appeared in both lists of own vehicles and the leased

vehicles. The assessee further stated that it has paid the lease

rent to its directors for 3 months only and for the remaining period

they were used as own vehicles and no lease rent was paid hence

no double claim. However, the A.O. found from the details

furnished by the assessee relating to its Directors that they had

not admitted the lease rent of Rs.14,16,600/- in their respective

returns of income and the assessee has not furnished the copy of

resolution passed in order to take the Directors' vehicles on lease.

Hence, the A.O. concluded that on the one hand the assessee

stated to have paid the lease rent of Rs.14,16,600/- and on the

other hand the Directors of the assessee company had not

admitted the lease rent in their returns of income, hence, held

that the assessee failed to prove the payment of lease rent of

Rs.14,16,600/- and accordingly disallowed the same.

A.O. on examination of profit & loss account noticed that the

assessee had claimed other lorry charges of Rs. 11,77,95,333/-,

which includes lease rent for 44 vehicles said to be taken from the

Directors and their spouses and relatives. The assessee paid lease

ITA No.375/Vizag/2016 M/s. Kranti Road Transport Pvt. Ltd., Vijayawada rent of Rs.2,98,80,869/- on account of these 44 vehicles. The

assessee explained before the A.O. that these 44 vehicles are used

for the purpose of business and were taken on lease from the

Directors, for which 36 vehicles were used for the whole year and

remaining vehicles for 3 months. The assessee is making the

payments towards the hire charges per km basis @Rs.10/- per km

to the Directors as well as outsiders. The Assessing Officer

observed that the assessee has not furnished the details relating

to gross receipts per vehicle along with trip sheets, terms and

conditions entered into with its Directors and Relatives of the

Directors and working details to show that there was no excessive

or unreasonable lease rent paid. Further, the Assessing Officer on

verification of information furnished with regard to lease rent paid

to Directors and relatives of Directors noticed that it contains only

the journal entries of date truck hire advance and other lorry hire

payables etc. Accordingly, the A.O. after considering the

information furnished by the assessee held that the claim for

expenditure can be allowed to an assessee, only when it produces

supporting evidence and establishes that the expenditure has been

incurred wholly, exclusively and necessarily for the purposes of its

business. In this regard, the A.O. has relied on the decision

ITA No.375/Vizag/2016 M/s. Kranti Road Transport Pvt. Ltd., Vijayawada rendered by the Hon’ble Supreme Court in the case of M/s. Sutlej

Cotton Mills Ltd. 116 ITR 1 (SC) (1979). The A.O. held that the

payment of ` 2,00,000/- per vehicle per month is reasonable and

worked out the disallowance u/s 40A(2)(b) of the Act at `

2,12,64,270/- and accordingly completed the assessment.

appeal before the CIT(A) and the Ld. CIT(A) after verification of

the details produced by the assessee, he has partly allowed the

appeal of the assessee.

before us with the following grounds of appeal:

ITA No.375/Vizag/2016 M/s. Kranti Road Transport Pvt. Ltd., Vijayawada assessment order passed u/s.143(3) r.w.s.147 of the I.T.Act. 6. Any other ground that may be urged at the time of hearing.

require specific adjudication.

2,12,64,270/- disallowed u/s 40A(2)(b) of the Act in respect of

the hire charges paid to the relatives of the Directors and a sum

of ` 14,16,600/- lease rent paid to the Directors.

the appeal hearing, the Ld. D.R. argued that the A.O. has

considered for disallowance of ` 2,12,64,270/- for taking 44 lorries

on hire from the Directors and relatives. Out of the 44 vehicles, 36

vehicles were plied for 12 months and 8 vehicles were plied for 3

months. The total amount paid to the Directors and their relatives

as a hire charges was ` 2,98,80,865/- out of which the A.O. allowed

the deduction of ` 72 lakhs @ 2 lakhs per vehicle for 36 vehicles

and disallowed a sum of ` 14,16,600/- for 8 vehicles taken on lease

from the Directors and the balance amount of ` 2,12,64,270/- was

disallowed as excess payment u/s 40A(2)(b) of the Act. The

reasons assigned by the A.O. was assessee’s failure to furnish the

ITA No.375/Vizag/2016 M/s. Kranti Road Transport Pvt. Ltd., Vijayawada details called for by the A.O. as under:

reasonableness of the payment made to the Directors in the absence of

the information called for and hence the A.O. has made the disallowance

correctly. The Ld. D.R. further submitted that during the appeal

hearing, the assessee had furnished the above details to the CIT(A),

hence the Ld.CIT(A) ought to have given the opportunity to the A.O. as

required under Rule 46A of the Income Tax Rules, thus, requested to

remit the matter back to the file of the A.O. for fresh adjudication.

the assessment proceedings, the assessee has produced the books of

accounts, relevant vouchers and the entire information including the trip

sheets before the A.O., both at the time of original assessment u/s

143(3) as well as in reassessment u/s 143(3) r.w.s. 147 of the Act. The

Ld. A.R. further argued that the assessee has neither furnished any 7

ITA No.375/Vizag/2016 M/s. Kranti Road Transport Pvt. Ltd., Vijayawada fresh information nor fresh evidence before the CIT(A), which warrants

opportunity under Rule 46A of the I.T. Rules. The information placed

before the A.O. was furnished to the Ld. CIT(A) during the appeal

proceedings. Since the assessee has furnished entire information before

the A.O. and produced the books of accounts along with vouchers and

evidences in two rounds i.e. at the original assessment and in the re-

assessment proceedings, again remitting the matter back to the file of

the A.O. is nothing but undue hardship to the assessee to appear time

and again on the same issue in spite of submitting all the details,

therefore, argued that there is no case for sending the case back to the

A.O. and requested to dispose of the appeal. The Ld. A.R. further

submitted that the assessee is making the payment of hire charges @ `

10/- per km. for all the vehicles taken on lease both from the Directors

as well as from others. Though the vehicles appear to be old, the

assessee had maintained them very well they are in good condition and

giving good mileage. The vehicles are also in fit condition, which was

approved by the concerned motor vehicle authorities, hence, there is no

reason to give less price to the vehicles hired from Directors. The Ld.

A.R. further argued that the A.O. made disallowance u/s 40A(2)(b) of

the Act without ascertaining market rate of hire charges from others.

There is no incidence of comparable cases brought on record to make

ITA No.375/Vizag/2016 M/s. Kranti Road Transport Pvt. Ltd., Vijayawada the disallowance u/s 40A(2)(b) of the Act. The A.O. required to bring

the market rate of comparable cases and fix the market rate to arrive at

the excess if any. No such excuse was made by the A.O. The Ld. A.R.

argued that the A.O. fixed the yearly rent at ` 2 lakhs per vehicle, which

worked out approximately to ` 17,000/- p.m. for which an auto also

cannot be hired. The Ld. A.R. argued that the order passed by the A.O.

is highly arbitrary and the Ld.CIT (A) has considered all the facts and

allowed the appeal hence no interference is called for in the order of the

LD.CIT(A) in this issue.

on record and gone through the orders of the authorities below. The

A.O. made the disallowance of ` 2,12,64,270/- as excess claim towards

hiring of vehicles from the Directors and relatives. The assessee has

debited a sum of ` 11,77,95,333/- towards the lorry charges, out of

which the assessee has taken 44 vehicles on lease from the Directors

and their relatives. Out of the 44 vehicles, 36 vehicles were operated

throughout the year and 8 vehicles were operated for partial period.

The A.O. computed the fair rent of 36 vehicles at ` 72 lakhs per year

which works out to ` 2 lakhs per month. While fixing the annual rent of

` 2.00 lakhs per month, the A.O. has misguided himself with monthly

rent of ` 1,55,000/- to ` 1,77,000/- paid by the assessee for other 9

ITA No.375/Vizag/2016 M/s. Kranti Road Transport Pvt. Ltd., Vijayawada vehicles. On careful verification, the fair rental value fixed by the A.O.

works out to ` 17,000/- per month for which an auto also cannot be

hired let alone the lorry. Considering the expenses involved for plying

the truck, the fair rental value determined by the A.O. at ` 2 lakhs per

year is highly arbitrary and without application of mind. We are also not

inclined send the case back to the AO since it is settled issue that the

CIT(A) is having co-terminus powers to do further enquiries which the

AO failed. From the above information we do not find any reason to

hold that the A.O. acted fairly to determine the fair rental value of the

vehicles hired from the directors and connected relatives. Merely

because of the gross receipts of each vehicle along with trip sheet and

the terms and conditions entered with the Directors were not furnished

it is unfair on the part of the A.O. to make such huge disallowance u/s

40A(2)(b) of the Act. As per the assessment order, it is gathered that

the assessee is making the payment of ` 10/- per km for hire for both

the vehicles taken from Directors as well as from the outsiders Ld. A.R.

of the assessee has stated that the assessee had produced the books of

accounts and all relevant vouchers before the A.O. The information

available for determining the fair rental value of the vehicles hired from

others and the Directors can be culled out from the books of accounts,

the vouchers and other relevant information submitted by the assessee

ITA No.375/Vizag/2016 M/s. Kranti Road Transport Pvt. Ltd., Vijayawada before the A.O. Having produced the books of accounts in two

succeeding proceedings before the AO we are not inclined rely on the

Ld. D.R’s submission that the assessee has not produced the information

called for by the AO. The Ld. CIT(A) has verified the entire information

with trip sheets and lease rent paid to Directors and other relatives of

Directors, depreciation payments, etc. and allowed the appeal of the

assessee. For the sake of clarify and convenience, we extract relevant

part of the CIT(A)’s order which reads as under:

“5.1.3 In view of the above, I hold that re-opening of assessment is in order. Appellant’s ground of appeal on this issue fails.

5.2 During the course of appellate proceedings, appellant submitted all relevant details for perusal and necessary examination. In respect of 8 vehicles mentioned in page 12 of assessment order, copies of Form 23 (Certificate of Registration) clearly indicated that Transfer of ownership w.e.f. 31.12.2008 i.e. Hypothecation/Hire Purchase/Lease Termination w.e.f. 31.12.2008. Thus, these vehicles appeared in company’s own vehicle list for 9 months and leased vehicle chart for 3 months of the relevant asst. year.

5.2.1 Thus, lease rental payment of ` 14,16,000/- in the hands of appellant company is duly supported by proper evidence. Hence, disallowance of ` 14,16,000/- made by Assessing Officer is not in order.

5.2.2 The Directors, on the other hand, opted for offering the lorry income u/s 44AE of the Act as they claimed to have satisfied the conditions therein. Consequently, this entire payment of ` 14,16,000/- was not offered as lease rental receipts for taxation in the hands of the relevant directors.

5.2.3 However, Assessing Officer did not let in any evidence to prove that expenditure of ` 14,16,000/- was not incurred by the appellant or it was not genuine. If the proper lease rental receipt was not offered in the hands of respective directors, then Assessing Officer should intimate the jurisdictional Assessing Officer of respective directors for taking necessary action in this regard in the cases of relevant directors. Disallowance in the hands of the appellant company of a genuine expenditure is not

ITA No.375/Vizag/2016 M/s. Kranti Road Transport Pvt. Ltd., Vijayawada warranted. Hence, I direct the Assessing Officer to delete addition of `14,16,000/-.”

payment of rent of ` 1,50,000/-, ` 1,64,000/-, ` 1,74,000/-, `

1,50,000/-, etc. treating them as a yearly rent. In fact the A.R.

submitted that the same was rent for 3 months. Taking into

consideration of 3 months at ` 1,50,000/- to ` 1,74,000/-, the lease

rent paid by the assessee appears to be reasonable. Further, the

rent payment works out from ` 7 lakhs to ` 9 lakhs per annum.

Depending on the rent per km as observed from the details filed by

the assessee before the CIT(A), it is observed that the assessee has

paid a rent of ` 10/- per km both to the outsiders as well as the

directors and there is no dispute. In this case as rightly observed by

the CIT(A), the A.O. has not brought any basis for determining the

fair rental value of ` 2 lakhs per vehicle and the disallowance u/s

40A(2)(b) of the Act is based on complete hypothetical. The A.O.

neither proved the excessive nor unreasonable with regard to the

hire charges paid to the Directors and relatives, hence, we hold that

the CIT(A) has rightly deleted the addition and no interference is

warranted. The revenue’s appeal on this ground is dismissed.

14,16,000/- in respect of 8 vehicles sold to Directors. The A.O. found 12

ITA No.375/Vizag/2016 M/s. Kranti Road Transport Pvt. Ltd., Vijayawada that the assessee has shown 8 vehicles in the own vehicles as well as

the leased vehicles list as follows:

S.No From whom vehicle Vehicle No Lease Make & said to be taken amount made (in Rs.) 1 15.05.2000 1,55,620 S. Rama Rao AP16X2166

1,72,190 2 S.Rama Rao AP16X5844 19.03.2001 3 S.Sujatha AP16W9322 06.08.1999 1,78,290 4 S.Sujatha AP16W9622 06.08.1999 2,08,340 5 S.GangaBhavani AP16W9422 1,57,300 03.08.1999 6 S.Ganga Bhavani AP16W856 03.08.1996 2,03,210 7 S.Vasavi AP16X1866 15.05.2000 1,77,060 8 S.Vasavi AP16X1966 15.05.2000 1,64,590 Total 14,16,600

the vehicles to the Directors and the Directors have leased the vehicles

to the company. During the period of ownership of vehicles by the

company, the company has not claimed any lease rent but subsequent

to the sale of vehicles to the Directors, the lease rent was paid to the

directors and the same was claimed as deduction. Therefore, argued

that the assessee has rightly claimed the expenditure of lease rent. The

assessing Officer has verified from the cash flow statement of the

respective Directors and observed that the Directors have not admitted

the lease rent in their returns of income and also did not admit the

receipt in their cash flow statement. Hence, the A.O. doubted the

ITA No.375/Vizag/2016 M/s. Kranti Road Transport Pvt. Ltd., Vijayawada genuineness of the payment, accordingly disallowed the sum of `

14,16,600/- lease rent paid to the assessee. In First appeal the

ld.CIT(A) deleted the addition. Hence the Revenue is in appeal before

us.

A.O. and the Ld. A.R. supported the orders of the CIT(A). The Ld.

CIT(A) observed that 8 vehicles mentioned in the assessment order

were owned by the company for 9 months and subsequently sold the

same and taken back on lease on sale and lease back transaction,

hence, the vehicles appeared both in own vehicles and leased vehicles

of the company. The recipients have duly admitted the income in their

hands u/s 44AE of the Act. Since the same is admitted in section 44AE

of the Act, the payment made by the company does not find place in

the cash flow statements. Hence, observed that payment of `

14,16,000/- is supported by the proper evidence and no disallowance is

warranted. For the sake of clarity and convenience we extract relevant

part of the CIT(A) order in para Nos.5.2.2 & 5.2.3 which reads as under:

“5.2.2 The Directors, on the other hand, opted for offering the lorry income u/s 44AE of the Act as they claimed to have satisfied the conditions therein. Consequently, this entire payment of ` 14,16,000/- was not offered as lease rental receipts for taxation in the hands of the relevant directors.

5.2.3 However, Assessing Officer did not let in any evidence to prove that expenditure of ` 14,16,000/- was not incurred by the appellant or it was not genuine. If the proper lease rental receipt was not offered in the 14

ITA No.375/Vizag/2016 M/s. Kranti Road Transport Pvt. Ltd., Vijayawada hands of respective directors, then Assessing Officer should intimate the jurisdictional Assessing Officer of respective directors for taking necessary action in this regard in the cases of relevant directors. Disallowance in the hands of the appellant company of a genuine expenditure is not warranted. Hence, I direct the Assessing Officer to delete addition of `14,16,000/-.”

assessment order and the submissions of both the parties. The

directors have declared their income on operating the trucks u/s

44AE of I.T. Act. When the income is declared u/s 44AE, the net

income would be admitted but not the gross receipts. Further if the

admission of income is suspicious, the directors cases have to be

examined but the addition should not be made in the hands of the

assessee. Hence, we do not find any reason to interfere with the

order of the Ld.CIT(A) and the same is upheld.

fresh evidence filed by the assessee before the Ld. CIT(A). We have

already addressed this issue in preceding paragraphs of this order

and decided the issue against the revenue since the assessee had

produced the books of accounts and relevant information before the

A.O. at the time of assessment proceedings. Hence, we dismiss the

appeal of the revenue on this ground.

ITA No.375/Vizag/2016 M/s. Kranti Road Transport Pvt. Ltd., Vijayawada 19. In the result, the appeal of the revenue is dismissed.

The above order was pronounced in the open court on 16th Mar’18.

Sd/- Sd/- (वी. दुगा�राव) ( ड.एस. . . . सु�दर "संह) (V. DURGA RAO) (D.S. SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

#वशाखापटणम /Visakhapatnam: 'दनांक /Dated : 16.03.2018 VG/SPS आदेश क� ��त)ल#प अ*े#षत/Copy of the order forwarded to:-