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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 1ST DAY OF SEPTEMBER 2020
PRESENT
THE HON’BLE MR. JUSTICE ALOK ARADHE
AND
THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD
I.T.A. NO.81 OF 2011 BETWEEN:
THE COMMISSIONER OF INCOME-TAX
C.R. BUILDING, QUEENS ROAD
BANGALORE.
THE ASSISTANT COMMISSIONER OF INCOME-TAX
CENTRAL CIRCLE-1(4), C.R. BUILDING
QUEENS ROAD, BANGALORE. ... APPELLANTS (BY SRI. K.V. ARAVIND, ADV.,)
AND:
M/S. RAJMAHAL SILKS PARTNERSHIP FIRM NO.48/1, SANJEEVAPPA LANE AVENUE ROAD CROSS BANGALORE-560009. ... RESPONDENT (BY SRI. A. SHANKAR, SR. COUNSEL A/W SRI. M. LAVA, ADV.) - - -
THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 21.10.2010 PASSED IN ITA NO.690/BANG/2010 FOR THE ASSESSMENT YEAR 2005-06, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO:
(I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. (I) ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT, BANGALORE IN ITA NO.690/BANG/2010 DATED 21-10-2010 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2(1), BANGALORE, IN THE INTEREST OF JUSTICE AND EQUITY.
THIS ITA COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING:
JUDGMENT
This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2005-06. The appeal was admitted by a bench of this Court vide order dated 26.09.2011 on the following substantial questions of law: (i) Whether the Tribunal was correct in holding that a sum of Rs.1,53,32,679/- and Rs.35,68,815/- expenses claimed towards transportation charges were not allowable despite the transporters adducing evidence that they did not execute these transactions and the
payments received were only book entries which evidence was not taken into consideration in the proper perspective and consequently recorded a perverse finding?
(ii) Whether the Tribunal was correct in holding that the disallowance of Rs.1,82,83,210/- was not justified even though the same was contrary to Section 40a(ia) of the Act without assigning any reason and consequently recorded a perverse finding?
(iii) Whether the Tribunal was correct in holding that a sum of Rs.36,56,642/- disallowed under Section 40A(3) of the Act is liable to be allowed despite the assessee not satisfying Rule 6DD of the Income Tax Rules and consequently recorded a perverse finding?
Facts giving rise to filing of this appeal in nutshell are that the assessee is a partnership firm carrying on the business of export of silk waste and sale
of iron ore fines. A search was conducted under Section 132 of the Act on 14.12.2005 in the office as well as the residential premises of M/s Rajmahal Silks Group and its partners respectively. The assessing officer issued a notice under Section 153A of the Act. The assessee filed the return of income on 21.07.2006 in response to the notice under Section 153A of the Act for the Assessment Year 2005-06 declaring a total income of Rs.99,15,140/-. The Assessing Officer thereafter issued a notice under Section 143(2) of the Act on 13.07.2007. In response to the aforesaid notice, the assessee produced book of accounts and other necessary documents. The assessing officer determined the total income of the assessee as Rs.2,55,15,140/- by disallowing the business expenditure under Section 37(1) of the Act and passed an order under Section 153A read with Section 143(3) of the Act on 31.12.2007.
The assessee filed an appeal before the
Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) by an order dated 30.03.2010 held that transportation expenses to the extent of Rs.1,58,01,494/- was not genuine and therefore, the same was not incurred for the purpose of business carried on by the assessee. It was further held that transportation expenses to the extent of Rs.1,47,52,025/- and Rs.35,31,185/- paid to M/s M.M.Transport and S.Abdul Munaf were contrary to Section 40(a)(ia) of the Act. It was further held that payments were made in cash above the prescribed limit and therefore, there was violation of Section 40A(3) of the Act. Thus, total enhancement to the income on account of transportation expenses was made to the tune of Rs.2,15,84,704/- and the appeal was dismissed. The assessee thereupon approached the Income Tax Appellate Tribunal (hereinafter referred to as ‘the Tribunal’, for short). The Tribunal by impugned order dated 21.10.2010 confirmed the addition of Rs.31 Lakhs
made in respect of payment to M/s IBL Enterprises. However, remaining additions made by the Assessing Authority as well as Commissioner of Income Tax (Appeals) were deleted and the appeal preferred by the assessee was partly allowed. In the aforesaid factual background, the revenue has filed this appeal.
Learned counsel for the revenue while inviting the attention of this court to the order passed by the assessing officer submitted that the assessing officer on meticulous appreciation of evidence on record has recorded a finding that assessee had adopted modus operandi of siphoning of cash in the nature of bogus transportation charges and thereby inflating the expenditure. Thus, the amount shown to have been expended on account of transportation charges, which was paid to M/s M.M.Transports and Syed Abdul Munaf was treated as non business expenditure for Assessment year 2005-06. While referring to the order passed by the Commissioner of Income Tax (Appeals), it is
pointed out that the Commissioner of Income Tax (Appeals) by assigning cogent reasons has held that transportation expenses incurred by the assessee are not incurred for the purposes of business carried on by the assessee and therefore are not allowable under Section 37(1) of the Act. It was also held that payments were made to the transporters in cash in violation of the limit and therefore, the provisions of Section 40A(3) of the Act are applicable to the fact situation of the case. It is argued that the Tribunal which is the final fact finding authority in a cryptic and cavalier manner without assigning any reasons has directed deletion of additions made by Assessing Officer as well as Commissioner of Income Tax (Appeals) except confirming the addition of Rs.31 Lakhs. It is also pointed out that neither any reasons have been assigned nor any basis have been disclosed for deleting the additions. Therefore, the order passed by the Tribunal suffers from the vice of non application of mind and the finding with regard to
deletion of the addition made by Assessing Officer and the Commissioner of Income Tax (Appeals) is perverse. It is also argued that in the fact situation of the case, the matter deserves to be remitted to the Tribunal for decision afresh in accordance with law.
On the other hand, learned Senior counsel for the assessee submitted that the assessee had deducted the tax at source and the return was filed thereafter on 31.10.2005. It is further pointed out that the provision of Section 40(a)(ia) was incorporated by Finance Act, 2010, which is remedial / curative in nature and therefore, in view of decision of the Supreme Court in ‘CIT VS. CALCUTTA EXPORT COMPANY’, 404 ITR 654 (SC), and therefore, the second substantial question of law deserves to be answered in favour of the assessee and against the revenue. It is also urged that provision of Section 40A(3) is not applicable in case of the assessee as the firm has paid all payments through account payee crossed cheques only. It is further
submitted that disallowance made under Section 40A(3) can be only on the basis of profit and loss account and only on those expenditures claimed in terms of Section 28 to Section 37 of the Act and the notional presumption of cash payments having been made, disallowance under Section 40A(3) of the Act is non sustainable in law. In this connection, reference has been made to Bank statement and ledger account to show that all payments were made by account payee crossed cheques. It is also argued that assessee at the time of beginning to commence the work had given some advance to transporters in certain transactions for incurring expenses on the exigencies of the business, the peak of the advances is already offered to tax and therefore, the aforesaid payments were not claimed in profit and loss account. It was also pointed out that claim made in profit and loss account are through cheques and therefore, Section 40A(3) would not be applicable. Alternatively it is submitted that advances
have been made at the places where there is no banking facility. It is also urged that Commissioner of Income Tax (Appeals) failed to appreciate that disallowance if any under the provisions of Section 40A(3) of the Act shall be restricted to an extent of 20% of the amount expended in excess of Rs.20,000/-.
It is also argued that existence of the transporters has been proved, as they are assessed to income tax in their respective jurisdictions. It is also pointed that the transporters attended the proceedings before the Assessing Officer And also filed the copies of income tax returns. It was further submitted that all expenses incurred through the aforesaid two transporters were transacted through banking channels in compliance with the provisions of the Act. The transporters in their statement recorded under Section 131 of the Act have accepted the fact that they have rendered transportation services to the assessee and the assessee had discharged the onus by producing the
transporters, submitting their confirmations and affidavits, their complete address and Permanent account Number etc. and had discharge the burden. Therefore, no addition could have been made by the Assessing Officer. It is also pointed out that the assessee has produced the material evidence to state that entire expenses were claimed under Section 37(a) of the Act. It is also urged that the entire issue in this appeal are only questions of fact and disallowance of Rs.1,82,83,210/- under Section 40(a)(ia) of the Act is contrary to law and is covered against the revenue by decision of the Supreme Court in CIT VS. CALCUTTA EXPORT COMPANY supra. It also pointed out that the assessee had produced all details and documents to demonstrate the incurrence and allowability of expenditure under Section 37(1) of the Act. It is further submitted that the Tribunal in paragraph 8 and 14 of its order had assigned reasons and had rightly deleted all the additions made by the assessing authority as well as
Commissioner of Income Tax (Appeals) except confirming addition of Rs.31 Lakhs made by the assessing authority. Lastly, it was urged that policy of law is that there must be a point of finality in all legal proceedings, that still issues should not be reactivated beyond a particular stage and the lapse of time must induce repose in and set at rest judicial and quasi judicial controversies as it must in other spheres of human activity. In this connection, reliance has been placed on decision of the Supreme Court in ‘PARASHURAM POTTERY WORKS CO. LTD., VS. INCOME-TAX OFFICER’, (1977) 106 ITR 1 (SC).
We have considered the submissions made by learned counsel on both the sides and have perused the record. Before proceeding further, we may advert to the well settled legal principles. It is trite law that Income Tax Appellate Tribunal is the fact finding authority and it should normally record its conclusion on every disputed question raised before it, setting out its
reasons in support of its conclusion. However, it is not necessary for the Tribunal to record reasons when the Tribunal fully agrees with the order passed by the Commissioner of Income Tax (Appeals).
[See: ‘COMMISSIONER OF INCOME TAX, BANGALORE VS. K.Y.PILLIAH AND SONS’, (1967) 63 ITR 411 (SC)]. The aforesaid principle was referred to approval in ‘PATNAIK AND CO. LTD. VS. COMMISSIONER OF INCOME-TAX, ORISSA’, (1986) 161 ITR 365 (SC) and ‘GANAPATHY AND COMPANY VS. THE COMMISSIONER, INCOME TAX BANGALORE’, (2016) 381 ITR 363 (SC).
In the backdrop of aforesaid well settled principles, the facts of the case in hand may be examined. In order to claim deduction the assessee has to prove that the payment was incurred wholly and exclusively for the purpose of business. The Assessing Officer after considering the statements of Mr.Abdul Razak, Proprietor of M/s M.M. Transport and statement
of Syed Abdul Munaf inter alia held that the aforesaid individuals did not carry any identity to prove themselves. It was further admitted by them in their statement that they did not maintain books of accounts. They further stated that they have not done any transportation work for any other person except the assessee. The Assessing Officer therefore, came to the conclusion that genuineness of the transportation done by the aforesaid persons is doubtful and the expenditure cannot be considered as incurred wholly and exclusively for purposes of business. The Commissioner of Income Tax (Appeals) inter alia has held that payments made to the transporters were made in cash and are not reflected in the return of income, confirmations and in the affidavits filed in the course of the proceedings. Thus, it was held that the amount incurred as expenditure in transportation charges represents the inflation of transportation expenses. It was also held that no material was produced to show in the form of
weighing slip, vehicle used for transport of mineral, the Octroi receipts as well as the delivery challans etc. to prove that the quantity of minerals was actually transported by the transporters. Accordingly, it was held that the transportation expenses have not been incurred for the purposes of business carried on by the assessee and are not allowable under Section 37(1) of the Act. It has also been held that transporters were carrying on business from Hospet and they were maintaining books of accounts at Hospet. Therefore, the assessee was not required to pay cash to the transporters as they were not carrying on the business in a remote area where there was no banking facility. It was further held that payments made to transporters on a particular day exceeds Rs.20,000/- therefore, provision of Section 40A(3) are applicable. The Commissioner of Income Tax (Appeals) enhanced the income of the assessment under appeal to the extent of Rs.2,15,84,704/-.
Paragraph 14 and 18 of the order passed by the Income Tax Appellate Tribunal reads as under: 14. We heard both sides in detail. The Assessing Officer had made additions and the CIT(A) has enhanced the additions mainly on the ground of the statements extracted from the transport contractors who had rendered services to the assessee in its business of exporting iron ore. Both the authorities have overlooked a very vital aspect of whole episode while accepting the denial of the transporters of the receipts of any payments from the assessee. Those transporters have categorically admitted before the authorities that they had acted as the transporters of the assessee firm. On one side the concerned transporters admitted that they have rendered transport services to the assessee firm and on the other hand those persons denied any payments received from the assessee. This is patently contradictory. Therefore clarity of the evidence relied on by the assessing authority and the CIT(A) is extremely doubtful. In addition to the above contradiction, it is to be seen that those
parties who have deposed against the assessee had admitted that they were carrying on the transportation business on a large scale. None of them have maintained any of the accounts. None of them have filed any returns of income. Therefore, what is their credibility? The assessing authority has used the most unreliable witness to discount down the arguments of the assessee firm. Therefore, the approach adopted by the Assessing Officer is against all the cannons of prudence. The CIT(A) also has perpetuated this in appreciating the so called evidences collected against the assessee firm. What is the basis for the lower authorities in preferring the statement of the transporters to the statement of the assessee? Are the transporters are holier than the assessee? The revenue has no answer.
Accordingly, we delete all the additions made by the assessing authority as well as by the CIT(A), except confirming the addition of Rs.31 Lakhs made by the assessing authority.
Thus, it is evident that the Tribunal has neither assigned any reasons nor has disclosed any basis for directing deletion of additions made by the assessing authority as well as Commissioner of Income Tax (Appeals) except confirming the addition of Rs.31 Lakhs made by the assessing authority. It is also pertinent to mention here that the Tribunal has not assigned any reasons on the issues raised before it and has not given any reasons in support of its conclusion. The order passed by the Tribunal is cryptic and suffers from the vice of non application of mind.
The second substantial question of law framed by a bench of this court is no longer respondent integra and is covered by a decision of the Supreme Court in Calcutta Exports Company supra and the same does not require any adjudication. Therefore, the same is answered in favour of the assessee and against the revenue. Though we are conscious of the legal principle that finality has to be attached to all legal proceedings,
but in the peculiar facts of the case since, factual adjudication is required so far as substantial question of law Nos.1 and 3 are concerned, which has not been done by the Income Tax Appellate Tribunal, which is the final fact finding authority, we are left with no option but to set aside the order passed by the Income Tax Appellate Tribunal insofar as it pertains to substantial questions of law No.1 and 3 and remit the matter to the Tribunal for decision afresh on issues covered by substantial question of law Nos.1 and 3. Therefore, it is not necessary for us to answer the substantial questions of law No.1 and 3.
In view of preceding analysis, the appeal is disposed of. Sd/- JUDGE
Sd/- JUDGE ss