AXIS CARRIERS & LOGISTICS LTD,MUMBAI vs. DCIT 10(2), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य,राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार /PER RAJENDRA, AM- अनुसार Challenging the order,dtd.21/10/2014 of the CIT(A)-21,Mumbai,the Assessing Officer(AO) and the Assessee have filed cross appeals.assessee-company, engaged in the business of logistics and transportation of automobile products,filed its return of income on 28/09/ 2011, declaring total income at Rs.59,56,067/-.The AO completed assessment on 13/03/2014, determining its income at Rs.2.64 croress,u/s.143(3) of the Act. ITA/7448/Mum/2014: 2.First ground of appeal,filed by the assessee,is about confirming the disallowance of Rs.72.51 lakhs.During the assessment proceeding,the AO found that the assessee had debited an amount of Rs.72,51,999/- on account of repair and maintenance charges, that the payment was made to Balaji Enterprises (Balaji),that it was a firm in which directors of the assessee company were partners.He directed the assessee to furnish details of all the expenditure claimed as deduction, u/s. 37 of the Act, with documentary evidences. He also directed it to support the claim that expenditure was incurred wholly and exclusively for the purpose of business.The assessee was also asked to furnish details of various payments made to persons covered u/s. 40A (2) (b) of the Act and to submit necessary evidence to prove the reasonable -ness of the payment. As per the AO the assessee did not file details in respect of the payments made to Balaji. On 21/02/2014 the assessee was again directed to submit the details 163/M/15&7448/M/14 -M/s. Axis Carriers & Logistics Ltd. of nature of services rendered by Balaji with evidence of rendering of actual services.It was also asked to show cause as to why in the absence of proper justification,repair and maintenance charges paid to sister concern should not be disallowed as not being incurred wholly and exclusively for the purpose of business.The assessee submitted copies of bills for the repairing charges paid to Balaji.It also submitted a video of garages claiming to show the actual work on labour being carried out. After considering the material submitted by the assessee,the AO held that the repair charges were shown to have been billed on lump sum basis for each month with description such as being minor repairing charges for during the month, that the description attested with the bill for each month showed that fixed the charges of Rs.1600/-(later on Rs. 2900/- per vehicle)was paid for each vehicle, that same was multiplied result in random numbers of vehicles to arrive at the charges for the month, that no justification was provided by the assessee for regular increase of the adoption his from Rs. 1600/-per vehicle to Rs. 2900/-per month during the year under consideration, that no specific details such as nature of repair services done, type of part replaced,value of the part replaced were provided for any of the vehicles,that it was difficult to comprehend as to how each vehicle was suffering wear and tear each month which costed fixed charges of Rs. 1600/-, that assessee had failed to furnish any evidence to show that services of any nature were rendered during the year under appeal, that the video did not establish the fact that services were actually rendered to the assessee,that debiting the fixed amount every month was a device to transfer the amount from the assessee company to the directors of the assessee,that it had no evidence in support of its claim that services had actually been rendered by Balaji,that it had devised the mechanism to reduce its taxable profits, that mere payment through banking channel or obtaining copies of bills could not entitled the assessee for deduction,that the argument of Balaji showing receipt as its income had no relevance,that for claiming any deduction u/s.37 certain essential conditions had to be satisfied, that the onus of establishing of incurring expenditure wholly and exclusively for the purpose of business was on the assessee. He relied upon certain case laws and observed that payments had been made to perform in which the directors of the company were partners, that it had not brought on record any evidence to establish that payments made were actually in lieu of any services being rendered by the firm. Finally,he held that payment made by the assessee to the persons covered u/s. 40A(2)(b) was excessive and unreasonable having regard to the benefit derived by it, that repair and maintenance charges paid by the assessee to Balaji had to be disallowed.

163/M/15&7448/M/14 -M/s. Axis Carriers & Logistics Ltd. 2.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA) and made elaborate submissions. It also relied upon the order of the tribunal in the case of Hush India P Limited (ITA/5881/Mumbai/210). After considering the available material,he observed that the Ledger copies of Balaji (dated 30/04/2010) indicated that the assessee had claimed Rs. 1600/- for each of the vehicles. He referred to bills for the months of May,September and November, 2010. After analysing the bills of Balaji he observed that there was no mention in any bill about the nature of the repairs and the replaced parts, that the assessee had indulged in claiming amounts on repairing charges without any proper billing or vouchers, that it had raised bills without any proper justification, that all bills were raised with the similar amount at start of the month, that if the bill for the month was Rs. 1600 /- all the vehicle maintenance charges were mentioned at Rs. 1600/- only, that later on the charges increased two Rs. 2900/-, that the pattern proved improbable,that the facts of Hush India (supra) were different from the facts of the case under consideration.Finally,he upheld the addition made by the AO. 2.2.During the course of hearing before us, the Authorised Representative (AR) contended that the assessee did not own any plot of land or premises where normal day-to-day repairing and maintenance of vehicles could be carried out, that during the year it operated 435 trucks and 254 vehicles on hire, that after every trip minor damage would be caused to every truck, that realignment of wheels had to be done, that the trucks were load bearing vehicles that suffered more damages ware and tear, that the repair and maintenance charges were paid to Balaji, that charges paid to Balaji were in the nature of servicing charges paid for each truck being minor repairing charges which was service at the workshop of Balaji, that each trip undertaken by a truck required servicing of normal wear and tear, that the AO failed to appreciate that such services were a must for any transport company, that the assessee did not have its own facilities, that it hired the services of sister concern,that a video footage of the operations done by Balaji was given to the AO,that the AO failed to appreciate that Balaji also facilitated parking of trucks of the assessee over an area encompassing 40,000 ft.², that the payments were regularly made through normal banking channels for the services of print from Balaji, that assessee was regularly deducting tax at source, that details of vehicles which would come for repair also formed part of the bill for services received by the assessee, that he had not appreciated the service charges levied by Balaji were minimum considering the service charges levied by other service centres,that assessment of Balaji was completed u/s. 143 (3) for the AY.s 2007- 08 and 2008-09, that the AO of Balaji had confirmed that it was doing repairing business for the assessee, that audited accounts of Balaji were furnished 163/M/15&7448/M/14 -M/s. Axis Carriers & Logistics Ltd. during the assessment proceedings, that area made available for parking the vehicles of the assessee by Balaji was approximately Rs. 15 per square feet per month even if the argument of non-rendering of services was accepted, that Balaji had obtained a registration with several authorities for carrying on servicing and repairing, that repair charges were made on regular basis through banking channels. He relied upon the case of Hush India (supra). The Departmental Representative (DR)supported the order of the FAA and stated that the assessee had not furnished any evidence about rendering of services by Balaji, that there was no justification for charging flat rate for each truck for every month,that it had produced sterotype bills,that no explanation was filed about increase in service charges from Rs.1600 to Rs. 2900/- per truck. 2.3.We have heard the rival submissions and perused to the material before us. We find that the assessee had claimed an expenditure of Rs. Expenditure 72.51 lakhs towards repairing and maintenance,that it had claimed that its sister concern i.e.Balaji had rendered the services,that directors of the company were also partners of Balaji,that the assessee had shown repairing and maintenance expenditure at Rs.1600/-(later on Rs. 2900/-)per month per truck, that the AO disallowed the entire expenditure holding that same was not incurred wholly and exclusively for the business purposes.He also held that payment made to related party i.e. to Balaji ,was not reasonable and was excessive as per the provisions of section 40A(2)(b)of the Act.The FAA confirmed the order of the AO.Issue before us it two fold-first we have to decide as to whether the expenditure was incurred wholly and exclusively for the business purposes and secondly as to whether the payment was reasonable and not excessive.In short,the incurring of expenditure is to tested on the touchstone of two sections i.e. section 37 and section 40(A)(2)(b) of the Act. 2.3.1.We find that the assessee had claimed that it was plying its own trucks and trucks hired from others.Naturally,for the hired trucks it would not have incurred any expenditure.The basis for paying Rs.1600/- or 2900/- per month has not been submitted.Agreements,if any,between the assessee and Balaji for rendering services at a particular rate is not on record.In the earlier years at what rate/(s)Balaji was offering same services or whether there was increase in service charges in the same proportion i.e. from Rs. 1600/- to Rs.1900/- and finally Rs.2900/-,is also not known.All the trucks would not travel the same distance every time.So,similar type of services would not be required.It is not clear as to whether the assessee was maintaining log books or any other record for the trucks that would indicate the distance covered by them in every trip.The assessee had not explained as to whether Balaji was replacing any parts or what was the nature of services or general maintenance.If it was 163/M/15&7448/M/14 -M/s. Axis Carriers & Logistics Ltd. only wheel alignment or just washing the bodies of the trucks,then the issue of reasonable - ness of the expenditure will definitely arise,as Balaji is an entity covered by the provisions of section 40A(2)(b) of the Act.When the parties to a business transactions are covered by the provisions of said section ,the onus is greater on the assessee to prove that transaction entered in to with related persons is at arm’s length.The fair market price has to proved by the assessees and they have to produce evidences that would establish that payment made to related parties was not excessive and was reasonable.In short,there are many basic and fundamental question that have remained unanswered.It is not that only the assessee is in fault in that regard.The AO had not brought on record any comparable case that could prove that the payments made by independent parties for repairing or maintenance in Thane locality was less than the payments made by the assessee.Unreasonableness or excessiveness of an expenditure,as per the provisions of section 40A(2)(b),has not only to be alleged but also has to be proved with cogent material.It is true that Balaji is filing returns and showing income from repair charges.But,it is not clear as to whether it is offering similar services to other truck operators also.If yes,then at what rates is not known.Whether Balaji had claimed losses or was there any ostensible tax evasion are the issues that should have been considered before disallowing entire expenditure.Considering all these factors we are of the opinion that the issue needs further investigation and verification.So,in the interest of justice,we are remitting back the issue to the file of the AO for fresh adjudication,who would decide it after affording a reasonable opportunity of hearing to the assessee. Now,we would deal with the alternative argument also.It was stated before us,that expenditure should be allowed as parking charges,if the argument of availing of services from Balaji was not acceptable.We are not convinced with the argument.Parking charges,cannot be termed repair and maintenance charges . Term ‘repair and maintenance’ is a well recognised term of commercial and business world.Any expenditure incurred for parking vehicles cannot be allowed as repair and maintenance charges.There was no agreement between Balaji and the assessee for providing or availing parking facilities.Again being a related person the reasonableness of incurring expenditure has to be proved by the assessee.Ground no.1 stands partly allowed.

3.Second ground pertains to confirming the reduction in cost of acquisition of vehicles for the purpose of allowability of depreciation.During the assessment proceedings, the AO found that the assessee had acquired 43 trucks and 25 trailers at Rs. 3.21 crores from the persons who were related to it and were covered u/s.40A(2)(b) of the Act, that assessee had claimed depreciation on those vehicles on the cost of acquisition. However, he was of the opinion that 5 163/M/15&7448/M/14 -M/s. Axis Carriers & Logistics Ltd. depreciation should be allowed only on written down value(WDV)of the vehicles.he reduced the depreciation by Rs. 38. 68 lakhs,invoking the provisions of Explanation 3 to section 43 of the Act. 3.1.During the appellate proceedings, before the FAA,the assessee made detailed submissions and relied upon the case of Navlakha Transline. After considering the available material,he held that the main contention of the assessee was that the AO had not shown any satisfaction that the transaction was entered into to reduce the tax liability, that the AO had obtained the approval of the prescribed authority, that as per explanation 3 to section 43 (1) the AO had power to invoke the section if he were satisfied that the claim of the assessee was for the reduction of tax incidence, that request made by it to adopt insurance value for determining the depreciation,was not as per law,that the facts of the case relied upon by the AO were different from the present case. Finally,he held that AO had rightly invoke the provisions of explanation 3 to section 43 (1). 3.2.Before us,the AR contended that the cost of new vehicles would have been 15.35 crores,that the assessee had purchased old vehicles for Rs. 3.21 crores, that the details of the vehicles,model number,insured value and the cost of acquisition of the vehicle in the hands of the previous owner were furnished during the assessment proceedings,that the cost of acquisition was lower than the insured value of the vehicles, that the insured value was correct indicator of the market value of the truck, that the insurer was liable to pay the amount in case of total loss, that the insurer would not insured vehicle at a value more than the market value,that the provisions of section 43 (1) explanation 3 were applicable,that the AO had not recorded his satisfaction that the main purpose of transfer of assets was to reduce the tax liability,that he had merely observed that higher cost of vehicles would result in higher depreciation,that he did not dispute the business need of the assessee to acquire the trucks, that he had not shown the basis on which he had come to the conclusion that the acquisition cost was an enhanced one,that he should have taken market value of the vehicles for ascertaining the real value, that written down value was not the market value of the vehicles, that the sale proceeds of the vehicles would reduce the block of assets of the seller,that the seller would be entitled for lesser depreciation on its remaining assets,that there would be no claim of enhanced depreciation, that it was not proper for the AO to decide and guide the course of its business,that no opportunity was provided to the assessee by the additional Commissioner before approving the change in the cost of acquisition of the assets, that explanation 3 to section 43 (1) was about enhanced the cost, that it was not applicable where the cost of acquisition was less than the cost of acquisition of the seller.He relied upon 163/M/15&7448/M/14 -M/s. Axis Carriers & Logistics Ltd. the cases of Sekar Offset Press(214 ITR 516) and Bombay Household and Industrial Plastic Mfg.Co.P.Ltd.(1 ITD 152). 3.3.We have heard the rival submissions and perused the material before us.Before proceeding further,we would like to refer to the relevant provisions of the Act and same read as under: Explanation 3.— Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the Assessing Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Assessing Officer may, with the previous approval of the Joint Commissioner determine having regard to all the circumstances of the case. In the case of Ashok Theater (10 ITD 552)the Tribunal ,while dealing with the explanation 3 to the section 43(1)has held as follows: If any transaction is to be treated as entered into for the purpose of reduction of tax liability, then the ITO has to give a specific finding after giving the assessee an opportunity to explain the genuineness of the transfer. Such exercise not being done in the instant case, the mere fact of obtaining the approval of the IAC will not be sufficient compliance to the requirements of the section. In the matter of Unimed Technologies Ltd.( 69 TTJ 25)the Tribunal observed as under: Explanation 3 to s. 43(1) can be applied if the AO is of the view that the fair market value of the assets has been inflated to claim excess depreciation. Only then, he can replace the fair market value with the estimated cost. We would also like to refer to the judgment of Hon’ble Madras High Court delivered in the case of Sekar Offset Press(supra). In that matter there was a firm consisting of one Individual and his sons as partners. On the death of the preson disputes arose among the other partners. The disputes could not be amicably settled, but could only be done with the help of three leading persons of the locality. In consequence of the understanding between the parties, the firm's assets were revalued at Rs. 11,50,609/-, though the written down value was only Rs. 5,42,564/-and were divided among the partners. Some of the assets were given to the assessee-firm and their market value was Rs. 5,59,730/-.The assessee-firm had shown the market value of assets in their books and had claimed depreciation on that basis. The AO, however,disallowed the claim and granted depreciation on the basis of the written down value,relying upon Explanation 3 to section 43(1). The FAA and the Tribunal held that the market value of the assets alone should be taken for allowing depreciation.Dismissing the appeal filed by the department the Hon’ble Court held as under: “Explanation 3 to section 43(1) of the Income-tax Act, 1961, would be attracted only in cases where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business and the Income-tax Officer is satisfied that the main purpose of the transfer of such assets directly or indirectly to the assessee was for the reduction of the liability to income-tax. There is no other circumstance under which this Explanation can be invoked……. the second and main requirement of Explanation 3 to section 43(1) that the transfer of assets should be mainly for reducing tax liability was not established in the instant case. There were serious differences among the partners which 163/M/15&7448/M/14 -M/s. Axis Carriers & Logistics Ltd. needed the help of three other important persons of the locality for an amicable settlement. Under the circumstances, Explanation 3 to section 43(1) was clearly not attracted. The Tribunal was justified in holding that the market value of the assets taken over by the assessee-firm, viz., Rs. 5,59,730, should be taken into consideration for the purpose of allowing depreciation. From the above,it is clear that explanation can be invoked if the AO is satisfied that main purpose of transferring the assets was to reduce tax liability.In other words if by inflating the purchase price an assessee claims higher depreciation,the department is authorised to curb the tax evasion practice adopted by such an assessee.In the case before us,the assessee is not trying to reduce tax liability.So,in our opinion,the FAA was not justified in reversing the order of the AO.We decide Ground of appeal No. 2 in favour of the assessee.

ITA/163/Mum/2015: 4.First ground of appeal raised by the AO pertains to deletion of addition made on account of bad debts of Rs.43.12 lakhs.During the assessment proceedings, the AO found that the assessee had written off bad debts of Rs. 43,12, 380/-.He called for details in that regard and held that the assessee had not provided the details of efforts made by it for recovery of debts. He disallowed the claim made by the assessee. 4.1.During the appellate proceedings before the FAA,the assessee made detailed submissions. After considering the available material,he held that the assessee had written off bad debts in case of six parties, namely, Sundram Finances Ltd, Dantal Hydraulics Private Ltd, Timken India Ltd, Ford India Private Ltd., Glovies India Private Ltd and Kotak/Citicorp Finance (I) Ltd.Referring to the judgment of the Hon’ble Apex court in the case of TRF Ltd (323 ITR 397), he deleted the addition made by the AO. 4.2.Before us, DR stated that matter could be decided on merits. The AR supported the order of the FAA.The AR relied upon the case of TRF Limited (323 ITR 297). 4.3.We find that the FAA has given a categorical finding of fact that the assessee had written off the bad debts in the books of accounts.We are of the opinion,that after the judgment of TRF Ltd.(supra),what the assessee has to prove is writing off of the bad debts .As the assessee had passed the necessary entries in the regular books of accounts,so,we are not inclined to disturb the order of the FAA.First ground of appeal decided against the AO.

5.Next ground of appeal is about deleting the disallowance made by the AO under the head advances written off, amounting to Rs.4.73 lakhs. During the assessment proceedings,the AO found that the assessee had extended advances to certain parties during the year under appeal, that same were not recovered. After obtaining the information in that regard he made a disallowance of Rs.4,73,360/-and added it to the total income of the assessee.

163/M/15&7448/M/14 -M/s. Axis Carriers & Logistics Ltd. 5.1.After considering the available material, the FAA held that the assessee had extended advances during the course of business, that advances were also given to the drivers of the trucks for incurring day-to-day expenditure, that the drivers, while leaving the job suddenly,had not paid back the advances to the assessee, that assessee had to write off such advances,that advances were extended to the drivers while they were proceeding on duty, that it had debited the amount in the P&L account,that expenses were related to the regular business of the assessee,that it was in the nature of business loss. Finally, he allowed the claim made by the assessee. 5.2. Before us,the DR stated that issue could be decided on merits and the AR supported the order of the FAA. We find that assessee had given advances to its drivers while they were undertaking the business trips, that some of the drivers did not return the advances and left the job. Considering the peculiar nature of the business, in our opinion,recovery of such advances is not possible.The assessee had routed the entry through regular books of accounts. There was no justification in disallowing the written off advances.We do not want to interfere in the order of the FAA.Ground number two is decided against the AO.

6.Next ground of appeal is about deleting the disallowance of Rs.30 lakhs made by the AO invoking the provisions of section 40A(3) of the Act. During the assessment proceedings, the AO made an ad hoc disallowance of Rs.30 lakhs out of the expenses debited to the P&L account.He observed that the assessee had not been able to establish with the credible and independently verifiable evidences that the expenses incurred mostly in cash had been incurred wholly and exclusively for the purpose of the business. He disallowed the entire claim made by the assessee, amounting to Rs. 30 lakhs. 6.1.In the appellate proceedings, FAA referred to the order of his predecessors for the year 2010-11,wherein the then FAA had deleted the similar disallowance, relying upon the order of the Tribunal in the case of Hush India Private Ltd.(ITA/8584/Mum/2011 and ITA/ 677/Mum/2012). 6.2.Before us,the DR supported the order of the AO and the AR relied on the order of the FAA. We find that the AO had disallowed the entire amount claimed by the assessee, that he had invoked the provisions of section 40A(3) of the Act.But, he had not given a finding as to how the provisions of the said section were violated. He has not pointed out any defects in the books of accounts of the assessee. Considering the peculiar nature of the business carried out by the assessee, expenditures incurred on account of told taxes, loading unloading, purchase 9 163/M/15&7448/M/14 -M/s. Axis Carriers & Logistics Ltd. of diesel,replacement of spare parts on the roads,repair and maintenance on roads cannot be ruled out.Respectfully,following the order of the tribunal in the case of Hush India Private Ltd.(supra),we uphold the order of the FAA and dismiss the ground number three raised by the AO. 7.Deletion of addition of Rs.1.42 lakhs, under section 36. (1) (va) of the Act is the subject matter of next ground of appeal. During the assessment proceedings, the AO found that assessee had made payment pertaining to employees’ contribution of PF after the due date.So, he made a disallowance of Rs.1,42, 903/-. 7.1.In the appellate proceedings,the FAA held that the assessee had paid the amount before filing of return of income,that it was eligible for deduction under section 43B proviso 1. 7.2.The DR left the issue to the discretion of the Bench and the AR supported the order of the FAA. 7.3.We find that the assessee had paid the amount before filing of return of income for the year under consideration.Therefore, in our opinion there is no need to interfere with the order of the FAA.Confirming the same, we dismiss ground number four.