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Facts
The Revenue appealed against the CIT(A)'s order deleting the disallowance made by the AO under section 40A(3) for cash expenses. The assessee, a clearing and forwarding agent, incurred expenses on behalf of principals and paid laborers through gang leaders. The AO disallowed expenses paid in cash exceeding the prescribed limit, while the assessee argued that these were payments on behalf of principals and individual payments to laborers did not exceed the limit.
Held
The Tribunal held that the CIT(A) was correct in deleting the disallowance. Following the decision of the Co-ordinate Bench in the assessee's own case for earlier years, it was found that the expenses were incurred on behalf of clients and not by the assessee company. Therefore, Section 40A(3) was not applicable. The business exigency also warranted cash payments to laborers through intermediaries, and individual payments to laborers were within the prescribed limit.
Key Issues
Whether cash payments made to laborers through intermediaries, on behalf of principals, are disallowable under Section 40A(3) of the Income Tax Act.
Sections Cited
40A(3)
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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
ITO-30(1)(1), Vilas Transport Company, Room No. 235, 2nd Floor, 103/104, 1st Floor, Kautilya Bhawan, BKC, Vs. Vyapar Nagar, P.D. Mello Road, Mumbai-400051. Masjid, Mumbai-400009. PAN : AAAFV0760G Appellant) : Respondent) Revenue/ Appellant by : Shri G.J. Ninawe, Sr. DR Respondent /Assessee by : Shri Ajay Singh & Shri Akshay Pawar, AR Date of Hearing : 10.09.2024 : 16.09.2024 Date of Pronouncement O R D E R
Per Padmavathy S, AM:
This appeal by the Revenue is against the order of Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre (NFAC), Delhi [in short 'the CIT(A)'] dated 19.01.2024 for Assessment Year (AY) 2012-13. The Revenue raised the following grounds of appeal:
1. Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance made by AO of Rs 3,06,18,455/- u/s. 40A(3) of the Act without appreciating that these expenses were made in cash which were not routed through the books of account Vilas Transport Company "2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance made by AO, despite the fact that the assessee has violated the provisions of section 40A(3) of the Act, by making the payment in cash even though the payments were distributed between wages earner through only a single person aka gang leader.”
The assessee is a firm engaged in the business of clearing and forwarding, stevedoring, transportation, loading and unloading on behalf of principals. The assessee filed the return of income for AY 2012-13 on 28.09.2012 declaring a total income of Rs.6,26,360/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. During the course of hearing, the Assessing Officer (AO) noticed that the assessee has shown gross receipts of Rs. 4,02,54,185/- and against this receipt the assessee has claimed various expenses incurred on behalf of the principal. The AO further noticed that the assessee has earned a net agency receipts to the tune of Rs. 44,21,404/- in the Profit and Loss account and has offered the same to tax. The AO called on the assessee to furnish details pertaining to the gross receipts which according to the assessee includes the reimbursement of expenses incurred by the assessee on behalf of the principals. The assessee furnished the details of expenses as tabulated below:
Description Gross Paid by Paid by Outstanding Amount Cheque cash Steavedoring Charges 13092266 - 11304282 1787984 Handling charges 12451355 473408 11977947 - Transport Charges 7766434 6451771 1314663 - Godown repairing 101323 101323 - - charges Lunch Hire Charges 102500 102500 - - Godown management 6740307 25067728 4235579 - Charges Total 40254185 9635730 28830471
On perusal of the details furnished by the assessee, the AO noticed that the assessee has incurred certain expenditures to the tune of Rs. 2,88,30,471/- in cash.
Vilas Transport Company The AO called on the assessee to show-cause why disallowance under section 40A(3) should not be made with respect to the expenses incurred in cash. In response the assessee submitted that the impugned payments are not debited to the P&L A/c claiming it to be expenses and therefore the provisions of section 40A(3) cannot be applied. The assessee further submitted that these payments which were made on behalf of the Principal were routed through gang leaders and were ultimately paid to the labourer where payment to any single labourer did not exceed limits prescribed under section 40A(3). The assessee furnished the details of payments to labourer including the vouchers and party wise payment details to the AO in this regard. The AO did not accept the submissions of the assessee and held that “5.4 The submission of the assessee has been considered but I do not find any merit on it. The contention of the assesse that it had paid above expenses on behalf of its principal is not acceptable because the assessee has shown payable of Rs. 17,87,984/- for above expenses as on 31.3.2012 which is not reflected in the balance sheet. It means the assessee had made these expenses also during the year under consideration itself in cash. Further, the assessee has not furnished any details of the payment of outstanding liabilities of such expenses in subsequent year Further it is also pertinent to mention here that the major amount paid in the month of March 2012 in cash to gang leader and he had distributed to various labourers and that too all are uneducated to the extent that their thumb impressions were obtained as an acknowledgement of having received their dues. The assessee has made the payment of gang leader and he had distributed among the labourers it means the assessee made the cash payment to single person above the prescribed limit as per section40A(3) of the I.T. Act. Further, for the A.Y2009-10, the Ld.CIT[A] enhanced the assessed income for A.Y.2009-10 in the assessee's own case on the ground that when it is a cash payment to single party and there is a violation of section 40A(3), in that case, addition has to be 100% of such expenditure and not only 20% thereof as per the provisions prevailing for the previous year under consideration should be made. 5.5 During the year under consideration, the assessee has submitted the same details labour payment sheet cash vouchers etc. facts remain the same that assessee is making payment in cash on behalf of the principals to gang leader Vilas Transport Company as the same is not possible for the assessee to distribute huge cash every day to so many labourers working for the assessee to complete the task, it means cash payment made to person i.e. gang leader and provisions of section 40A(3) are applicable though not routed through profit and loss account, in turn the who in turn distribute the cash to labourer as the same is not possible for the assessee to distribute huge cash in so many labourers and same has not been proved by the assessee during the course of assessment proceedings. 5.6. Considering the totality of facts and circumstances of the case also giving due respect to the Ld.CIT(A)'s valued decision, disallowance of Rs.3,06,18,455/ being 100% of cash expenses amounting to Rs. 3,06,18,455/- (Rs.2,88,30,471 + Rs.17,87,984) is being made. since the provisions of section 40A(3) undergone major amendment vide finance Act, 2007 w.e.f. 01.04.2008 and hence added to the total income of the assessee returned. Penalty proceeding u/s. 271(1)(c) for furnishing inaccurate particulars of income are hereby initiated separately.”
On further appeal, the CIT(A) deleted the disallowance made by the AO by placing reliance on the decision of the Co-ordinate Bench in assessee's own case for AY 2011-12 (ITA No. 2600/Mum/2011 dated 24.11.2015). Aggrieved, the Revenue is in appeal before the Tribunal.
The ld. AR reiterated the submissions made before the AO stating that no disallowance under section 40A(3) is warranted since the impugned payments were not routed through the P&L A/c of the assessee. In this regard, the ld. AR submitted the details of the gross receipt from Principals and the details of various expenses reimbursed by the principals to substantiate that only the net agency fees is accounted as income and that the impugned payments made on behalf of principals are not routed through P&L account (page 2 to 10 of the PB). The ld. AR further submitted that the AO has considered the lumpsum payments made to the gang leaders while making disallowance under section 40A(3) whereas the assessee has made payments to the labourers through the gang leaders and that the payments to single labourer did not exceed the limit prescribed under section Vilas Transport Company 40A(3). In this regard, the ld. AR took the Bench to the invoice, sample vouchers and the breakup of labour charges paid ultimately to the labourers (page 11 to 17 of PB). The screenshot of one such sample is reproduced below
The ld. AR also submitted that the Co-ordinate Bench in assessee's own case for AY 2007-08, 2009-10, 2010-11 and 2011-12 have been consistently holding that no disallowance under section 40A(3) is warranted towards the impugned payments made by the assessee. The ld. AR further submitted that the nature of payments disallowed by the AO for the year under consideration are similar to that of earlier AYs and accordingly the issue is covered by the decision of the Co- ordinate Bench.
7. The ld. DR on the other hand submitted that the assessee has incurred expenditure in cash which fact has been admitted by the assessee itself while submitting the breakup of expenses before the AO. The ld. DR further submitted that the claim of the assessee that the expenses are not routed through P&L A/c cannot be admitted since the assessee has shown certain amount as expenses payable. The ld. DR also submitted that the assessee has paid the gang leader through cash voucher amount exceeding to the limit prescribed under section 40A(3) and therefore, the AO has correctly disallowed the expenses. Accordingly, the ld. DR prayed that the order of the AO be upheld.
We heard the parties and perused the material on record. The assessee is a clearing agent acting mainly on behalf of Principals. The assessee during the year under consideration has received certain charges as reimbursement from its Principals and has shown a net agency charges of Rs. 44,21,404/- as income in the P&L A/c. The assessee submitted before the AO the breakup of various expenses incurred on behalf of the Principal through cheque and cash (refer table extracted in the earlier part of this order). The AO disallowed the payments made in cash under section 40A(3) of the Act. The claim of the assessee with respect to the Vilas Transport Company payments made in cash is that the said payments are not routed through the P&L A/c and that the payments are made on behalf of Principals who have reimbursed the same to the assessee. The assessee further contended that the payments made to the gang leader should not be considered for the purpose of section 40A(3) since they have acted as intermediaries and the ultimate payment made to labourers are within the limit prescribed under section 40A(3).
We notice from the perusal of the sample documents (refer screen shots above) submitted that the assessee is raising invoices claiming reimbursement of the various expenses paid on behalf of the principals along with agency charges. The expenses claimed as reimbursement by the assessee are towards the various charges which are paid to the gang leader who in turn makes payment to the labourers. We notice from the perusal of the list of payments made to the labourers that there is merit in the claim that payment made to single labourer does not exceed the limit prescribed under section 40A(3). It is also relevant to mention here that the AO has not questioned the genuineness of the expenditure incurred by the assessee. The ld. AR during the course of hearing submitted that the nature of business in which the assessee is engaged in warrants payments to labourers in cash through gang leaders or otherwise the assessee will not able to unload the items from the vessels immediately which will result losses due to demurrage. The ld AR further submitted that the payments are made in cash to the labourers since they are uneducated not having access to banks and this fact has been admitted by the AO himself. Accordingly it was argued that the business exigency warrants incurring expenses in cash. From the combined perusal of the documents submitted and considering the nature of business the assessee is engaged in we are of the view that there is merit in the claim that the business exigency warrants the payments to be made in cash. Further the Co-ordinate Bench in assessee's own case Vilas Transport Company for AY 2007-08 has considered the similar issue and has deleted the disallowance made under section 40A(3) by holding that – “6. By giving the careful thoughts to the contentions raised by the representatives for the parties and perused the record carefully, the grounds which have been taken by the assessee are being decided accordingly. Issue-I It is required to be decided whether the Ld. CIT(A) has erred in deleting the disallowance of Rs.46,75,800/- made by the AO under section 40A(3) of the IT Act, 1961 being 20% of the expenditure incurred in cash. So far as the business of the assessee company is concerned, it is not disputed that the assessee company is engaged in the business of clearing agent (CHA), clearing, forwarding, speed money, transportation, loading and unloading for clients. Undoubtedly, the assessee company was incurring expenditure on behalf of its clients. The assessee company has shown the handling charges, transport charges, BPT charges, and gunny bag purchases. In fact, all these charges are belonging to the clients and the same cannot be said to be expenditure of the assessee company. The assessee company also explained in this regard that the company was utilizing the said amount for the payment of labour for job work, for stenciling done manually and high piling and speed money charges to the labour for speed delivery of the cargo. No doubt, to clarify the said expenditure the AO issued notice to the concerned companies but failed to receive the answer from the other companies but it cannot be the ground to disallow the expenditure incurred on behalf of the clients and add the same to the income of the assessee company. Moreover, no expenditure was claimed by the assessee company nor these amounts belong to the assessee company. Thereupon, the said situation, in our view section 40A(3) of the IT Act is not attracted in the hands of the assessee. Hence, the Ld. CIT(A) has rightly deleted the addition of Rs.46,75,800/- being 20% of the expenses. Similar situation is with the speed money regarding the issue No.2. The speed money is to be payable by the company to the labourers and others to achieve the result or to do the work at spot. This expenditure has also been incurred by the assessee company on behalf of its client. This amount has not been belonging to the assessee company and in this regard the company also reflected the said amount in its Profit and Loss account. As discussed above, section 40A(3) deals with the computing of income under the head of profit and gains of business and provision under section 40A(3) is one of the sub sections of section 40A and while computing the taxable income under the head of profit and gains of business then the provisions of section 40A(3) can be invoked. When there is no claim with regard to any expenditure, therefore Vilas Transport Company there should not be any disallowance in view of the provision under section 40A(3). In this regard, we also find the support of the law settled in (2010) 2 ITR 29 Trib.- Cochin.
As discussed above, when the expenditure is not related to the assessee company however executed on behalf of its client, then the question of application of the provisions of section 37(1) of the Income Tax Act, 1961 does not arise. Therefore, it is quite clear that the Ld. CIT(A) has rightly decided the issue numbers (1) & (2) in favour of the assessee which is not required to be interfered with at this stage. Hence, the finding of the Ld. CIT(A) under the issues number (1) & (2) are hereby affirmed.”
In view of the above discussion and respectfully following the decision of the Co-ordinate bench in assessee's own case for earlier years, we hold that no disallowance under section 40A(3) is warranted in assessee's case. Accordingly, the AO is directed the delete the disallowance made in this regard.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 16-09-2024. Sd/- Sd/- (KAVITHA RAJAGOPAL) (PADMAVATHY S) Judicial Member Accountant Member *SK, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER,