BAIJNATH MELARAM,MUMBAI vs. ADDL CIT RG 14(3), MUMBAI

Order : 27/01/2017 आदेश / O R D E R Per Ashwani Taneja: These appeals pertain to same assessee for the two different years involving identical issues, therefore, these were heard together and being disposed by this common order: 2. First we shall take Appeal For A.Y. 2007-08 filed by the assessee against the order of Ld. CIT(A) dated 24.10.2011 passed against the assessment order of the AO u/s 143(3)

2 Baijnath Melaram dated 09.11.2009 for A.Y. 2007-08 of the following grounds:

2. (a) On the facts and in the circumstances of the case, the learned CIT(Appeal) erred in confirming and not allowing deduction of Rs.2,25,000/- being the bad debts return of which should be allowed in full. (b) The learned CIT(Appeal) that as per the provisions of section 36(i)(vii) such bad debt is not allowable as deduction. (c ) The appellant prays that, these are business debts should he allowed in full.

3. (a) On the facts and in the circumstances of the case, the learned CIT(Appeal) erred in confirming the 10% addition in respect of the following expenses:- Cylinder stacking expenses i) Office expenses ii) Repairs and maintenance expenses iii) Transport expenses iv) Goods shifting charges. v) ( b ) The disallowance out of these expenses is made based on no details and made arbitrarily which be deleted. (c) Without prejudice the addition made being ad hoc and on higher side it be reduced.

4. The appellant craves leave to add amend or alter any or all of the grounds of appeal.

3 Baijnath Melaram 2.1. It was noted that there was delay in filing of this appeal by 16 days, for which petition seeking condonation of delay was filed by the assessee duly supported with an affidavit wherein reasons for delay in filing the appeal were explained on oath as under: AFFIDAVIT I, Vinod Melaram Agarwal, adult Hindu Inhabitant, having its office at 43, Ramwadi, Kalbadevi Road, Mumbai-400 002 do hereby affirm and state as under:-

1. 1. That I am the managing partner of M/s.Baijnath Melaram, having its registered office at 43, Ramwadi, Kalbadevi Road, Mumbai-400 002.

2. (a)That the firm has failed two appeals to the Income Tax Appellate Tribunal for Asstyear.08-09 on 30-1-2012 being appeal no.597/M/12 —"B" Bench and Asst.year:07-08 appeal no. 598/M/12.

3. The appellant business is of ship breaking and it has its branch office at ship breaking Yard (retibunder) Darukhana, Mumbai. The office building at 43, Ramwadi, Kalbadevi Road was vacant due to building repair work going on. All the post was collected from the concerned Kalbadevi post office or on request delivered to our office at Darukhana. For these reasons in our appeal memo we have requested to serve notice c/o (care off) our advocates office when appeal filed.

4. The appellate order for both the years were served on 15- 11-2011, served at 43, Ramwadi, Kalbadevi road, where it was received by not authorized person, since the accountant and other staff was working from Darukhana office. On enquiry, we came to know the appellate order were served on 15-11-11, and making enquiry from the workers repairing the building we got the copy of The appellate orders and immediately we filed the present appeals for both the years.

5. I further say that the appellate orders were served not at the 4 Baijnath Melaram address given in the appeal memo.

6. Under the circumstances there has been little delay of few days in filing of the appeals.

5 Baijnath Melaram 3.2. During the course of hearing before Ld. CIT(A), detailed arguments were made by the assessee. It was submitted that no borrowed were used for making investment into shares and the investment was made from own funds. The borrowings were utilized for the business of the assessee. However, Ld. CIT(A) did not agree with the submissions of the assessee on the ground that no separate accounts were maintained. Therefore, disallowance made by the AO was confirmed. 3.3. During the course of hearing before us Ld. Counsel drew our attention upon the balance sheet showing that own capital of the assessee was far more than the amount of investment, therefore no disallowance should have been made u/s 14A. Per contra, Ld. DR relied upon the orders of the lower authorities. 3.4. We have gone through the orders of the lower authorities. It is noted that out of total disallowance a sum of Rs.56888/- has been made on account of interest. It is noted that own capital of the assessee is of Rs.15.77 crores whereas investment in shares is far less than the said amount. Therefore, no disallowance should have been made on account of interest. Thus, disallowance of Rs.56888/- is directed to be deleted. 3.5. The remaining disallowance of Rs.48150/- was made on account of administrative expenses incurred for earning the exempt income. During the course of hearing before us, it was fairly admitted that some expenses were incurred for earning exempt income. Thus, in our view, the disallowance made by the AO is quite reasonable in the given facts and 6 Baijnath Melaram circumstances of the case. Therefore, same is directed to be sustained. Thus, this ground is partly allowed.

Now, we shall take up appeal for A.Y. 2008-09, filed against order of Ld. CIT(A) dated 24.10.2011 passed against the order of the AO dated 22.12.2010 u/s 143(3) for A.Y. 2008-09 on the following grounds:

1.(a) On the facts and in the circumstances of the case, the learned CIT(Appeal) erred in confirming the addition of Rs. 10,53,155/- made under section 40(1)(a) of the Act which be deleted. (b)The learned CIT(Appeal) and the assessing officer failed to appreciate that, the provisions of section 194C of the Act are not applicable to payments made for transport expenses. (c )The learned CIT (Appeal) erred in observing that, there was implied contract when there is no contract. (d) The appellant prays that, addition of Rs. 10,53,155/- be deleted.

2. (a) On the facts and in the circumstances of the case, 9 Baijnath Melaram the learned CIT(Appeal) erred in upholding the disallowance made of Rs. 2,52,575/- in respect of transport charges paid which should be allowed in full. (b) The appellant prays that, these are business expenses and should be allowed in full.

3. (a) On the facts and in the circumstances of the case, the learned CIT(Appeal) erred in confirming the addition of Rs.1,16,791/- made u/s.14A r.w. Rule 8D which be deleted. (b) The learned assessing officer erred in making such addition without ascertaining the expenditure relating to exempt income and that no interest bearing loan fund utilized for such investment. (c ) The appellant prays that, addition of Rs. 1,16,791/- made be deleted. (d) Without prejudice, the addition made be reduced.

4. (a) On the facts and in the circumstances of the case, the learned CIT(Appeal) erred in confirming 5% addition out of (i) cylinder stacking expenses,(ii) repairs and maintenance expenses and (iii) Goods shifting expenses and at 10% out of (i)office expenses (ii) car running expenses which be deleted. (b)The disallowance out of these expenses is made based on no details and made arbitrarily which be deleted.

7. Ground Nos. 1& 2: Both these grounds are interconnected and are based on identical facts; therefore these have been taken up together. These ground pertains to disallowance made by the AO and confirmed by the Ld. CIT(A) u/s 40(a)(ia) for disallowance of Rs.10,53,155 and Rs.2,52,575/- on account of transport expenses. 7.1. The brief background is that during the course of assessment proceedings, the AO found that assessee had claimed an amount of Rs.13,95,925/- as transportation expenses. According to him, all of these expenses were noted to have been incurred in cash. He also found that payments under this head of expenses were made mainly 4 to 5 parties 10 Baijnath Melaram as mentioned in assessment order. Out of these different parties, three parties were major to whom payments were made in excess of Rs.50,000/- as under:- i) J.K. Roadlines Rs.2,51,750/- ii) Jai Mataji Transport Rs.4,70,750/- iii) Rajvi Roadlines Rs.3,30,655/- Rs.10,53,155/- The AO also found that no TDS was deducted by the assessee on these payments. According to him, as per provisions of section 194C, the assessee is liable to deduct tax at source, if the aggregate of amounts paid during the financial year exceeds Rs. 50,000/- to a party. Simultaneously, the provision of section 40(i)(a) provides that if no such tax is deducted at source then such sums paid by the assessee are to be disallowed in computing the income. Since no tax was deducted at source on payments made by the assessee to these parties i.e. J. K. Roadlines, Jai Mataji Transport and Rajvi Roadlines, the AO disallowed these payments u/s 40(i)(a) of the I.T. Act. Accordingly, he disallowed a sum of Rs. 10,53,155/- and added it back to the income of the assessee. Being aggrieved with the action of the AO, the assessee is in appeal before us. 7.2. During the course of appeal before Ld. CIT(A), the assessee stated that each of the payment was less than Rs.20,000/-. There was no permanent contract with any specific transportation company and payment of transporter was on each truck basis. Reliance was placed on CBDT’s circular 11 Baijnath Melaram No.715 dated 08.08.1995 wherein the board observed ad under: "Normally, each G.R can be said to be a separate contract if the goods are transported at one time. But if the goods are transported continuously in pursuance of the contract for a specific period or quantity, each G.R. will not be a separate contract and all G.Rs relating to at party or quantity will be aggregated for the purpose of TDS." 7.3. Thus, main thrust of the assessee was that as per CBDT’s circular, the assessee had no contract with an specific transporter company and each GR of the transport payment was not in excess of Rs.20,000/-. However, the Ld. CIT(A) did not agree with the submissions of the assessee and confirmed the disallowance made by the AO by observing as under: 3.1.4 On careful consideration of facts stated by the AO and written submission of the Ld. A.R. it immensely transpires that there is no dispute as to quantum of amount paid to these 3 parties. In other words, payment made to these 3 parties are more than Rs.50,000/- in aggregate during the year. There was no rebuttal on finding of the AO that all these expenses are incurred in cash. Similarly, it is also undisputed that no tax was deducted at source. According to the assessee, there was no liability to deduct the tax at source, being the amount not exceeding Rs. 20,000/- per invoice. The assessee had relied upon the circular of CBDT, which was published in August 1995, in light of provisions existing in the year 1995. In the said circular, it is specifically mentioned that each G.R. can be said to be a separate contract if the goods are transported at one time. It is undisputed that goods are not transported at one time. The goods are transported continuously during the year through these 3 parties. The assessee had taken a plea that 12 Baijnath Melaram there was no written contract for continuous transportation. The plea of the assessee is not acceptable for the reason that a contract need not to be in written. Continuous transportation through these 3 parties ipso facto establishes the existence of implied contract, presuming that there was no written contract. Whether there was a written contract or not is a matter of exclusive knowledge of the assessee and it is possible that inspite of existence of written contract, the assessee would not like to admit so because the same would go against the assessee in light of impugned circular. Without prejudice to existence or non-existence of a written contract, it can be logically and implicitly inferred that there was an implied contract for transportation of goods continuously throughout the year. Therefore, the reliance placed by the assessee on the circular No. 715 dated 8/8/1995 is of no consequence. On the contrary, it goes against the assessee. The more important fact is that it clarify the application of section 194C as existed in the year 1995. In the year 1995, relevant provision was different than the provision as existed in extant assessment year. In that year, the proviso to clause (i) of sub-section (3) of section 194C was not inserted. The relevant provisions as inserted vide Finance Act 1995 were as under:- Section 194C : No deduction shall be made under sub-section (1) or sub-section (2) from – "(i) any sum credited or paid in pursuance of any contract, the consideration for which does not exceed Rs. 20,000/-". 3.1.5 The said circular was issued in light of this provision enacted through Finance Act 1995 w.e.f. 1/7/1995. However, the relevant provision of sub- section (3) of section 194C was amended by Finance Act No.2 of 2004 w.e.f. 1/10/2004. For ease of reference the newly inserted proviso is reproduced along with relevant sub-section as under:- Section 194C(3): No deduction shall be made under sub- section (1) or bus-section (2) from- (i) The amount of any sum credited or paid or likely to be 13 Baijnath Melaram credited or paid to the account of, or to, the contractor or sub-contractor, if such sum does not exceed twenty thousand rupees; Provided that where the aggregate of the amount of such sums credited or paid or likely to be credited or paid during the financial year exceeds fifty thousand rupees, the person responsible for paying such sums referred to in sub-section(1) or, as the case may be sub section (2) shall be liable to deduct income –tax {under this section] The proviso to clause (I) of sub-section (3) a depicted above (in bold letter) clearly states that where aggregate of amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds Rs. 50,000/-, a person responsible for paying such sums referred to in sub- section (1) or as the case may be, sub-section (2) shall be liable to deduct income-tax under this section. Thus, the proviso to clause (i) of subsection (3) of section 194C mandates for deduction of tax at source, if the aggregate of amounts exceeds Rs. 50,000/- during the year. This proviso was inserted / substituted w.e.f. 1/10/2004. Needless to say that the CBDT circular relied upon by the assessee is not applicable for instant provisions, which were enacted after 9 years of the said circular. Therefore, there is no application of circular in instant case for instant assessment year. Accordingly, I find no flaw or infirmity in the action of the AO to disallow the impugned payments. Accordingly, the disallowance of Rs. 10 - made by the AO is confirmed and relevant ground of appeal is rejected. 7.4. Similarly for another sum of Rs.2,52,575/- the disallowance was made by the AO, firstly for the reason that no TDS was deducted and the second reason was that no documentary evidences were made available by the assessee in the support of these transportation expenses. Thus, the AO had held that payments made to these parties were liable to be disallowed as there was no proof or evidence available with the assessee to show genuineness of these expenses and to 14 Baijnath Melaram establish that these expenses were incurred for the business purpose of the assessee. Under these circumstances, Ld. CIT(A) confirmed the disallowance of the aforesaid amount with following observations: “During the course of appellate proceedings, there was no rebuttal of findings of the AO that no evidences are available with the assessee to prove impugned expenses i.e. no lorry receipts are available and payments are not through account payee cheque or banking channels. The Ld. A.R. had relied upon the CBDT Circular No. 715 dated 8/8/1995 for this ground of appeal also. I have already discussed this issue in preceding ground of appeal. For the reason discussed in preceding ground of appeal, the impugned expenses are not allowable. Moreover, there is valid substance in the findings of the AO that no evidence are available to prove the genuineness of expenses as well as business purpose of these Expenses For these reasons also the impugned expenses are not allowable Accordingly, disallowance of Rs 2 52 575/ is upheld and this ground of appeal is rejected.” 7.5. During the course of hearing before us, it was submitted by the Ld. Counsel that if each GR was less than Rs.20,000/- then proviso of section 194C was not applicable. Thus, embargo of limit of overall aggregate amount of Rs.50,000/- was also not applicable. It was also submitted that assessee had no written or oral contracts with any of the transporters through whom trucks were arranged for transportation of goods. Thus, in absence of any written or oral agreement, provisions of section 194C were not applicable. Reliance was placed in this regard on the judgment of Hon’ble Punjab and Haryana High Court in the case of CIT. vs. United Rice Land Limited 322 ITR 594 (P& H) and Amritsar Bench of the 15 Baijnath Melaram Tribunal in the case of DCIT vs. Satish Aggarwal & Co. 317 ITR (AT) 196 (Amritsar). It was also submitted that none of the amounts remained payable at the close of the concerned financial year, therefore, provisions of section 40(a)(ia) could not have been invoked in absence any amount remaining payable at the end of the year. 7.6. Per contra Ld. DR submitted that the pleadings taken by the assessee before the Tribunal were not taken before the lower authorities and therefore, complete facts were not available. The examination of proper facts is needed before arriving at final conclusions. 7.7. We have gone through the orders passed by the lower authorities. A perusal of the orders passed by the lower authorities reveals that no proper facts are available on record with respect to the details and nature of payments made to various transporters. It has been contended that there was separate GR for each transactions and none of them were inter related and each payment was for less than Rs.20,000/-. It was also argued that there was no written or oral contract with any party. Trucks were hired from different persons every time. Further, with regard to amount of Rs.25,25,575/- it was stated that completed evidences are available and lower authorities had wrongly stated GRs and other evidences were not available. Further, assessee has argued that no amount was payable at the end of the year. It is noted that no such facts are available on record. Thus, we find it appropriate to send this issue back to the file of the AO. The assessee shall submit complete details of individual payment made to all the 16 Baijnath Melaram parties along with requisite GR’s and other supporting evidences so as to enable the AO to verify the nature of payments, nature of transactions and nature of agreement/contract if any in the light of judgment as have been relied upon before us and as may be relied upon before the AO. The assessee shall be free to raise any legal or factual issues so as to determine the ultimate liability of the assessee to deduct the TDS on the said amount and applicability of provisions of section 40(a)(ia) on the impugned amounts. Thus, with these directions both these grounds are sent back to the file of the AO. Thus, both grounds may be treated as allowed for statistical purposes.

8. Ground No.3: This ground deals with the disallowance made u/s 14A for Rs.116791/-. It is noted that the AO had made total disallowance of Rs.116791/- u/s 14A comprising of a sum of Rs.70916/- and a sum of Rs.45875/- on account of administrative expenses. 8.1. It is noted that the facts are identical as were there in A.Y. 2007-08 wherein we have found that interest was not disallowable for the reasons that own funds of the assessee are more than the amount of investment made in tax free securities. Both the parties agreed that facts are identical in this year; therefore, amount of interest is deleted following our order for A.Y. 2007-08. 8.2. The disallowance on account of administrative expenses was sustained in A.Y. 2007-08. We find that disallowance of Rs.45875/- is quite reasonable in this year as well. Therefore 17 Baijnath Melaram same is sustained in this year also. This ground is partly allowed.

9. Ground No.4: In this ground the assessee is aggrieved with the ad hoc disallowance sustained @ 5% in some of the expenses and @ 10% of some of the expenses as have been described in Ground No.4 reproduced above in our order. 9.1. It is noted that disallowance @5% has been sustained in A.Y. 2007-08. It was jointly stated by both the parties that the facts remains same in this year as well. Therefore, disallowance of 5% is sustained for all the expenses as mentioned in the grounds. The disallowance made @ 10% shall be reduced to 5% following our order for A.Y. 2007-08 and disallowance made @ 5% shall be sustained as it is. Thus, this ground is partly allowed.