Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, Kolkata Bench, KOLKATA
Before: SHRI N. V. VASUDEVAN & SHRI M. BALAGANESH,
IN THE INCOME TAX APPELLATE TRIBUNAL Kolkata Bench, KOLKATA (Bench- “C”) BEFORE SHRI N. V. VASUDEVAN JUDICIAL MEMBER AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER, I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10
DCIT Cir-4 Kolkata M/s. Maruti Freight Movers Ltd. -Vs- [PAN :AABCM7485K] (Appellant) (Respondent)
Rajat Kumar Kureel, JCIT, Sr. DR For the Appellant For the Respondent Manoj Kataruka, Advocate Date of Hearing 21.03.2017 Date of Pronouncement 05.04.2017 ORDER Per M. BALAGANESH, AM
This appeal is preferred by the Revenue against the order of the Ld. Commissioner of Income Tax(Appeals)-IV, Kolkata, (hereinafter referred to as the “Ld. CIT(A)”), dt. 08.11.2013, passed u/s 250 of the Income Tax Act, 1961(hereinafter the “Act”) relating to assessment year 2009-10.
The only issue to be decided in this appeal is as to whether the ld CIT(A) was justified in deleting the disallowance u/s 40A(3) of the Act in the facts and circumstances of the case.
We find that the revenue had erroneously mentioned the section 43B in its grounds of appeal instead of section 40A(3) of the Act and this was duly
2 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. pointed out by the ld DR at the time of hearing. The same is taken as duly rectified by the revenue as it is only a typographical error and accordingly the appeal of the revenue is taken up for adjudication.
The brief facts of this issue is that the assessee is a limited company engaged in the business of transportation, operating as a transport contractor for transport of goods by road, for its clients. The company has 37 branches in different locations in India. The assessee company, as per the contract with its clients, collects goods and arranges delivery of the same from their sites to different destinations, normally, as per the annual contract. The deliveries are handled by assessee’s branches and offices and payments to truck owners are made by branch offices, partly from branch and partly through middle man, say agents / through local body of truck owners association. The ld AO observed from the books of accounts of the assessee company that huge cash payments were made towards transportation of goods on behalf of the clients far in excess of stipulation laid down in section 40A(3) of the Act. He made the detailed analysis of such payments in the assessment order and showcaused the assessee for invoking the provisions of section 40A(3) of the Act in that regard. The assessee replied that it obtains vehicles for particular destination from the reputed agents in the market for that particular destination and supplies the same on being satisfied with genuineness and bonafide of the owner of the lorry. On receipt of the goods from the concerned consignor company, the assessee acknowledges receipt of the goods in term of documents such as challan of the goods, invoice, transit documents such as permits, way bills etc. as required for the journey and issues a consignment note evidencing such receipt. Back to back, when the truck is released from the factory or the place of work at the end of the day, the agent who has supplied the lorry, is entrusted with whole set of transit documents, together
3 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. with requisite amount as agreed for safe and sound delivery of the goods to its destination. While the agent is provided with the agreed amount towards the expected expenses to be made for the journey for safe and sound delivery of the goods entrusted with, to the agent, in support of such understanding a challan is issued from the place of origin describing details of understanding as to quantity of material handed over, particulars of lorry, total amount payable, amount paid as part payment at the time of commencement of journey and the balance payment towards hire charges payable on completion of the journey. The remuneration of the agency is included in the freight settled for a particular destination. In the case of Balasore Branch, the agent is Balasore Truck Owners Co-ordination Committee (BTCC) and others. The assessee submitted that lorries were taken through the said agents in Balasore Branch and the payments were made to the said agents. The assessee enclosed the copies of debit vouchers, copies of trip hire challan showing supplier / broker name as BTCC and others. In the same way for Angul Branch, the agent is Angul District Truck Owners Association (in short ADTOA) and others. Here also every lorry hired for the purposes of transportation through the agents and the payments were made to them. Since the payments were made to agents, the assessee is outside the ambit of violation of provisions of section 40A(3) of the Act as it falls under the exception provided in Rule 6DD of the Rules. The assessee further explained that certain transport contractor /agent engaged in providing trucks to the transporters, working as an agent to transporters. In pursuance of generally accepted trade practices in the field of transportation, the agent supply trucks to the transporters giving details such as Owners name, Driver’s name, License No. and takes guarantee of Truck Driver and also ultimately becomes a link between unknown truck owner / driver and the transporter. The transporter is supposed to make advance payment to the agent and as such Rule 6DD(k) of the Rules would be applicable where assessee
4 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. makes payment to his agent who is required to make payment in cash for goods or services rendered, on behalf of the assessee. The advance payments are paid to the transport contractors / commission agents and are in relation to trucks hired by the assessee in the course of its regular activities. Such payments are to be made in cash because then and there the agent is supposed to make advance payment to the truck driver. Based on these submissions, it was pleaded that the assessee would fall outside the rigours of section 40A(3) of the Act.
The ld AO observed that the assessee’s case does not fall under any of the exceptions provided in Rule 6DD of the Rules so as to provide immunity to the assessee from the provisions of section 40A(3) of the Act. The ld AO also observed certain defects in the invoices / road challans submitted by the assessee before him. He observed that the argument of the assessee that it had made such payments to his agent on the terms of commercial expediency does not hold good. Agents operate where the assessee does not have a physical presence and in order to smoothen his business interest, the assessee has to appoint agent. In the instant case, the places are fully covered by banks and its own branch office manned by his own employees. The assessee is transporting goods of reputed companies wherein it knows the expected amounts of goods to be delivered beforehand. This is the regular business of the assessee for many years and nothing new. The assessee is appointing sub-contractor for taking vehicles from the owner of the vehicles directly. Hence the question of treating such transport operators as agent who operates as commission agent does not hold good since the assessee has not paid any commission to these so called agents nor deducted any tax at source from any commission payment to commission agent. Moreover the assessee has claimed to have hired trucks from these parties and no payment was made by these parties to anybody
5 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. whom the assessee has hired itself. It was the duty of the hirer to provide trucks / trailer, drivers etc. whether from its own source, or from others and the hirers have done so. In view of this it can be stated that the assessee has inflated the expenditure on hiring and plying of goods vehicles by concealing its actual income throughout the year as apparent from books of account produced and reproduced above. Thus Rule 6DD(k) is not applicable in the instant case and since Rule 6DD(g) and (j) are also not applicable, the assessee comes under the provisions of section 40A(3) of the Act sans any exception under Rule 6DD. Accordingly, he disallowed a sum of Rs. 2,88,19,342/- u/s 40A(3) of the Act in the assessment.
Before the ld CIT(A), the assessee explained the complete business model which it has been carrying on for years as below:-
Booking of Trucks Trucks are hired by the branches of the appellant through agents or members of local body Truck Owners Association. Loading of Trucks Hired trucks are loaded in the factory generally in the night and sometimes part payments are made after midnight through, agent or members of local body by our branch manager. First Payment: First Payment is shown in the challan/consignment note as advance out of the total hire charges due. Balance payment of Hire Charges: Balance of hire charges are paid after producing the challan showing delivery of goods to the party. These payments are also made by branches during office hours and payments to truck owner who come after offices hours are made through agents or members of local body of truck owners.
6 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd.
Payment beyond office hours: The Id. Assessing Officer did not consider that the truck hire charges are paid partly on loading and balance on delivery of goods to the consignor‟s premises and many a times truck drivers come beyond office hours and also at midnight and nonpayment to them will cause genuine difficulties to the payee and the appellant and so the services of the agents are utilized in such situations also. Payment of Commission to Agents Payments to agents who contacts our branch manager on behalf of trucks owners are paid their commission or brokerage by the truck owners as it is included in total freight payments. The agents or members of local body of truck owners are persons known to the branch managers and can be contacted in Payment By Cheque: The truck drivers or the owners are not having any bank e/c at the place of loading of trucks and do not accept payment by cheque or drafts. In the circumstances it is not practicable to the appellant to insist on payment of balance amount of trucks charges in respect of goods delivered by the truck owners to the party concerned. And thus the appellant is unable to comply with the terms of section 40A(3) requiring payment by A/c payee Cheque or Draft. Conclusion; From the aforesaid facts it can be ascertained that the appellant has not acted deliberately in defiance of law or laid down rules and payments have been made through local agents in compliance with the rule 600 and payment of commission to agents is included in gross trucks hire charges paid to the owner of the truck and therefore there is no case for disallowance of the payment of truck hire charges u/s 40A(3) and read with rule 6DD.”
6.1. The assessee made the following submissions before the ld CIT(A):-
7 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. The Id. Assessing Officer disallowed Rs.2,88,19,342/- u/s40a (3) stating that the places where such transactions reported are commercial places fully covered by Banks and assessee's own branch. The Id. A.O. did not consider the local conditions prevailing at (he place of operation and did not give adequate and reasonable opportunity to place the papers and documents to explain the reasons for making payment of truck hire charges in cash. From the enclosed documents it will be appreciated that due to union activities of the local truck owners and agents the applicant is forced to engage local truck owner or agent to carry on its operations at the said place. The adamant attitude of the local people is still continuing by Issuing rate chart of transport charges after every hike in diesel prices. Copies of old and new chart are enclosed. The habit of threatening/ forceful detection of trucks and the activities are still continuing and are verifiable. Having regards to local conditions prevailing at NALCO Factory and the Memorandum of Arrangements or Understanding agreed by the members of NALCO under the supervision of District Authorities allowing the local truck owners and agents to operate as transporter for dispatch of their products or act as agent it will be appreciated that the appellant has made the cash payments due to the compelling circumstances existing at the place of operation but within the provisions of rule 6DD. Secondly the Id A. O. disallowed the said freight payments on the ground that the said payments are bogus. However, we have filed the statement of said freight payments and corresponding freight receipts which shows that these is a receipt against each freight payment and is offered as income for assessment.”
The assessee stated that: “a) The ld. Assessing Officer rejected the appellant‟s explanation regarding cash payments of the Truck Hire Charges through local agents without making proper enquiries and without giving proper and reasonable opportunity to the appellant to explain with documents the compelling circumstances prevailing in the branch which forced the appellant to take the service of local agents and also to make payment in cash
8 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. b) In support of our case we hereby submit the copies of Memorandum of Arrangements between the Factory Management & Association of Truck Owners & Association of agents duly agreed in the presence of District Authorities c) On the basis of the said arrangements the Office Bearers of the said Association issued rate charge and amount of the total freight payable for different destinations and the appellant has no alternative but to engage the services of the said local members of the association d) Copies of Memorandum of Understanding between the members of Association and works management as made in the past are enclosed for examination by the Ld. Assessing Officer ii) Statement of actual receipts against corresponding payment a) The Ld. Assessing Officer disallowed payment of actual Truck Hire Charges made in cash through local agents of Rs. 2,88,19,342/- also on the plea that it is an inflated expenditure on hiring and plying of goods vehicles by concealing its actual income. b) The appellant has prepared the relevant details of disallowed Truck Hire payments showing corresponding receipt of Truck Hire Charges along with particulars of consignment note and other details to show that against each payment of Freight Charges there is corresponding income of the appellant and all payments are genuine and bona fide. "
6.2. The ld CIT(A) called for a remand report from the ld AO with regard to the abovementioned submissions and evidences submitted by the assessee. The assessee filed its objections to the remand report submitted by the ld AO by stating that the ld AO had neither conducted any verification nor offered any comments in his remand report. The assessee also submitted statements showing payment of truck charges wherein the payments vis a vis the corresponding receipt of the freight have been shown. The receipts have been accepted whereas the payments have been disallowed stating them to be bogus. It is evident there that the truck hire charges are genuine and not bogus. There are no comments in this regard in the remand report. Truck hire charges were paid through local agent as per agreement between truck owner association,
9 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. factory management and transport contractors. On these specific issues, further remand report was called for from the ld AO wherein it was stated as under:- “The A.O. made disallowance of freight payments of Rs.2,88,19,342/- in the order u/s 143(3) on the ground that they were made in cash and thus the expenses of hiring and plying of the goods vehicle are inflated and the actual income concealed. In connection the A.R. of the assessee company produced the statement showing the receipts and corresponding payments of the goods vehicle hire charges which were made through local associations and agents. He also produced cash book along with vouchers which were test checked. On examination of the books produced it seems that the income has been taken into consideration but the corresponding expenses have not been considered.”
6.3. The assessee filed further objections to the second remand report of the ld AO. The ld CIT(A) after considering the same deleted the disallowance by observing as under:-
“4.7 I have considered the assessment order, the submission of the A.R. of the appellant as well as the remand report. Two issues have to be considered here. Firstly, is the issue whether the appellant has inflated his expenditure on hiring and plying of goods vehicles and thereby concealing his actual income. I am of the view that this issue has been put to rest by the Remand Report of the A.O. dt.1.10.2013 wherein he has duly examined the receipts and payments made by the appellant on hiring of goods vehicles. The A.O. has also examined in course of remand the cash book and supporting vouchers, No infirmity was noticed by the A.O. The A.O. has further noted in his remand report that on examination of the books produced by the appellant it seems that the income has been taken into consideration but the corresponding expenses have not been considered during assessment. The conclusion drawn by the A.O. is after due examination of the books of accounts maintained by the appellant and therefore, there remains no evidence on record which establishes that the appellant has resorted to inflating his expenses to conceal his income. The second issue pertains to the applicability of Sec. 40A(3) of the I.T. Act in case of the, appellant. The appellant in his submissions before me had
10 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. repeatedly stated that the peculiarities of his business must be taken into consideration and commercial expediency could not be overlooked. The appellant had also argued that i s case is fully exempted from the provisions of Sec. 40A(3) in view of Rule 6DD(k). In this respect, the written submission of the A.R. of the appellant was remanded on various occasions but the matter was not commented upon in the remand report. From the assessment order I find that most of the payments towards transportation were made through the regional Truck Owners Association and Transporters, It has been argued by the appellant that they are compelled to take services of the Truck Owners Association, which is recognised by the local district administration as well as the factory management. To run the entire business of transportation smoothly, the transporters enter into agreement with the Association of Truck Drivers along with the factory management and the district administration. The transporters are forced to take the vehicle for transportation from the Truck Drivers Association. These associations therefore, function as an agent of the transporters. The ownership of the trucks could be with various individual truck drivers but it is the agent who takes the responsibility to get the work executed on behalf of the transporter. Several such documentations was made available to the A.O. at the remand stage but he has not commented on this issue. If such is the case with the appellant, then, I find no issue as to why the exception of Rule 6DD(k) should not apply in the case of the appellant. The agents in turn have to make the payments to the truckers in cash because the truck drivers may not even have a bank account or he may have his bank account at some other place and it is not prudent for him to wait for the clearance of such cheques. The dispatch and receipt of .goods have to follow a time schedule and cannot wait for cheque clearances. In that sense, I am in agreement with the issue of commercial expediency raised by the A.R. of the appellant. The A.O. has also accepted that the appellant has not paid directly to any trucker and all the payments have been made to the Associations which function as an agent of the appellant. Rule 6DD comes with the heading "Cases and circumstances in which a payment or aggregate of payments exceeding twenty thousand rupees may be made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft." Therefore, the circumstances under Rule 6DD have to be carefully considered before arriving at any conclusion. Reference here is being made to the Guwahati High Court Judgement in the case of Walford Transport (Eastern India) Ltd. vs CIT 240 ITR 902 (Guwahati), which held:- "The purpose of section 40A(3) of the Act is to check evasion of tax and the flow of unaccounted money. But in cases where the authorities are satisfied about the genuineness of the transaction and the identity of the payee,
11 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. there would be no occasion to disallow such kind of payment in the circumstances of acute financial stringency which has been accepted by the assessing authority in relation to a major part of the payments. In our view, where the transaction is found to be genuine and the identity of the payee is established a liberal view of compelling and mitigating circumstances should be taken.”
The above judgement .also finds support in the judgements of Hasan & Pinjomal vs CIT (1978) 112 ITR 134 (Guj) and Girdharilal Goenka vs CIT (1989) 179 ITR 122 (Cal). It has been held that the object of the provision is to prevent evasion of taxes and not to disallow legitimate expenditure. The circular No.220 (see [1977] 108 ITR (ST) 8), dated May 31, 1977, must be interpreted liberally. It has further been held that the time between the date of bills and the date of payment cannot be a ground to disallow expenditure where the transactions were genuine and the business was new. It has been observed by a Division Bench of the Calcutta High Court in the above noted case that Circular No. No.220 (see [1977] 108 ITR (ST) 8), dated May 31, 1977, is illustrative and not exhaustive and the Assessing officer is to take into account - the surrounding circumstances, considerations of business expediency and the fects of each particular case. In a case reported in Kantilal Purushottam & eo, Js CIT 155 ITR 519, a Division Bench of Rajasthan High Court took the view that where the genuineness of payments has been established and the default was only technical, the assessee would be entitled for the benefit of exemption u/r.6DD. 4.8 From a perusal ~f the decisions of different High Courts referred to above, it clearly emerges that' the purpose of Sec.40A(3) of the Act is not to penalise the assessee for making' cash payments over and above the stipulated amount. The purpose is only preventive and to check evasion of tax and flow of unaccounted money or to check transactions which are not genuine and may be put as camouflage to evade tax by showing fictitious and false transactions. The A.O. in his remand report dt.01.10.2013 has clearly not noticed any false or fictitious or bogus transactions made by the appellant even though he had examined the books of accounts and the supporting vouchers of the appellant. Considering the above judicial pronouncements and the nature of business and the local situation, the appellant was forced to do business through certain Associations on the terms set by such Associations. This being the case, if the appellant had to survive in business, then, it had to adapt itself to the local circumstances. I am of the view that the case of the appellant is covered by Rule 6DD(k) and addition made on this account should stand deleted.
12 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. 6.4. Aggrieved, the revenue is in appeal before us.
The ld DR argued that the ld CIT(A) had granted relief that the subject mentioned payments fall under the exception provided in Rule 6DD(k) of the Rules . In the instant case, the assessee had not made payment to his agent. There is no evidence that is brought on record to prove that the said agent had to make payment in cash on behalf of the principal. The agent is not appointed by the assessee. The agents in the instant case were appointed by the truck owners and commission to the agents were paid by the truck owners to the agents. He argued that normally principal also directs the agents as to how the work should be done. Here association of truck owners are not directed to send trucks from such and such person. The genuineness of the transaction is absolutely not relevant for the purpose of invoking the provisions of section 40A(3) of the Act. The proviso in section 40A(3) of the Act containing the clause of business expediency is to be read along with Rule 6DD of the Rules and if a particular payment is not covered in any of the exceptions provided in Rule 6DD of the Rules, then the assessee would fall automatically under the rigours of section 40A(3) of the Act and has got no escape route. Hence the genuineness of transactions and other business considerations resulting in abnormal increase in net profits etc would have no relevance for adjudicating the impugned issue. He argued that from the relevant pages of the paper book filed by the assessee, it could be seen that the assessee had compulsion to choose the agent alone and no compulsion to make payment of cash was proved by the assessee.
In response to this, the ld AR stated the expenditure towards payment of truck hire charges are purely genuine in nature as could be evident from the corresponding truck hire receipts of the assessee. In this regard, he referred to
13 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. the paper book containing the statements filed in respect of each and every consignment of hire charges paid vis a vis hire charges received. He stated that the freight income offered by the assessee was Rs 66.57 crores and freight expenses claimed as deduction by the assessee was Rs 60.69 crores. The disallowance of Rs 2.88 crores made by the assessee u/s 40A(3) would result in abnormal increase in gross profit of the assessee which is practically not possible in the field in which assessee is engaged. With regard to argument advanced by the ld DR that assessee had not paid any commission to the agents, he argued that the same is prohibited in transport business and as per the generally accepted trade practice, the agents would be paid commission only by the truck owners. He placed reliance on the proceedings of Monopolies & Restrictive Trade Practices Commission New Delhi vide Restrictive Trade Practices Enquiry No. 8 of 1983 dated 9.8.1984. He also placed reliance on certain newspaper reports stating that the transportation of goods getting paralysed due to tussle between the local transport owners and the transporters and the need for the agents to mediate the same. All these documents were referred by the ld AR from pages 82 to 92 of the paper book. He stated that the similar transactions carried out by the assessee have been accepted by the ld AO for the Asst. Year 2011-12 u/s 143(3) of the Act dated 17.12.2013. He placed reliance on the decision of the co-ordinate bench of Ahmedabad Tribunal in the case of Chartered Logistics Ltd vs ACIT in IT(SS) A No. 37 to 40/Ahd/ 2013 and IT (SS) A No 115 to 118/Ahd/ 2013 for the Asst. Years 2007-08 to 2010-11 dated 15.11.2013. He placed reliance on the following decisions:-
a) Hon‟ble Jurisdictional High Court in the case of Goenka Agencies vs CIT reported in (2003) 263 ITR 145 (Cal) ;
14 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. b) Hon‟ble Gujarat High Court in the case of Anupam Tele Services vs ITO reported in (2014) 366 ITR 122 (Guj) ; c) Hon‟ble Gauhati High Court in the case of Walford Transport (Eastern India) Ltd vs CIT reported in (1999) 240 ITR 902 (Gau) ;
We have heard the rival submissions and perused the materials available on record including the paper book of the assessee. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. The fact that assessee was forced to carry on its transportation activity through the assistance of agents is proved beyond doubt. Hence we hold that it does not make any difference whether the said agent through whom the business per se was carried on , was appointed by the assessee or by the truck owners association. The assessee had stated that out of the total consideration of hire charges paid by the assessee, a portion is also attributed towards the agency commission which is being recovered by the truck owners. Hence it could be concluded that the assessee indeed had paid commission to the agents and the same has been routed through payment made to truck owners towards truck hire charges.
9.1. We find that the similar issue had cropped up before the co-ordinate bench of Ahmedabad Tribunal in the case of Chartered Logistics Ltd vs ACIT in IT(SS) A No. 37 to 40/Ahd/ 2013 and IT (SS) A No 115 to 118/Ahd/ 2013 for the Asst Years 2007-08 to 2010-11 dated 15.11.2013. In the said case, it was held as below:-
“6. The learned AR of the assessee submitted before us that since in all the years the issue involved is identical, therefore, the same are argued together. He submitted that a search action under section 132 was carried out in the assessee‟s case on 11.02.2010. The AO found that certain cash payments were
15 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. made in excess of limit prescribed under section 40A(3), and hence, he made the impugned additions. He submitted that the assessee was engaged in the business of transportation, and has entered into contract with M/s. Hindustan Lever Ltd., Reliance, Kalpataru, etc. for transportation of goods. Copies of few such agreements are placed at page nos.77 to 102 of the paper book. He submitted that consequent to the aforesaid arrangement, such goods are transported through trucks owned by it as well as through hired trucks. It was submitted that as regard payments in respect of hiring charges of the trucks, the said payment was made in cash by the assessee to brokers who, in turn, was required to make payments to the concerned truck owner/drivers on behalf of the assessee. He submitted that the fact that the payments have been made by the assessee to brokers was not in dispute at all. He further submitted that the AO repeatedly mentioned in the show cause notices issued by him that the concerned payments have been made by assessee to its brokers. Copies of such show cause notice with respect to disallowance u/s.40A(3) for all the four years are placed at page nos.33 to 49 of the paper book. It was further argued that the assessee has also brought this fact to the notice of the AO as well as ld. CIT(A) that payments were made to brokers vide its written submissions, copies of which are placed at page no.11 to 26 of the paper book. In view of the above, it was contended that there was no violation of provisions of section 40A(3) r.w.s. Rule 6DD of the Income Tax Rules, since the cash payments have been made to brokers. Reliance was placed at page no.11 of the CIT(A)‟s order and page no.1 of the paper book. It was further submitted that even the learned CIT(A) has recorded a finding that the assessee has not made payments to individual truck owners but to various brokers through whom the trucks are engaged. Reliance was placed at page no.12, para 6 of the learned CIT(A)‟s order. It was further submitted that ultimate recipient of the payment viz. the drivers/owners of the truck have insisted for cash payments as they have to travel huge distance and cash was required for meeting with the expenditure and exigencies during the trips. For this, reliance was placed para 2.2. of the assessment order. It was further submitted that as per clause-„k‟ of Rule 6DD of the IT Rules, no disallowance u/s.40A(3) can be made where cash payment was to be made to an agent who in turn was required to make cash payment on behalf of the assessee. It was submitted that as per Black‟s Law Dictionary, “broker‟ means an agent who acts as on intermediary or negotiator, especially between prospective buyers and sellers. Therefore, it was submitted that it is established beyond doubt that the concerned payments were made by the assessee to its agents/brokers. When the payments were made to brokers and the fact that the ultimate recipient of the payment viz. the drivers/ owners of the trucks have demanded cash payments is not disputed, exception carved out as per Rule 6DD(k) clearly gets invoked and no disallowance u/s.40A(3) is called for and the same be deleted. He placed
16 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. reliance on the decision of the ITAT, Ahmedabad bench in the case of Vijaykumar P. Desaid (Individual & HUF) – ITA No.46 to 57/Ahd/2013 and 85 to 96/Ahd/2013 consolidated order dated 29.8.2013, and also on the decision of the Hon‟ble Madras High Court in the case of CIT Vs. Sri Shanmuga Ginning Factory 37 taxmann.com 422 (Mad.). In the alternative, the learned AR submitted that the assessee has on one hand received freight from various companies, and on the other hand, it has passed on considerately portion of the same to its brokers for making payments in respect of hiring charges. The assessee retains only a small amount from the gross receipts received from the concerned companies, and the same ranges between 2.79% to 3.83% of such gross receipts. He placed reliance on page no.17 of the paper book. It was argued that merely for the sake of convenience, assessee recorded freight income received from the companies as well as the freight expenses paid through brokers. It is submitted that what the assessee earns as income is merely the freight difference and the same is in the nature of commission. When the assessee earns merely freight difference, the freight paid to the brokers is not its expenditure at all. Once the payments are not in the nature of expenditure, there is no question of disallowance of any expenditure invoking the provisions of section 40A(3). He placed reliance on the decision of the ITAT, in the case of G.A. Roadlines Vs. ITO, 44 SOT 145 (Hyd) and ITO Vs. Shri Ashish V. Patel, ITA No.676/ahd/2013 order dated 28.6.2013. 7. On the other hand, the learned DR argued and supported the order of the AO, and submitted that the payments were not made to the brokers, but to the parties. 8. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the AO observed that the assessee has made cash payments for freight charges to brokers, which was in excess of the limit prescribed under section 40A(3) of the Act. He, therefore, by invoking the provisions of section 40A(3) of the Act, made disallowance of 10,69,899/- for A.Y.2007-2008, 7,05,198/- for A.Y.2008- 2009 6,92,47,389/- for A.Y.2009-2010 and for A.Y. 2010-2001 94,85,912/-. On appeal, the learned CIT(A) has confirmed the action of the AO, on the ground that the entire freight charges from customers have been included in the books of accounts of the assessee, as the turnover and freight payments have been made to the drivers are part of the business expenses, and therefore, the provisions of section 40A(3) are applicable to the assessee. The learned CIT(A) has also observed that the arguments of the assessee that the payments were made to truck drivers, who insisted for payment in cash was not exceptional case, because the assessee has not made payments to individual truck owners but to various brokers through whom the trucks were engaged,
17 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. and therefore, the case of the assessee was not covered by the exceptions mentioned in Rule 6DD. The alternative arguments of the assessee that if the disallowance is made under section 40A(3), the GP will go abnormally high, was also not accepted by the learned CIT(A) on the ground that the disallowance under section 40A(3) of the Act was a technical disallowance for violation of specific provisions of Income Tax Act. Before us, the learned AR of the assessee has relied on the decision of the Ahmedabad Bench of the Tribunal in the case of Vijaykumar P. Desai (Individual & HUF) (supra), wherein the Tribunal has held as under: “6. We find that on this aspect, it is noted by the learned CIT(A) that as per the remand report of the AO, the AO had issued notices u/s 133(6) of the Act to all eighteen persons whose names were available in the seized materials regarding cash payments exceeding Rs.20,000/- and all of them had confirmed that they were acting as agents on behalf of these two assessees for making purchases on their behalf and they were getting commission in the range of 0.75% to 1%, They had also confirmed that they were receiving cash payment from these two assessees and were in turn making cash payment to the raddiwalas from whom they were making purchases on behalf of these two assessees. These facts are noted by the learned CIT(A) from the remand report In the remand report, it was also reported by the AO that the AO had also issued notice u/s 131 of the Act to three such agents on random basis out of total eighteen agents and out of these three persons, two appeared before the AO and confirmed that they were acting as agent for these two assessees for making purchases on behalf of these two assessees. It was also confirmed by them that they were taking payment in cash from these two assessees and payment was made in cash to the suppliers of the goods. It was also confirmed that they were taking commission ranging from 0.5% to 0.75% on supply of waste papers to the assessee. In the light of these facts, it is seen that the provisions of clause (k) of Rule 6DD of the IT Rules are squarely applicable and hence, in the facts of the present case, no disallowance u/s 40A (3) of the Act is justified. Hence, on this aspect, we do not find any reason to interfere in the order of the learned CIT(A). Accordingly, we confirm his order on this aspect, we do not find any reason to interfere in the order of the learned CIT(A). Accordingly, we confirm his order on this aspect.” 9. We find that in the instant case also, it is not in dispute that the payments were made by the assessee to the brokers from whom the trucks were hired on payment, and in turn was required to make the payment in cash to the truck- drivers in each. As per Oxford Dictionary & Thesaurus-II Page no.15, an agent is: i) person acting for another in business etc. ii) person or thing producing effect
18 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. iii) broker, delegate, envoy, executor, functionary, go-between, intermediary, mediator, middleman, negotiator, proxy, representative, surrogate, trustee. Therefore, a broker is akin to an agent. Thus, the facts of the case are identical to the facts, which were in the case of Vijay kumar P. Desai (supra), and therefore, the decision in that case is squarely applicable to the facts of the assessee‟s case. Hence, respectfully following the above-cited decision of the Tribunal, we set aside the orders of the lower authorities, and delete the disallowance under section 40A(3) of the Act, and this ground of the appeal of the assessee is allowed. 9.2. We find that the Hon‟ble Jurisdictional High Court in the case of Goenka Agencies vs CIT reported in (2003) 263 ITR 145 (Cal) wherein the head notes are reproduced as below:- “Business expenditure-Disallowance under s. 40A(3)-Exceptional and unavoidable circumstances-Assessee has to establish only one of the requirements as provided in r. 6DD(j)(1) and (2), namely, that the payment was made in exceptional and unavoidable circumstances or the payment by cheque or bank draft was not practicable or would have caused genuine difficulty-Assessee made cash payments to its supplier on the insistence of the latter-Genuineness of the transaction was not doubted by the AO or by the Tribunal-Identity of the payee was also not questioned-CIT(A) found that the payments were made to keep harmonious relationship with the principal-Same clearly satisfies the requirement of the provisions of r. 6DD(j)(1)- Disallowance under s. 40A(3) not justified.”
9.3. We find that the Hon‟ble Gujarat High Court in the case of Anupam Tele Services vs ITO reported in (2014) 366 ITR 122 (Guj) wherein the head notes are reproduced as below:- Business Expenditure-Disallowance-Validity of-Cash payment exceeding prescribed limit-Assessee acted as agent of Tata for distributing mobile cards and recharge vouchers-Assessee made payments by account payee cheques till August 2005-Subsequently TATA issued circular and assessee was required to make payment by cash, since it had bank account with cooperative bank-Assessee made payment in cash on different dates and such payment exceeded Rs. 20,000 each-AO disallowed payment made in cash invoking
19 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. provisions of s 40A(3)-CIT(A) deleted disallowance made by AO holding that genuineness of transaction was not disputed and assessee took a very practical step in making payment in cash to stay in business in a competitive environment-Tribunal allowed revenue‟s appeal relying on clause (j) of r 6DD-Held, s 40A (3) aims to curb and reduce possibilities of back money transactions-It does not eliminate considerations of business expediences-Assessee was compelled to make cash payments under peculiar circumstances as principal company, to which assessee was a distributor, insisted that cheque payment from a cooperative bank would not do, since the realization takes a longer time-If assessee had not made cash payment, it would have received the recharge vouchers delayed by 4/5 days and thereby would severely affect its business operations- Rigors of s 40A(3) to be lifted-Further the exceptions contained in r 6DDD are not exhaustive and that rule must be interpreted liberally- Impugned order set aside-Assessee‟s appeal allowed.
9.4. We also find that the Hon‟ble Gauhati High Court in the case of Walford Transport (Eastern India) Ltd vs CIT reported in (1999) 240 ITR 902 (Gau) wherein the head notes are reproduced as below:- Business expenditure-Disallowances under s. 40A(3)-Exceptional and unavoidable circumstances-Assessee explained that its financial positions was very bad at the relevant time and it had to resort to cash transaction in order to avoid the risk of bouncing of cheques- Explanation accepted by AO in majority of transaction-Same however not accepted in some transactions only on the basis that the names of payees were not indicated in the vouchers-On appeal, CIT(A)- Where the transaction is found to be genuine and the identity of payee is established a liberal view of compelling and mitigation circumstances should be taken-The Tribunal, erred in drawing the inference that in no circumstances deferred payment would be covered by r. 6DD(j)-CIT(A) was justified in allowing deduction of cash payments.
In the said judgement it was also held as under:-
“13. Learned Counsel appearing for the Revenue has submitted that the payments have not been genuine, on the basis of the finding of the
20 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. assessing authority where it was has observed that on some of the vouchers the names of the payees were not indicated. As indicated earlier, this finding of fact has been upset by the CIT(A) on checking each voucher and it was observed that the names of the payees were indicate. From a perusal of the decisions of different High Courts referred to above, it clearly emerges that the purpose of s. 40A(3) of the Act is not to penalize the assessee for making cash payment of an amount of Rs.2,500 or above. The purpose is only preventive and to check evasion of tax and flow of unaccounted money or to check transactions which are not genuine and may be put as camouflage to evade tax by showing fictitious or false transactions.” 9.5. We also find that the Hon‟ble Rajasthan High court in the case of Smt Harshila Chordia vs ITO reported in (2008) 298 ITR 349 (Guj) had held that the exceptions contained in Rule 6DD of the Rules are not exhaustive and that the said rule must be interpreted liberally. 9.6. In view of our aforesaid findings and respectfully following the judicial precedents relied upon hereinabove, we hold that the subject mentioned cash payments would fall under the ambit of exception provided in Rule 6DD(k) of the Rules in the facts and circumstances of the case and accordingly the provisions of section 40A(3) of the Act could not be made applicable in the instant case. Hence we do not find any infirmity in the order of the ld CIT(A) in this regard. Accordingly, the grounds raised by the revenue are dismissed. 10. In the result, the appeal of the revenue is dismissed.
Order pronounced in the Court on 05.04.2017 Sd/- Sd/- [N. V. Vasudevan] [M. Balaganesh] Judicial Member Accountant Member
Dated 05.04.2017 {SC SPS}
21 I.T.A. No. 482/Kol/2014 Assessment Years: 2009-10 M/s. Maruti Freight Movers Ltd. Copy of the order forwarded to: 1.Appellant/Assessee – M/s. Maruti Freight Movers Ltd., 552, Marshall House, 5th Floor, 33/1, N.S. Road, Kolkata-700001. 2.Respondent – D.C.I.T. Cir-4, Kolkata 3. CIT(A)- Kolkata. 4. CIT – , Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.