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Income Tax Appellate Tribunal, ‘A’ BENCH : BANGALORE
Before: SHRI N.V.VASUDEVAN & SHRI INTURI RAMA RAO
IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SHRI N.V.VASUDEVAN, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA No.1139/Bang/2013 (Assessment year: 2008-09) Asst. Commissioner of Income-tax, Circle 1(1), Mangalore. … Appellant Vs. M/s. Coastal Roadways, D.No.4-64/11, Bantwal Chambers, Balikampady, Mangalore. … Respondent PAN:AAFFC 5977 M Cross Objn.No.35/Bang/2013 (In ITA No.1139/Bang/2013) (Assessment year: 2008-09) (by the Assessee) ****** Revenue by: Dr. P.K.Srihari, Addl.CIT. Assessee by: Shri R.E.Balasubramaniyan, CA. Date of hearing : 05/01/2016 Date of pronouncement: 08/01/2016 O R D E R Per N.V.VASUDEVAN, JM:
ITA No.1139/Bang/13 is an appeal by the Revenue against the order dated 17.12.2012 of CIT(A), Mysore, relating to AY 2008-09. The Assessee has filed a Cross objection against the very same order of the CIT(A).
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 2 of 24 2. Grounds No.1, 2, 5 & 6 raised by the revenue is general in nature and calls for no specific adjudication. Ground No.3 raised by the revenue reads as follows: “3. The learned CIT(A) has erred in deleting the disallowance made u/s. 40A(3) of the I.T. Act since the vouchers contain cash payments in excess of Rs. 20,000 and thus fall within the ambit of section 40A(3). These vouchers are in the names of various transport agencies and though each voucher bears the registration numbers of different trucks with different amounts mentioned against these numbers, the voucher is signed by only one recipient which is a conclusive proof that the total amount mentioned in that voucher has been paid to a single person on a given date towards truck hire charges. The payment is made to the transport agencies and not to the lorry drivers, thereby attracting provisions of section 40A(3) of the I.T. Act. Therefore, the AO was correct in disallowing an amount of Rs. 1,51,11,864/-u/s. 40A(3) of the I.T. Act. ” 3. The Assessee is a partnership firm engaged in transportation business. In the course of assessment proceedings u/s.143(3) r.w.s.147 of the Act, the AO noticed that the Assessee had debited to the profit and loss accounts a sum of Rs.8,47,45,928 towards truck hire charges. The AO verified the vouchers evidencing the payments made towards truck hire charges and found that the vouchers did not bear any voucher numbers. Further payments to the extent of Rs.1,51,11,864/- were payments made in excess of Rs.20,000/- by cash and were liable to be disallowed u/s.40A(3) of the Income Tax Act, 1961 (Act), which provides that where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 3 of 24 person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure. The Assessee in reply to the query of the AO in this regard pointed out that in transportation business the Assessee has to take the service of huge number of truck owners who are spread throughout the country. These truck drivers are illiterate and demand payment only in cash. The Assessee further pointed out that even though payment of more than Rs.20,000 by cash is shown in the truck hire charges paid ledger account, the vouchers in support of the aforesaid ledger account would show that payment on each occasion in cash to one person was Rs.20,000/- or less and therefore provisions of Sec.40A(3) of the Act are not attracted.
The AO however on scrutiny of the vouchers was of the view that the vouchers produced by the Assessee in support of its claim and each of the payment to truck drivers in cash was Rs.20,000 or less did bear registration numbers of different trucks with different amounts, yet the vouchers were signed by only on recipient. According to the AO this fact indicated that the truck hire charges were paid as a single sum on the date of vouchers towards hire charges. Hence, the provisions of Sec.40A(3) of the Act were attracted. The AO accordingly disallowed a sum of Rs.1,51,11,864 u/s.40A(3) of the Act and added the said sum to the total income of the Assessee.
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 4 of 24
On appeal by the Assessee the CIT(A) agreed with the submissions of the Assessee and held as follows: “6.6 I find strength in the argument of the appellant that the payments u/s 40A(3) which are made on holidays should be excluded from disallowance. The appellant worked out the total payments on holidays to the tune of Rs. 26,06,555/- However, it is not clear as to how much of these payments are in cash particularly. Hence, the AO is directed once again to verify the actual cash payments on holidays and to that extent reduce the addition on account of disallowance u/s 40A(3). 6.7 We have considered the rival contentions carefully. As seen from the vouchers, the payments are made on account of various trips of lorries. It is argued by the appellant, that whenever a trip is made, the lorry driver has to be paid on delivery together with their driver Bata arid other charges. It is only while raising the voucher this individual supplies were clubbed together by the broker. However, the payment per se is made to individual lorry drivers and the respective amounts are also mentioned in the vouchers. The appellant has paid commission to broker separately for arranging these trips. It is a common knowledge that lorry drivers are paid the transport charges upon delivery. From this, it is clear that the payment is made to lorry drivers as listed in the voucher. U/s 40A3 what is relevant is the payment made per person. Under this circumstances, I am of the considered view that the listing out of these payment in a voucher does not attract the provision of sec 40A(3). Hence, the AO is directed to verify the vouchers and see if any particular payment is exceeding the limit prescribed u/s 40A(3) and tax it accordingly. While doing so, the AO should also examine if the payments are made on holidays and exclude the same. ” 6. Aggrieved by the order of the CIT(A), the revenue has raised ground No.3 before the Tribunal. The learned DR reiterated the stand of the revenue as reflected in the ground No.3 reproduced
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 5 of 24 above. It is clear from ground No.3 that the revenue has not challenged the finding of the CIT(A) with regard to payment made on holidays in cash to be excluded after verification from the amount to be disallowed u/s.40A(3) of the Act.
As far as the other direction of the CIT(A) holding (a) that the individual payments made to various truck drivers were less than Rs.20,000 and it was the broker who made the payments who aggregated them and based on such aggregation entries in ledger were made and (b) that if the individual payments made to per person on a particular day if it was less than Rs.20,000/- no disallowance can be made u/s.40A(3) of the Act, we are of the view that the said findings are justified. It was not the case of the AO that a single payment was made to a single person. According to the AO though the vouchers bears different registration numbers of different trucks with different amounts mentioned against those numbers, the vouchers are signed by only by one recipient indicating that the total amount of that voucher is paid as a single sum to a single person on the date of vouchers towards truck hire charges. It is not disputed that vouchers evidenced payment made to individual lorry drivers and each of the payments in cash was not in excess of Rs.20,000.
The Finance Act, 2007 has substituted sub-section (3) of section 40A of the Income-tax Act by a new one with effect from
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 6 of 24 1st April, 2008 to provide for total disallowance of expenses paid in cash while bringing to tax income by way of profits and gains of business or profession of all classes of taxpayers. Earlier, the amount disallowable was 20 per cent of the expenses paid in cash. The reasons for the amended provisions as explained in CBDT Circular is owing to the fact that provisions of section 40A(3) were being circumvented by splitting a particular high value payment to a person into several cash payments, each below Rs.20,000/-. This splitting is also resorted to for payments made in the course of a single day. Courts have also held that the statutory limit in section 40A(3) applies to payment made to a party at one time and not to the aggregate of the payments made to a party in the course of the day as recorded in the cash book. According to the judicial opinion, the words used are ‘in a sum’, i.e., single sum. Therefore, irrespective of any number of transactions, where the amount does not exceed the prescribed amount in each transaction, the rigours of section 40A(3) will not apply. To overcome the splitting of payments to the same person made during a day as referred above and to increase the efficacy of the provision, the amendment seeks to substitute the present provision to provide that where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, the disallowance of such expenditure shall be made under the proposed sub-section (3) of
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 7 of 24 section 40A or the payment shall be deemed to be the profits and gains of business or profession under the proposed sub-section (3A) of section 40A, as the case may be. To illustrate with an example, let us assume a taxpayer has incurred an expenditure of Rs 40,000/-. The taxpayer makes separate payments of Rs 15,000/-, Rs 16,000/- and Rs 9,000/- all by cash, to the person concerned in a single day. The aggregate amount of payment made to a person in a day, in this case, is Rs 40,000/-. Since, the aggregate payment by cash exceeds Rs 20,000/-, Rs. 40,000/- will not be allowed as a deduction in computing the total income of the taxpayer in accordance with the proposed amendment.
In an earlier case of CIT vs. Triveniprasad Pannalal (1997) 142 CTR (MP) 562 : (1997) 228 ITR 680 (MP), a sum of Rs. 48,850 was disallowed by the Assessing Officer under section 40A(3). The sum was the aggregate of a number of payments made with respect to the various transactions. When the controversy came up before the Madhya Pradesh High Court, the Court, concurring with the opinion of the Appellate Tribunal, held that the case was not hit by the statutory bar contained in section 40A(3); for, "the law only says that the amount exceeding Rs. 2,500 (as it then was) should not be paid except by way of cheque drawn on a bank or by a crossed bank draft and if it exceeds this amount, then such expenditure shall not be allowed as a deduction.... It does not say that the aggregate of the
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 8 of 24 amount should not exceed Rs. 2,500. The words used are "in a sum", i.e., single sum has been used. Therefore, irrespective of any number of transactions, where the amount does not exceed Rs. 2,500 in each transaction, the rigours of section 40A(3) will not apply". While holding so, the Court approvingly referred to the identical view of the Orissa High Court expressed in an earlier case of CIT vs. Aloo Supply Co. (1980) 121 ITR 680 (Ori).
Notwithstanding the official proclamation that sub-section (3) of section 40A is being substituted to nullify the loophole created by the judicial decisions, the legal position remains the same even after the said substitution. The newly substituted sub- section (3) contains the phrase "a payment or aggregate of payments made to a person in a day..." This expression is analogous to the phrase "in a sum" used in erstwhile Sec.40A(3) of the Act. The new provision contains "in a day". Therefore, the judicial interpretation of the expression "in a sum", i.e., a single sum, would equally apply in interpreting the expression "in a day" to mean a single day. Therefore the new sub-section (3) of the Act also will not apply when a payment to one person on a single day in the aggregate does not exceeding twenty thousand rupees. In other words, in each day, an assessee can make cash payment upto twenty thousand rupees, without any statutory bar. The CIT(A) in our view has therefore rightly given directions to the AO
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 9 of 24 to verify if payment to one person on a single day exceeds Rs.20,000/-. We do not find any infirmity in the order of the CIT(A). Accordingly ground No.3 raised by the revenue is dismissed.
Ground No.4 raised by the Revenue reads as follows: “4. The learned CIT(A) has erred in deleting the additions in respect of unexplained cash credits u/s.68 of the I.T. Act as the assessee firm failed to satisfactorily explain the difference in the capital as per ledger account of the partners as well as balance sheet of the assessee firm and the A.O. has correctly added difference amount as unexplained cash credits u/s. 68 of the I.T. Act. ” 12. The Partnership firm of the Assessee has three partners. In the capital account ledger of one of the partner Mr.H.Moidinabba, capital to the tune of Rs.1,85,01,262 by way of cash and cash withdrawal of Rs.1,47,94,799 was found. Thee was therefore net capital introduction in cash by Sri.H.Moidinabba of Rs.37,06,463 (Rs.1,85,01,262 – Rs.1,47,94,799). The AO called upon the Assessee to explain the source and proof of introduction of capital in the capital account of the partner. In the balance sheet of the Assessee filed along with the return of income, the capital introduction by Mr.H.Moidinabba was shown only at Rs.50,000/-. In the capital account ledger of another partner by name Mr.Abdul Raheem Hussain, capital introduced was shown as Rs.5,00,000. However as per the Balance sheet enclosed with
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 10 of 24 the return of income, the capital introduced by this partner was shown as Rs.41,50,409.
Mr.Abdul Raheem Hussain explained before the AO that he introduced Rs.41,50,409 as capital of the Assessee firm through his brother H.Moidinabba. He gave a gift of Rs.5 lacs to his brother H.Moidinabba which was also introduced by him as capital in the Assessee firm. He explained that he was an Non-Resident Indian and was working abroad. He produced his NRI bank account which showed withdrawal of money from NRE SB A/C. as follows: a) SBI NRE SB A/C.No.10568914005 Rs. 45,00,000 b) SBI NRE SBA/c.No.30238594035 Rs. 27,85,000 c) Corporation Bank NRE SB A/C.3005458 Rs. 24,00,000 d) Syndicate Bank NRE SB A/c.12305 Rs 24,42,000 Rs.1,21,27,000 Mr.Abdul Raheem Hussain explained that the above withdrawal from the bank account was the source of introduction of cash in the capital account of Mr.H.Moidinabba.
The AO firstly held that there was no evidence to show that Rs.41,50,409 was introduced by Mr.Abdul Raheem Hussain as capital through Mr.H.Moidinabba. The AO went by the capital as shown in the balance sheet in so far as it concerns Mr.Abdul Raheem Hussain which showed introduction of capital in cash of
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 11 of 24 Rs.41,50,409. He accepted that withdrawal from the bank account by Mr.Abdul Raheem Hussain would explain the introduction of capital to the tune of Rs.41,50,409. As far as H.Moidinabba is concerned, the AO went by the capital account ledger and was of the view that there was no valid explanation with regard to introduction of capital to the extent of Rs.37,06,463. With regard to the contention of the Assessee that the withdrawal from the bank account was the source of funds for introduction of capital both by H.Moidinabba and Mr.Abdul Raheem Hussain, the AO held that there was no correlation of dates between the withdrawals from the bank account of Mr.Abdul Raheem Hussain and credit to Mr.H.Moidinabba’s account. The AO however accepted that the ledger account shows cash credits and withdraws as amounts received from and paid to M/S.Coastal Minerals. The AO also observed that the Assessee failed to explain the reasons as to why amounting totalling Rs.1,85,01,262 was introduced and then a sum of Rs.1,47,94,799 was withdrawn from the capital account of H.Moidinabba. The AO therefore held that the Assessee failed to satisfactorily explain capital introduction of Rs.37,06,463/-.
Before CIT(A) the Assessee argued that the conclusions of the Assessing Officer that net capital introduction of Rs. 37,06,4631/- by one of partners, Mr. H. Moidinabba was unexplained cash credit u/s. 68 (in spite of the sufficient
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 12 of 24 withdrawal of Rs. 1,21,27,0001- is available from the NRI accounts of the other partner Mr. Abdul Rahim Hussain (who is also brother of Mr. Moidinabba) was not correct. The Assessee clarified that the entire capital of both Mr. Moidinabba and Mr. Abdul Rahim Hussain is exclusively from the above NRI funds. This fact has been clearly stated by Mr. Abdul Rahim Hussain (page 7, para 1). It was explained that capital was brought in only by Mr. Abdul Rahim Hussain. However, since the affairs were managed by Mr. Moidinabba, the accountant by mistake had treated capital introduced, as that of Mr. Moidinabba instead of Mr. Abdul Rahim Hussain. This was purely a clerical error and the said credits pertain to capital introduced by Mr. Abdul Rahim Hussain only. Hence, such additions as unexplained cash credit is not correct and needs to be deleted."
The CIT(A) held as follows: “10.3 I have considered the rival contentions carefully. It is also argued that the impounded books shows capital in the name of Sri. Moidinabba and similar capital is introduced in the name of Sri. Abdul Raheem Hussain with some differences. It is argued except for the differences, it is the same amount in the books in the name of Sri. Abdul Raheem Hussain and in t he name of Moidinabba. It is further pointed out that:, if these are 2 different transactions, there should be two different
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 13 of 24 entries in the day book which is riot the case. Further, cash in hand as per audited balance sheet tallies with closing cash in hand as on .31.3.2008 in the day book. Therefore, I find that in the day books there is only one cash introduction and not two as rightly pointed out by the appellant. Hence, I find strength in the argument of the appellant that it is the same amount that was brought into the books and that too only once. Under this circumstances, I am convinced with the argument of the appellant and accordingly direct the AO to delete the addition.” 16. Aggrieved by the order of CIT(A), the revenue has preferred ground No.4 before the Tribunal.
We have heard the submissions of the learned DR who relied on the order of the AO. The learned counsel for the Assessee relied on the order of the CIT(A).
We have considered the rival submissions. It is clear from the evidence on record that the capital introduction in the ledger account of Abdul Raheem Hussain and Moidinabba was Rs.5 lacs and Rs.1,85,01,262 respectively and capital withdrawal was Rs.1,47,94,799 (from the account of Moidinabba). The entire capital brought in was the funds of Mr.Abdul Raheem Hussain. The withdrawal from the NRI bank account of Mr.Abdul Raheem Hussain was of Rs.1,21,27,000 and this was explained as the source of funds for introduction of capital in both the accounts. This was not believed by the AO for the only reason that dates of
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 14 of 24 withdrawal from Abdul Raheem’s account and credit to Moidinabba’s account did not correlate. When once source of funds is explained by the partners as withdrawal from a bank account and when in fact such a withdrawal exists than the AO cannot disbelieve the claim of the Assessee unless he is able to show that the withdrawals from the bank account are later in point of time to the introduction of capital in the capital account. The AO has not made out any such case in the order of assessment. The CIT(A) has given a finding that the same amount that was withdrawn was brought into the books and this was done only once. once it is found as a fact that cash was received by the firm from its partners, then, the relevant cash credits could not be assessed under section 68 in the hands of the firm in the absence of evidence to indicate that the cash credits represents the firm's profits and the firm is not further required to explain the source of deposit in the hands of the partners. It was so held in CIT vs. Jaiswal Motor Finance 141 ITR 706 (All) and CIT vs. Anupam Udyog 142 ITR 133 (Pat). In CIT vs. Metachem Industries (2000) 161 CTR (MP) 444 also it was held that once the firm has satisfactorily explained that the credit entries in the name of its partners represent the amount invested by them the burden of proof stood discharged and the amount cannot be treated as income of the firm under s. 68. In the light of the legal position stated above and in the light fact that the Assessee has satisfactorily shown receipt of cash from the partners the cash
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 15 of 24 credit in question should be considered as satisfactorily explained. For the reasons given above, we do not find any grounds with the order of the CIT(A). Accordingly, ground No.4 raised by the revenue is dismissed.
In the result, appeal by the Revenue is dismissed.
C.O.No. 35/Bang/15: The Assessee has filed an application for condonation of delay in filing C.O. In terms of Sec.253(4) of the Act, a C.O. has to be filed within thirty days from the date of receipt of notice in an appeal. The Assessee has received notice of appeal on 25.2.2015 and has filed cross objection on 20.3.2015. The Cross-objection is therefore filed within time.
Ground No.1 raised in CO is general in nature and Ground No.4 raised in CO is supportive of the order of the CIT(A) in so far as it relates to deletion of addition u/s.40A(3) of the Act, which was the subject matter of ground No.3 in revenue’s appeal. These grounds need not no specific adjudicatioin. As far as ground No.2 raised in CO is concerned, the same is in relation to disallowance u/s.40(a)(ia) of the Act for non- deduction of tax at source in respect of truck hire charges of Rs.1,00,57,864 and commission and lease rent paid of Rs.50,000 and Rs.1,25,000 respectively, in all totalling a disallowance of Rs.1,02,32,864. In
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 16 of 24 respect of truck hire charges the total amount of truck hire charges in respect of which the Assessee failed to deduct tax at source was a sum of Rs.2,51,69,728. Out of the aforesaid sum a sum of Rs.1,51,11,864 was disallowed u/s.40A(3) of the Act and the remaining sum of Rs.1,00,57,864 was disallowed u/s.40(a)(ia) of the Act. There is no dispute that there was an obligation to deduct tax at source in respect of the aforesaid sums and there was failure on the part of the Assessee to deduct tax at source and hence disallowance u/s.40(a)(ia) of the Act was required to be made. However, the Assessee submitted before CIT(A) that the sums in question were not outstanding as on the last date of the previous year and had actually been paid. The Assessee submitted that the disallowance u/s.40(a)(ia) of the Act can be made only where the sum in question is “Payable” and not in a case where the sum in question has been “paid” by the Assessee. The Assessee placed reliance on the decision of the Special Bench of ITAT, Vishakapatnam in the case of Merilyn Shipping & Transaports Vs. ACIT (2012) 20 Taxmann.com 244 (Vishakapatnam-Trib.). The CIT(A) did not agree with the aforesaid submission of the Assessee and held that operation of the aforesaid decision had been stayed by the Hon’ble AP High Court and hence the said decision could not be followed. 22. Before us it was pointed out by the learned counsel for the Assessee that in a later decision the Hon’ble AP High Court in the case of CIT Vs. M/s.Janapriya Engineers Syndicate ITA No.352 of
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 17 of 24 2014 order dated 24.6.2014 was pleased to hold that unless and until the decision of the Special Bench is upset by the High Court, the same is binding on smaller bench and co-ordinate bench of the Tribunal.
The ld. DR submitted that the decision of the Hon’ble Special Bench ITAT in the case of Merilyn Shipping (supra) has been reversed by the Hon’ble Gujarat and Calcutta High Courts in CIT Vs. Sikandarkhan N. Tunvar & Others in Tax Appeal No. 905 of 2012 & others dated 02/05/2013 and in CIT Vs. Md.Jakir Hossai Mondal in ITA No.31 of 2013, GA No.320 of 2013 dated 04.04.2013 respectively.
The ld. counsel for the assessee pointed out that the Hon’ble Allahabad High Court in the case of Vector Shipping Services Pvt. Ltd. in IT Appeal No.122/2013, order dated 9.7.2013 has however upheld the decision of the Special Bench of the ITAT and SLP filed by the Revenue against the said decision of the Allahabad High Court has also been dismissed by the Hon’ble Supreme Court. The ld. counsel submitted that where two views are possible, the view in favour of the assessee should be accepted and in this regard relied on the decision of the Hon’ble Supreme Court in the case of CIT v. Vegetables Products 88 ITR 192 (SC).
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 18 of 24 25. We have considered the rival submissions. We find that the use of word “Payable”, in Section 40(a)(ia) of the Act has created controversy as to whether payable includes amounts paid during the year. There were conflicting decisions rendered by the Tribunal. In the case of DCIT vs. Ashika Stock Broking Ltd. reported in 44 SOT 556 the Hon’ble Kolkatta ITAT has decided the matter in favour of revenue and after following its decision dated 15.01.2010 in the case of Poddar Son’s EXL. P Ltd vs. ITO in ITA No. 1418(Kol.)/09 has held that provisions of Section 40(a)(ia) of the Act are applicable to even sums paid during the year. In the case of Teja Construction vs. ACIT reported in 39 SOT 13 the Hon’ble Hyderabad ITAT has decided the issue against the Revenue and has held that provisions of Section 40(a)(ia) of the Act are not applicable in respect of sums/amount paid during the year and which are not payable at end of the year on date of balance sheet, as it is applicable only in respect of “Payable amount” shown in balance sheet as outstanding expenses on which TDS has not been made. Similar laws were laid in various other cases. To resolve the above issue Special Bench was constituted and the Hon’ble Visakhapatnam Special Bench of ITAT in the case of Merilyn Shipping & Transport vs. Addl CIT reported in 20 taxmann.com 244 has decided the issue against the Revenue and after comparing the proposed and enacted provision which is
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 19 of 24 intended from the replacement of the words in the proposed and enacted provision from the words ‘amount credited or paid’ to ‘payable’ has held that it has to be concluded that provisions of Section 40(a)(ia) are applicable only to the amounts of expenditure which are payable as on the date 31st March of every year and it cannot be invoked to disallow expenditure which has been actually paid during the previous year, without deduction of TDS.
In CIT Vs. Sikandarkhan N.Tunvar & Others, TAX APPEAL NO. 905 of 2012 & others Dated02/05/2013, the Hon’ble Gujarat High Court held that in Merilyn Shipping 146 TTJ 1 (Viz) (SB,) the majority held that as the Finance Bill proposed the words “amount credited or paid” and as the Finance Act used the words “amounts payable“, s. 40(a)(ia) could only apply to amounts that are outstanding as of 31st March and not to amounts already paid during the year. This view is not correct for two reasons. Firstly, a strict reading of s. 40(a)(ia) shows that all that it requires is that there should be an amount payable of the nature described, which is such on which tax is deductible at source but such tax has not been deducted or if deducted not paid before the due date. The provision nowhere requires that the amount which is payable must remain so payable throughout during the year. If the assessee’s interpretation is accepted, it would lead to a situation where the assessee who though was required to deduct
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 20 of 24 the tax at source but no such deduction was made or more flagrantly deduction though made is not paid to the Government, would escape the consequence only because the amount was already paid over before the end of the year in contrast to another assessee who would otherwise be in similar situation but in whose case the amount remained payable till the end of the year. There is no logic why the legislature would have desired to bring about such irreconcilable and diverse consequences. Secondly, the principle of deliberate or conscious omission is applied mainly when an existing provision is amended and a change is brought about. The Special Bench was wrong in comparing the language used in the draft bill to that used in the final enactment to assign a particular meaning to s. 40(a)(ia). Accordingly, Merilyn Shipping does not lay down correct law. The correct law is that s. 40(a)(ia) covers not only to the amounts which are payable as on 31st March of a particular year but also which are payable at any time during the year. The Hon’ble Kolkatta High Court in CIT Vs. Md.Jakir Hossai Mondal (supra) did not agree with the view of the Special Bench in the case of Merilyn Shipping following its judgment on 3rd April, 2013 in ITAT No. 20 of 2013, G.A. No. 190 of 2013 (CIT, Kolkata-XI Vs. Crescent Export Syndicates) holding that the views expressed in the case of Merilyn Shipping & Transports (ITA.477/Viz./2008 dated 20.3.2012) were not acceptable.
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 21 of 24 29. However, we find that the Hon’ble Allahabad High Court has however upheld the view taken by the Special Bench ITAT in the case of Merilyn Shipping (supra) in the case of M/s. Vector Shipping Services Pvt. Ltd. (supra). The relevant observations of the Hon’ble Court were as follows:- “We do not find that the revenue can take any benefit from the observations made by the Special Bench of the Tribunal in the case of Merilyn Shipping and Transport Ltd. (136 lTD 23) (SB) quoted as above to the effect Section 40(a)(ia) was introduced in the Act by the Finance Act, 2004 with effect from 1.4.2005 with a view to augment the revenue through the mechanism of tax deduction at source. This provision was brought on statute to disallow the claim of even genuine and admissible expenses of the assessee under the head ‘Income from Business and Profession’ in case the assessee does not deduct TDS on such expenses. The default in deduction of TDS would result in disallowance of expenditure on which such TDS was deductible. In the present case tax was deducted as TDS from the salaries of the employees paid by M/s Mercator Lines Ltd., and the circumstances in which such salaries were paid by M/s Mercator Lines Ltd., for M/s Vector Shipping Services, the assessee were sufficiently explained. It is to be noted that for disallowing expenses from business and profession on the ground that TDS has not been deducted, the amount should be payable and not which has been paid by the end of the year. We do not find that the Tribunal has committed any error in recording the finding on the facts, which were not controverted by the department and thus the question of law as framed does not arise for consideration in the appeal. The income tax appeal is dismissed.” 30. SLP by the Revenue against the decision of the Hon’ble Allahabad High Court has been dismissed by the Hon’ble Supreme Court. Thus there are two views on the issue, one in favour of the assessee expressed by the Hon’ble Allahabad High Court and the other against the assessee expressed by the Hon’ble Gujarat
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 22 of 24 & Calcutta High Courts. Admittedly, there is no decision rendered by the jurisdictional High Court on this issue. In the given circumstances, following the decision of the Hon’ble Supreme Court in the case of Vegetable Products Ltd. (supra), we hold that where two views are possible on an issue, the view in favour of the assessee has to be preferred. We accordingly, allow ground No.2 raised in the CO and direct the addition made u/s.40(a)(ia) of the Act be deleted.
Ground No.3 raised in the CO is with regard to the adhoc disallowance of a sum of Rs.10 lacs from trick hire charges. We have already seen that the Assessee incurred trick hire charges of Rs.8,47,45,928. Out of the above a sum of Rs.1,51,11,864 was disallowed u/s.40A(3) of the Act. Another sum of Rs.,1,00,57,864 was disallowed u/s.40(a)(ia) of the Act. Out of the balance sum of Rs.5,96,76,200, the AO found that vouchers for expenses to the extent of Rs.5,91,66,546 were unsigned and did not bear the names of the parties to whom the payments were claimed to have been made. The Assessee pointed out that inn the nature of business it is not possible to get vouchers signed by the lorry drivers who unload materials and immediately go for the next trip. The existence of registration number of the trucks on the vouchers was sufficient to believe the authenticity of the expenditure. The AO was of the view that considering the nature of business of the Assessee it was reasonable to disallow a sum of
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 23 of 24 Rs.10 lacs. Accordingly the aforesaid sum was added to the total income of the Assessee.
On appeal by the Assessee the CIT(A) upheld the order of the AO rejecting the argument of the Assessee that the disallowance was arbitrary and excessive.
The learned counsel for the Assessee reiterated the same submission as was made before the CIT(A). The learned DR relied on the order of the AO. After considering the rival submissions, we are of the view that the disallowance is reasonable considering the quantum of expenditure for which there were no proper vouchers. The Assessee has not demonstrated that the quantum of expenditure on truck hire charges and receipts from plying trucks on hire in the present AY compares favourably with the expenditure on truck hire charges and receipts from plying of truck on hire in the past AYs. We therefore uphold the order of the CIT(A) on this issue.
In the result, appeal by the Revenue is dismissed and the CO is partly allowed. Pronounced in the open court on 08th January, 2015.
sd/- sd/- (Inturi Rama Rao) (N.V.Vasudevan) ACCOUNTANT MEMBER JUDICIAL MEMBER eksrinivasulu
ITA No.1139 & CO No.35/Bang/2013 M/s.Coastal Roadways Page 24 of 24 Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order
Assistant Registrar Income-tax Appellate Tribunal Bangalore