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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAJESH KUMAR
PER SAKTIJIT DEY, J.M.
The aforesaid appeals of the Department and cross objection by the assessee are directed against separate orders of the learned Commissioner (Appeals), for the assessment year 2007–08 and 2009– 10.
./2010 In this appeal, the Department has raised four effective grounds.
In grounds no.1, 2 and 3, the Department has challenged the decision of the learned Commissioner (Appeals) in restricting the disallowance out of expenditure incurred on sea freight, truck freight and labour charges to 20% of the total amount.
3 Shri Rajnikant S. Doshi (HUF) 3. Brief facts are, the assessee a HUF is engaged in the business of trading in silica sand and other minerals through its proprietorship concern Jyoti Minerals. For the assessment year under consideration, the assessee filed its return of income on 28th October 2007, declaring total income of ` 3,15,450. During the assessment proceedings, the Assessing Officer noticed that the assessee has claimed expenditure on account of freight charges amounting to ` 64,92,403 and labour charges of ` 4,42,440. He, therefore, called upon the assessee to justify the expenditure claimed with supporting evidence. As observed by the Assessing Officer, in response to the query raised, the assessee furnished the ledger extracts of sea freight and truck freight. The Assessing Officer, after verifying the ledger extracts, found that the assessee had claimed expenditure of ` 38,46,400, towards see freight out of which an amount of ` 21,94,400, was shown as outstanding as on 31st March 2007. The Assessing Officer observed, details of payments were not furnished by the assessee. He also observed, in the absence of complete details, bills and vouchers, nature of transactions the genuineness of expenditure claimed is not verifiable only from the ledger account copies. He, therefore, issued notice under section 133(6) of the Act to the parties to whom the assessee claimed to have paid the sea freight. As observed by the Assessing Officer, notice issued to the concerned parties returned un–served. Alleging that the assessee failed to discharge its onus in proving the genuineness of the expenditure, the Assessing Officer disallowed the entire sea freight of ` 38,46,400. As far as the expenditure incurred of ` 27,46,003, on truck freight, the Assessing Officer after verifying the details submitted by the assessee, found that in most of the cases, the expenditures were either through credit note or journal entries. There is no evidence to establish the identity of the person to whom the amount was paid and the details of places from which goods were 4 Shri Rajnikant S. Doshi (HUF) transported and also the destination. He also alleged that no details of the transporters were filed. The Assessing Officer further alleged that there are two journal entries on 31st March 2007 one is of ` 1,70,000 to Shivnan Hedgre and another of ` 8,42,630 to R.K. Minerals and Refractory. The details of these two transactions were not available. The Assessing Officer observed, in 3CD report, the amount of ` 8,42,630, has been shown as purchase from sister concern. Therefore, alleging that the assessee has failed to substantiate its claim through proper documentary evidence, the Assessing Officer disallowed the entire truck freight charges of ` 26,46,003. Further, finding that the assessee has claimed labour charges of ` 4,42,440, the Assessing Officer called upon the assessee to justify the claim. As observed by the Assessing Officer in response to the query raised, the assessee only furnished copy of ledger account which contains only name of person without their address. No bills or vouchers were produced. The Assessing Officer, therefore, alleging that genuineness of the expenditure claimed is not verifiable disallowed the labour charges of ` 4,42,440. Being aggrieved of the aforesaid disallowance, the assessee challenged them in appeal preferred before the learned Commissioner (Appeals).
In the course of hearing of appeal before the first appellate authority, the assessee to prove the genuineness of expenditure claimed on account of freight and labour charges made elaborate submissions along with supporting evidence. On the basis of submissions made by the assessee and evidence produced, the learned Commissioner (Appeals) called for a remand report from the Assessing Officer. After perusing the comments of the Assessing Officer in the remand report in the context of facts and material on record as well as the submissions made by the assessee, the learned 5 Shri Rajnikant S. Doshi (HUF) Commissioner (Appeals) found that the payment made by the assessee on account of freight charges are not entirely in cash. He noticed out of the total sea freight of ` 38,46,400, payments made during the year was to the tune of ` 24,69,200 and out of the said payment made ` 14,88,000, was in cash and ` 9,81,200 in cheque. He observed that the Assessing Officer, while making disallowance, has not bifurcated the cash and cheque payments. He further observed, the Assessing Officer has not doubted the identity of the recipients but has only questioned the genuineness of the cash payment. The learned Commissioner (Appeals) observed, in the remand report also the Assessing Officer has not commented upon the amount paid through cross cheque and bank statement submitted by the assessee to prove such payment. The learned Commissioner (Appeals), therefore, observed that since the cheque payments are verifiable through bank account, no disallowance could be made of the expenditure incurred through cheque. In respect of truck freight also, the learned Commissioner (Appeals) held that payment made cannot be disallowed. However, as far as cash payments are concerned, the learned Commissioner (Appeals) observed, the assessee has not been able to fully prove the payments made in cash. He, therefore held, to take care of any inflation in expenditure by the assessee disallowance of 20% out of the expenditure incurred in cash would serve the purpose. Accordingly, the learned Commissioner (Appeals) sustained the addition of ` 2,97,600, out of sea freight, ` 26,777 in respect of truck freight and ` 34,427, out of labour charges. Being aggrieved of the aforesaid decision of the learned Commissioner (Appeals), the Revenue is in appeal before us.
Learned Departmental Representative, though, admitted that the entire expenditure incurred towards sea freight and truck freight is not in cash, but part of it was through account payee cheque. At the same
6 Shri Rajnikant S. Doshi (HUF) time, learned Departmental Representative submitted that the restriction of disallowance to 20% of the cash expenditure is without any reasonable basis. As far as truck expenses is concerned, learned Departmental Representative submitted, the Assessing Officer has given a categorical finding that two items of expenditure of ` 1,70,000 and ` 8,42,636, are through journal entries only. He further submitted, on a perusal of 3CD report, the Assessing Officer found that the amount of ` 8,42,636 has been shown towards purchases made from sister concern. He, therefore, submitted that the learned Commissioner (Appeals) was not justified in allowing assessee’s claim of deduction in respect of the amount of ` 8,42,636, without properly verifying the allegation of the Assessing Officer. As far as labour charges is concerned, the learned Departmental Representative raising similar objections submitted, the first appellate authority has not given adequate reason for restricting the disallowance to 20% of the expenditure.
Learned Authorised Representative on the other hand strongly supporting the order of the learned Commissioner (Appeals) submitted that in the course of assessment proceedings, the assessee had submitted all necessary evidences as required by the Assessing Officer to prove the genuineness of claim of freight expenses and labour charges. He submitted, if the Assessing Officer was not satisfied with the evidence produced or had any doubt he should have expressed them to the assessee and given opportunity to explain the same. He submitted, without calling for further explanation from the assessee, the Assessing Officer was not justified in treating the entire expenditure to have been incurred in cash and disallowed the same. Learned Authorised Representative submitted, there is no prohibition in the Income–tax Act to incur expenditure in cash subject to the 7 Shri Rajnikant S. Doshi (HUF) conditions imposed under section 40A(3). Therefore, only because the expenditure was incurred in cash, it cannot be disallowed if otherwise the expenditure incurred is genuine. The learned Authorised Representative submitted, the Assessing Officer also erroneously treated the entire expenditure to have been incurred in cash, whereas the assessee has made payments through account payee cheques also which were proved through bank account. Learned Authorised Representative submitted, though, in case of the assessee even 20% disallowance is not called for considering the documentary evidence submitted but only for the purpose of avoiding protracted litigation, the assessee has accepted 20% disallowance. Thus, it was submitted by the learned Authorised Representative that there is no reason to interfere with the order of the learned Commissioner (Appeals).
We have considered the submissions of the parties and perused the material available on record. On a perusal of the assessment order, it is evident, the Assessing Officer disallowed sea freight expenses on the ground that the assessee failed to furnish supporting evidence to establish the genuineness of the expenditure incurred. However, as could be seen, the assessee before the first appellate authority produced documentary evidence by way of confirmation from the concerned parties to whom payments were made, bank statement copy, ledger copies and also produced the agent through whom the goods were ferried to Bombay along with sample copies of bills and vouchers. These evidences produced by the assessee were also sent for examination of the Assessing Officer. The Assessing Officer, in his remand report, apart from making some general observations has not mentioned any valid reasons for not accepting assessee’s claim. It is also noticed that part of the payments made by the assessee was through account payee cheque and part of payment in cash. In fact,
8 Shri Rajnikant S. Doshi (HUF) the learned Departmental Representative had submitted before us that the payment made in cash towards ship freight is ` 14,88,000, truck freight of ` 1,33,833 and labour charges of ` 1,72,134. As far as cheque payments are concerned, there cannot be any doubt regarding their genuineness. In the remand report also, the Assessing Officer has not made any specific comments on the cheque payments by making any enquiry to indicate that they are not genuine. As far as cash payments are concerned, we find merit in the submissions of the learned Authorised Representative that there is no prohibition under the statute in incurring cash expenditure subject to conditions imposed under section 40A(3). The Assessing Officer has not made any allegation regarding violation under section 40A(3). Under these circumstances, restriction of disallowance to 20% to the cash expenditure made by the learned Commissioner (Appeals) in our view is reasonable, hence, no interference is called for. However, as far as truck freight is concerned, the learned Departmental Representative, at the time of hearing, referring to Para–2.4 of the assessment order submitted, as per 3CD report, the payment of ` 8,42,630, to R.K. Minerals and Refractory was shown towards purchases. Before the learned Commissioner (Appeals), it was pleaded by the assessee that amount of ` 8,42,630 was paid to R.K. Mineral and Refractory towards expenditure incurred on behalf of the assessee. The learned Commissioner (Appeals), while allowing assessee’s claim has observed that the ledger account of R.K. Mineral and Refractory shows that the payment was made by cheque to transporters towards freight charges attributable to assessee’s proprietorship concern Jyoti Minerals. The learned Commissioner (Appeals) further observed that the balance sheet of the assessee shows the sister concern as the debtor and balance sheet of R.K. Mineral and Refractory shows Jyoti Minerals as creditor. The learned Commissioner (Appeals) has observed that by 9 Shri Rajnikant S. Doshi (HUF) making payment on behalf of the assessee to transporter R.K. Mineral and Refractory has actually reduced its debts owed to the assessee. However, as could be seen, the learned Commissioner (Appeals) has not dealt upon the observation of the Assessing Officer in the assessment order that as per 3CD report, the amount of ` 84,20,636, was shown by the assessee as purchase from sister concern. To a specific query from the bench to the learned Authorised Representative to show any confirmation to prove that R.K. Mineral and Refractory has paid the amount on behalf of the assessee’s proprietorship concern, learned Authorised Representative submitted, the documentary evidence such as confirmations have not been submitted in the paper book. Therefore, in the absence of documentary evidence to conclusively prove that amount of ` 8,42,636 claimed to have been paid to R.K. Mineral and Refractory towards truck freight and not against purchases, we are unable to accept the order of the learned Commissioner (Appeals) on this issue. We, therefore, direct the Assessing Officer to verify the details of payment of ` 8,42,636 to R.K. Mineral and Refractory and if the assessee will be able to prove through proper documentary evidence that the amount was paid on behalf of the assessee by R.K. Mineral and Refractory to transporters and reduction in debt owed to assessee by R.K. Mineral and Refractory, to that extent was reflected in respective books of account, then expenditure claimed can be allowed. Subject to the above verification, the grounds no.1, 2 and 3, raised by the Department are deemed to have been dismissed.
In ground no.4, the Department has challenged the decision of the learned Commissioner (Appeals) in restricting the disallowance to 10% of the expenditure incurred in cash.
10 Shri Rajnikant S. Doshi (HUF) 9. In the course of assessment proceedings, the Assessing Officer found that the assessee has incurred certain expenditure such as cartage charges, conveyance, loading and unloading charges, packing charges, sundry expenses, telephone expenses, vehicle charges, aggregating to ` 68,956, mostly in cash. He, therefore, called upon the assessee to establish the genuineness of the expenditure claimed. Though, the assessee submitted his explanation justifying the claim of expenditure but the Assessing Officer opining that the assessee had not proved that whole of the expenditure claimed is for the purpose of business disallowed 20% out of the total expenditure claimed which amounted to ` 3,44,781. Being aggrieved of such disallowance, assessee challenged the same before the learned Commissioner (Appeals).
The learned Commissioner (Appeals), though agreed that the some amount of disallowance out of expenditure claimed has to be made in the absence of proper documentary evidence, the expenditure claimed is not fully verifiable but at the same time he restricted the disallowance to 10% of the expenditure claimed.
Having heard the parties and perused the material on record and looking at the nature of expenditure claimed, we are of the view that the disallowance of 10% out of the expenditure claimed is just and reasonable, hence, no interference is called for. Ground no.4, is dismissed.
In the result, Revenue’s appeal is partly allowed for statistical purposes. ITA no.4909/Mum./2013 13. Both the parties agreed before us that the tax effect pertaining to the amounts disputed by the Department is less than the monetory
11 Shri Rajnikant S. Doshi (HUF) limit of ` 10 lakh fixed by the CBDT in Circular no.21 of 2015 dated 10th December 2015, in relation to appeal before the Income Tax Appellate Tribunal. Taking into consideration the aforesaid submissions of the learned Departmental Representative and also finding that the CBDT circular under reference applies retrospectively, even to pending appeals, we dismiss the appeal of the Department as not maintainable.
In the result, Department’s appeal stands dismissed.
Cross Objection no.132/Mum./2015
The learned Authorised Representative on the instructions of his client expressed his intention not to press the ground raised in the cross objection. Accordingly, ground raised is dismissed as “not pressed”.
In the result, cross objection by the assessee is dismissed.
To sum up, Revenue’s appeal in ITA no.6643/Mum./2010 is partly allowed for statistical purposes, Revenue’s appeal in ITA no. 4909/Mum./2013, and assessee’s C.O. no.132/Mum./2015 are dismissed.
Order pronounced in the open Court on 29.04.2016