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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: Ms. Annapurna Gupta & Shri Siddhartha Nautiyal
आदेश/ORDER
PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-
This assessee’s appeal for A.Y. 2014-15, arises from the order of Ld. CIT(A), Rajkot-2 dated 28-02-2020, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.
The assessee has raised the following grounds of appeal:-
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That, the Ld. CIT(A) has wrongly confirmed the disallowance of Rs. 19, 96,751 /- being 5% of the total transportation expenses.
That, the Ld. CIT(A) has wrongly confirmed the interest u/s. 234A, 234B, 234C of the IT. Act 1961.
That, the findings of the Ld. CIT(A) are not justified and are bad-in-law.
That, the appellant craves to add, amend, alter or delete any of the above grounds of appeals.
Total tax effect Rs. 44,25,920/-
The brief facts of the case are that the assessee is engaged in the business of transportation. The assessee does not own any trucks used for transportation, but works as a cash commission agent and earns commission income by way of arranging trucks for its clients. The assessee, during the year under consideration, has made arrangement of trucks for primarily two parties- M/s Anjali Roadlines and M/s Ranjit Transport Company. The assessee is arranging trucks on behalf of these parties and these parties are in turn making further arrangements for other parties. During the course of assessment, the AO observed that most of the vouchers produced by the assessee in connection with transportation expenses are not matching with the transportation expenses Ledger. He also observed that most of the vouchers are made in a single sitting, on the same paper, having the same handwriting and by using the same pen i.e. not made on the day to day manner in the routine course of business. In most of the vouchers no PAN is mentioned, the truck number, type of truck, destination and name of party to
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whom goods have to be delivered etc. has not been mentioned, which leads to the conclusion that the vouchers in respect of expenses are fictitious and defective. Accordingly, the AO disallowed 25% of the transportation expenses amounting to � 3,99,35,020/- i.e.made a disallowance of � 99,83,755/- and added the same to the total income of the assessee.
Before Ld. CIT(Appeals), the assessee contended that the assessee is regularly maintaining books of accounts and the books of accounts of the assessee were also duly audited by a qualified chartered accountant and the auditor has not found any defect in the books of accounts. Further, the expenses were incurred for the purpose of running the trucks for its clients and the assessee could not run its business without incurring such expenses. Further, the assessee submitted that it had declared a net profit of 0.94% in the return of income and after making such disallowance by the Ld. Assessing Officer, the net profit of the assessee had inflated to 25.59% which is not justified in the assessee’s line of business. The assessee produced various judicial precedents in support of his contention that in similar line of business 2% of net profit is a reasonable and acceptable profit margin. The Ld. CIT(Appeals) appreciated the assessee’s arguments and restricted the disallowance to 5% of the transportation charges. The Ld. CIT(Appeals) made the following observations while passing the order:
“The appellant has further contended that all these expenses were incurred for the purpose of business only and the appellant has not inflated or claimed incorrect expenses. The expenses claimed by the appellant were incurred to fulfill the need of the business and the need of the business cannot be ignored. The appellant could not run business without incurring such expenses.
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The appellant does not own any trucks during the year under consideration and only works as a cash commission agent and earned the cash commission income by way of arranging trucks for the clients. The appellant has made arrangement of trucks for mainly two parties, M/s. Anjali Road lines and M/s. Ranjit Transport Co. Therefore, the total transportation income is mainly from these two parties." Therefore, the profit margin can be duly reconciled with the third party evidences.
The appellant is only arranging trucks on behalf of these parties and these parties are making further arrangements for other parties and therefore the profit margin in this type of nature of activities is much lower. It is stated that the profit earned by the M/s. Ranjit Transport Co. who is also engaged in similar nature of activities is 0.45% and the profit declared by the appellant is 0.94%.
In various comparable cases, the appellant engaged in the transportation business, the net profit of around 2% is considered as fair and reasonable by the Hon'ble ITAT Rajkot, the details are as under:
Sr. Name of the Assessee ITA No. Net Profit Ratio No.
1 Ayub Bachu & Co. 595/RJT/03 1.75%
2 Geli Darshan Transport Co. 113/RJT/07 2.00%
3 Savani Handling & 78/RJT/07 2.00% Transport Co.
4 Geli Darshan Transport Co. 348/RJT/08 2.00%
Respectfully following the decision of the Hon'ble Courts in the following cases.
CIT V. Swaminarayan Vijay Carry Trade (P.) ltd. (33taxmann.com 403) (2016) (Gujarat High Court) ACIT V. Minpro Industries (Jodhpur Tribunal) (25 taxmann.com 155) (2012) (Jodhpur Tribunal)
CIT V. Gupta K N Construction Co. (59 taxmann.com 293) (2015) (Rajasthan High Court) the lumpsum disallowance made by the assessing officer @25% of expenses claimed the net profit of the appellant increases to 25.59% from 0.94%, which is not justified and the profit is on such higher side. However, the overall profit in
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this kind of business activities is around 2%, hence, the disallowance in on much of higher side. Therefore it is held that disallowance made by the assessing officer @25% of the transport expenses is very much on extremely and exorbitantly higher side. In the interest of justice and considering the nature of business it will be reasonable to disallow the transport expenses @ 5 % of the transport expenses of Rs.3,99,35,020/-. Therefore the disallowance made by the assessing officer on transport expenses is confirmed to that extent. The ground of appeal on this account is accordingly partly allowed.”
The assessee is in appeal before us against the aforesaid order passed by the Ld. CIT(Appeals) which restricted the disallowance of transportation expenses to 5% of such transportation expenses. The counsel for the assessee submitted that during the course of appellate proceedings, the assessee had placed on record various judicial precedents which have held that in such transportation line of business 2% of the net profit margin is reasonable and acceptable margin. The Ld. CIT(Appeals) has also appreciated that 2% rate of net profit margin in the assessee’s line of business is acceptable when he observed that “however, the overall profit in this kind of business activities is around 2%, hence, the disallowance is on much of higher side”. In response, DR relied upon the observations made by Ld. CIT(Appeals) in the appellate order.
We have heard the rival contentions and perused the material on record. We observe that the assessee produced several case laws passed by the jurisdictional ITAT Rajkot before Ld. CIT(Appeals) which have held that in the assessee’s line of transportation business, net profit ratio of 2% is justifiable and reasonable. Even the Ld. CIT(Appeals) in the appellate order has accepted the assessee’s contention that disallowance made by the AO @25% is very much on the excessive side, which has inflated the net profit
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of the assessee from 0.94% to 25.59%. Accordingly, in interest of justice and in the light of various judicial precedents on the subject placed on record by the assessee, we are hereby holding that in the instant set of facts, net profit of 2% is justified and the assessee may be taxed on such net profit.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 23-12-2022
Sd/- Sd/- (ANNAPURNA GUPTA) (SIDHHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 23/12/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order,
Assistant Registrar, Income Tax Appellate Tribunal, Rajkot