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Income Tax Appellate Tribunal, VISAKHAPATNAM “SMC” BENCH, VISAKHAPATNAM
Before: SHRI DUVVURU RL REDDY, HON’BLE
अपीलधथी की ओर से/ Appellant by : Shri Vamsi Rajesh, AR प्रत्यधथी की ओर से / Respondent by : Shri Madhukar Aves, DR सुनवधई की तधरीख / Date of Hearing 20.09.2023 : घोर्णध की तधरीख/Date of Pronouncement : 18.10.2023 आदेश /O R D E R Per Shri Duvvuru RL Reddy, Judicial Member :
This appeal is filed by the assessee against the order of Commissioner of Income Tax (Appeals) [CIT(A)], National Faceless Appeal Centre (NFAC), Delhi vide DIN & Order No.ITBA/NFAC/S/250/2022-23/1048396210(1) dated 02.01.2023, arising out of assessment order passed u/s 143(3) of the Income Tax Act, CMR Transport Contractors Company Pvt. Ltd., Vijayawada 1961 (in short ‘Act’) dated 26.12.2016 for the Assessment Year (A.Y.) 2014-15.
2. Brief facts of the case are that the assessee, engaged in the business of transport of bitumen filed it’s return of income, admitting total income of Rs.11,84,960/- on 15.10.2014 and declared the total turnover of Rs.4,33,12,838/-. During the assessment proceedings, the Assessing Officer(AO) observed that the company owned 10 vehicles, which were being used by the company for the purpose of business. The company is headed by 3 Directors viz., Shri Ch.Mallikarjunana Rao, Ms.C.V.N.Rajeswari and Shri Y.Subba Rao. The Directors of the company owned some vehicles registered in their names, which were taken on hire by the assessee company and utilized for the purpose of business of the assessee. The assessee company had also taken vehicles on hire from Smt.Y.Suneeta, wife of one of the directors Shri Y.Subba Rao. The assessee company had also taken the vehicles on hire from outsiders. Majority of the transport activity was carried by the vehicles hired from the Directors and their relatives and the major part of the expenditure for the financial year 2013-14 was on account of vehicles hired from the Directors and their relatives. The total hire charges debited by the company was Rs.2,73,60,846/- and the company had paid the hire CMR Transport Contractors Company Pvt. Ltd., Vijayawada charges to directors and relatives a sum of Rs.1,97,53,065/- as per the details given below: Hire charges debited to Number of vehicles taken profit and loss account of Name of Director/relative on hire by the company the assessee company due of director from them for atleast a to the vehicles hired from part of the year them Ch.Mallikarjuna Rao 8 Rs.35,44,037 /- C.V.N.Rajeswari 9 Rs.61,48,454/- Y.SubbaRao 6 Rs.23,11,976/- Y.Suneeta 8 Rs.77,48,598/- Total 31 Rs.1,97,53,065/- The Assessing Officer(AO) further observed that the assessee company had paid 82.67% of the transport bills received as hire charges to the directors and relatives, whereas, the expenditure incurred while hiring vehicles from outsiders was only 76.35%, thereby the company had paid excess charges of 6.32% compared to outsiders. Out of the total transport bills received in respect of vehicles hired from directors and relatives amounting to Rs.2,38,92,373/-, the assessee company had paid the sum of Rs.1,97,53,065/- which is 82.67% of the bills received by the company. Similarly in the case of outsiders, the company had received bills of Rs.99,64,256/- and the hire charges were paid to the extent of Rs.76,07,781/- which works out to 76.35%. From the above information, the AO observed that the assessee was making excess payments to the directors and their relatives than the outsiders. Hence, the AO was of the CMR Transport Contractors Company Pvt. Ltd., Vijayawada view that the payments made to directors and their relatives attracts disallowance u/s 40A(2) of the Act, since the payment made to Directors and their relatives is excessive and unreasonable compared to the fair market value of the hire charges. The AO further observed that the directors own less than 10 vehicles each and the income was admitted u/s 44AE of the Act on presumptive basis, inspite of the fact that the receipts exceeding the limit of 44AB for compulsory audit in each case of Directors and their relatives. The AO called for the explanation of the assessee as to why the excess payment made to the directors and their relatives over and above the payments made to outsiders should not be disallowed and added back to the income u/s 40A(2) of I.T.Act. The Ld.AR submitted before the AO that the assessee has to make the immediate payments to the outsiders and has to give the advances before commencement of journey, whereas in the case of hiring of vehicles from the directors and their relatives, the vehicles are at the complete disposal of the assessee and the assessee company is at liberty to make the payment before 31st March of the concerned assessment year as per the convenience, thereby saving the interest cost and having the benefit of the vehicles at its disposal. Therefore, the Ld.AR argued before the AO that as per the Company Board of Directors Resolution, the company has CMR Transport Contractors Company Pvt. Ltd., Vijayawada agreed to make the payment of 90% of the bills received as hire charges to the directors and their relatives. Not being convinced with the explanation offered by the assessee, the AO held that the payment made to the directors and their relatives is in excess of 6.32% more than the hire charges paid to the outsiders, hence disallowed 5% of the hire payments made to the directors and their relatives i.e. 5% of Rs.1,97,53,065/- which works out to Rs.9,87,653/- u/s 40A(2) of the I.T.Act and accordingly disallowed a sum of Rs.9,87,653/- on total payments of Rs.1,97,53,065/-.
Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A) and the Ld.CIT(A) dismissed the appeal of the assessee relying on the decision of the coordinate bench of the Tribunal in assessee’s own case for the A.Y.2012-13 in I.T.A.No.388/Viz/2016 dated 25.04.2018.
Aggrieved by the order of the Ld.CIT(A), the assessee preferred an appeal before the Tribunal by raising the following grounds of appeal :
1. The order of the learned CIT(A) is contrary to law weight of evidence and probabilities of the case.
The learned CIT(A) grossly erred in comparing freight charges paid to the directors vehicles by the assessee – company with freight charges paid to the other third party vehicles to apply provisions of CMR Transport Contractors Company Pvt. Ltd., Vijayawada section 40A(2) of the income tax act, 1961, as the third party cases are incomparable with directors cases, since a. Directors vehicles were admittedly under exclusive hire to the assessee with its attendant substantial business advantages to the assessee’s business. b. Directors gave substantial credit on payment of hire charges to the assessee company without charging any interest unlike third party cases where the asseessee has to pay substantial advance at the time of loading itself and has to clear the bill at the end of the month invariably, duly proved with evidence. c. The hire charges paid to director vehicles and third parties were compared in the following table: S.no Material terms and conditions regarding hiring of specified persons vehicles material terms an.
3. The CIT(A) simply depended upon the decision of ITAT in 388/viz/2016 rendered in the case of the assessee on 25-04-2018 for assessment year 2012-13 where in the Hon’ble tribunal held that the addition made by the AO for the assessment year 2012-13 U/s 40A (2)(b) is correct depending upon two issues. a. The assessee has not entered into a formal agreement for hire of vehicles belonging to the directors and their relative. b. No tendering process is followed to determine whether the price paid by the company to its directors and relative as compared to third parties for hiring the vehicles and hence the apparently excess payment of hire charges ( With out considering the advantages like interest on late payments, exclusive hiring, timely service to the clients of the assessee, etc..,) to third parties. Thus, they are of the opinion that without tendering process the excess payment cannot be established. The anomalies of the above views are that: a. The considerations for disallowance U/s 4. The learned CIT(A) grossly erred in not considering the evidence placed before him except replying upon the tribunals CMR Transport Contractors Company Pvt. Ltd., Vijayawada decision. Even when the observation of the Ld. AO was challenged regarding the statement at para 3.4 of the assessment order that: “……… The directors and relatives do not incur any operational and administrative expenditure for the running of these vehicles. All the operational and administrative expenses for these vehicles are debited to the profit and loss account of the company only the depreciation nd the finance costs pertaining to the vehicles hired books of the company…….”. By the assessee specifically by filing evidences which was quoted as follow in his order at page. 7&8 as follows:”…… While in assessment proceeding the Ld. AO has not expressed any doubt about the maintenance expenses of the DRD vehicles being debit in the books of accounts of the company as expend.
The CIT(A) simply relied upon the judgement of the ITAT in earlier assessment year which in fact was contested before the Hon’ble High Court by the way of appeal which is numbered as ITTA SR 52614/2016 which is pending before the Hon’ble High Court.
Any other ground(s) that may be raised with the leave of the Honourable Tribunal. All the grounds of appeal are related to the disallowance of expenditure u/s 40A(2)of the Act on account of vehicles hired from the directors and their relatives. Appearing for the assessee, the Ld.AR argued that the Ld.CIT(A) erred in comparing freight charges paid to the directors vehicles with freight charges paid to the other third party vehicles, ignoring the business advantages accrued to the assessee, such as credit given to the assessee and exclusivity of hiring of the vehicles. The Ld.CIT(A) erred in invoking the provisions of section 40A(2) as the CMR Transport Contractors Company Pvt. Ltd., Vijayawada assessee has taken informed decision to hire tankers of the directors and their relatives based on the fair market value of similar services, facilities offered by third parties and decision is taken on commercial considerations. The Ld.AR further argued that the CIT(A) did not consider the material evidence available in the form of price fixed by HPCL which is a public sector company following the tender quotations. The Ld.AR argued that the Ld.CIT(A) placed reliance on third party case which is incorrect and without furnishing the details. Since the assessee is engaged in the transport of bitumen, the other transport vehicles are incomparable. The Ld.AR further submitted that the company has earned more than 60% of the turnover by hiring vehicles from the directors and their relatives because of exclusivity of vehicles at the disposal of the company. In bitumen transport the assessee has to incur hire charges on Round trip per kilo meter(RTKM) basis and the company has gained substantial business and monetary advantage on exclusive hiring of vehicles of the directors. The Ld.AR further explained that in case of third party vehicles, the vehicles would be used for carrying others good in the return trip, whereas in the case of directors’ vehicles, the vehicles are exclusively used for the purpose of assessee’s business. The Ld. AR invited my attention to the resolution of the Board of Directors for hiring CMR Transport Contractors Company Pvt. Ltd., Vijayawada vehicles and also the quotations received from outsiders and argued that the terms and conditions of hiring the vehicles from the Directors and their relatives was more advantageous even though the company has paid 90% of hire charges to the vehicles hired from the Directors. The Ld.AR filed a paper book and submitted that the assessee preferred an appeal u/s 260A before the Hon’ble High Court of Andhra Pradesh in ITTA 486/2018 which is pending before the Hon’ble High Court for adjudication. The assessee has also filed an application u/s 158A in Form No.8 before the Tribunal and pleaded to pass such orders after considering the application.
5. Per contra, the Ld.DR argued that on similar set of facts, appeal of the assessee was dismissed by the Tribunal during the A.Y.2012-13, hence, the Ld.CIT(A) has rightly relied on the order of the Tribunal and dismissed the appeal of the assessee. He, therefore, pleaded to uphold the order passed by the Ld.CIT(A) and dismiss the appeal of the assessee.
6. I have heard both the parties and perused the material available on record. In the instant case, as brought out in the foregoing paragraphs, the assessee is engaged in the business of transportation of bitumen, using own vehicles, hired from directors and their relatives and also from outsiders. Out of the total transport bills received in respect of vehicles CMR Transport Contractors Company Pvt. Ltd., Vijayawada hired from directors and relatives amounting to Rs.2,38,92,373/-, the assessee company has paid the sum of Rs.1,97,53,065/- which is 82.67% of the bills received by the company. Similarly in the case of outsiders, the company has received bills of Rs.99,64,256/- and the hire charges were paid to the extent of Rs.76,07,781/- which works out to 76.35%. The AO held that the payment made to the directors and their relatives is in excess of 6.32% more than the hire charges paid to the outsiders, hence disallowed 5% of the hire payments made to the directors and their relatives i.e. 5% of Rs.1,97,53,065/- which works out to Rs.9,87,653/- u/s 40A(2) of the I.T.Act and accordingly disallowed a sum of Rs.9,87,653/- on total payments of Rs.1,97,53,065/-. The Ld.CIT(A), relying on the decision of the coordinate bench of the Tribunal in assessee’s own case, on similar set of facts for the A.Y.2012-13 dismissed the appeal of the assessee. For the sake of convenience, relevant part of the order of the coordinate bench of the Tribunal is extracted as under : “6.1. The argument of the assessee and the reasons assigned by the assessee with regard to the hiring of the vehicles from the directors for payment at higher rate is not based on any documentary evidence. For a query from the bench, the Ld.AR submitted that the assessee company has not followed any tendering process. As observed from the quotations in the paper book it had obtained some quotations for the various routes from the known transport operators without following any tendering process. The company has not invited any quotations following the due process with the specific terms and conditions required by the company. After obtaining the quotations from some suppliers without following any procedure the company has passed Board resolution highlighting the disadvantages and CMR Transport Contractors Company Pvt. Ltd., Vijayawada expectations from the vehicles hired from the directors, but no agreement was signed by the company with directors as per the specific terms and conditions mentioned therein. The Board of Directors has passed the resolution holding that hiring of the vehicles from the directors is in the interest of the business and commercial expediency. However, the company has not disclosed its terms and conditions and invited the global tenders. Therefore, the quotations obtained by the company and passing the Board Resolution in favour of hiring the vehicles from the Directors appears to be a self serving document to suit the needs of the company. For a query from the bench, the Ld.AR submitted that the company has not entered into any written agreement either with the Directors and relatives or with the outsiders. Therefore, in the absence of written agreement from the outsiders as well as the directors and their relatives, the argument of the assessee with regard to the method of payment of hire charges to the outsiders and the directors and exclusivity of vehicles cannot be given much credence. Even the assessee has not established this fact with the Financial statements of the company. Bitumen is a component which required to be transported in specially designed vehicles for the purpose. Either the vehicles hired from directors or relatives or from outsiders require to be fit for transportation and payment required to be made on RTKM basis. Though Ld.AR argued that the vehicles of the directors and their relatives do not carry outsiders’ goods in the return trip it is equally applicable to the outsiders vehicles since after unloading the bitumen, the vehicle cannot be used for any other purpose unless it is properly cleaned which a long drawn process. In general, the freight rate is fixed on the basis of per kilometer per metric ton. In the case of directors’ vehicles, the same is fixed at 90% of the transport receipts which is not a common feature in the transportation business. The Ld.AR did not bring any evidence to show that the payment of 90% of transportation receipts is common for fixing the freight rate. Apart from the above, in the case of directors, the income is admitted on presumptive basis as per Section 44AE and the excess payment made to directors did not suffer tax either in the hands of the Director or in the hands of the company. The Ld.AR’s argument of complete disposal of vehicles at the company and payment of transportation charges at the end of the year cannot be accepted unless the tenders are invited as per the specific requirements and following the due procedure. Apart from the above there are no written agreements also from the Directors specifying the terms and conditions mentioned in the Board of Directors resolution. In the absence of the written agreement, the contention of the Ld.AR are extraneous consideration which cannot relied upon. Therefore, we hold that the payment made to directors is in excess of fair market rate and attracts provisions of section 40A(2) of I.T.Act. In the instant case, the payment made to directors is in excess of 15.14% compared to outsiders and the disallowance 12% of hire charges made by the AO is reasonable and we do not find any reason to interfere with the order of the Ld.CIT(A)and the same is upheld.”
CMR Transport Contractors Company Pvt. Ltd., Vijayawada Since the assessee followed the similar practices in running his business for the A.Y.2014-15 also, respectfully following the decision of the coordinate bench of the Tribunal, I am inclined to dismiss the appeal filed by the assessee. However, the Ld.Counsel for the assessee has brought to my notice that the assessee filed a petition u/s 158 of the Act and submitted that the assessee preferred an appeal u/s 260A before the Hon’ble High Court of Andhra Pradesh against the order passed by the Tribunal in dated 25.04.2018 for the A.Y.2012-13 and presented an application u/s 158A in Form No.8 before the Tribunal. He requested the Bench to give a direction that if the assessee succeeds for the A.Y.2012-13, then the same ratio will be applicable for this A.Y.2014-15 also. In the result, appeal of the assessee is dismissed,
Order pronounced in the open court on 18th October, 2023 (दुव्वूरु आर.एल रेड्डी) (DUVVURU RL REDDY) न्याधयक सदस्य/JUDICIAL MEMBER Dated : 18.10.2023 L.Rama, SPS