TMI Blog2013 (9) TMI 572X X X X Extracts X X X X X X X X Extracts X X X X ..... ecided partly in favor of assessee. Decisions in the case of Sassoon J. David & Co. Ltd. Vs. CIT [1979 (5) TMI 3 - SUPREME Court ] and CIT v. Goodlass Nerolac Paints Ltd. [1990 (8) TMI 72 - BOMBAY High Court] followed. Disallowance of Commission – Held that:- The commission paid for earlier assessment years and the commission paid by similar companies in similar circumstances and reasonableness of the payment can definitely quantify the excessive payment of commission at 15% of the total commission paid by the assessee for these assessments years under consideration before us - This disallowance at 15% of total commission paid by the assessee would meet the ends of justice - the assessing officer to disallow only 15% commission paid the assessee as excessive in these assessment years as inadmissible - the disallowance at 15% on cash payment of the commission and the payments by crossed cheque/DD shall not be considered for disallowance. Disallowance of Fixed En-Route Expenses - Held that:- Toll tax payment and payments to RTAs cannot be doubted - The assessee had furnished break up of these expenses - The other expenses like payments to local vehicle owners associations/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance of enroute expenses (Rs.) Assessed income (Rs.) 2008-09 39,47,83,300 23,04,086 12,77,50,333 86,08,61,100 2009-10 41,82,67,330 5,48,520 5,66,37,750 88,61,11,530 3. On appeal, the CIT(A) given relief as follows: Relief given by the CIT(A) (in Rs.) A.Y. Freight Commission Enrouteexpenses 2008-09 31,58,26,649 19,58,473 10,85,87,783 2009-10 33,46,13,866 4,66,242 2,83,18,875 Addition sustained by the CIT(A) (in Rs.) A.Y. Freight Commission Enroute expenses 2008-09 7,89,56,651 3,45,613 1,91,62,550 2009-10 8,36,53,464 82,278 2,83,18,875 4. The assessee is in appeal before us in respect of sustaining the addition in respect of the above expenses for the A.Ys. 2008-09 and 2009-10. The Revenue is in appeal before us for deleting the additions by the CIT(A) for the same assessment years. 5. On the disallowance of freight charges for AY 2008-09, the learned AR submitted that the AO made the disallowance on the reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cks taken on hire and confirmations directly to the assessing officer also. The assessee took copies of the correspondence from the owners of the trucks, and filed these copies before the CIT(A) as additional evidence. Additional evidence filed before the CIT(A) are as under: Particulars 85 cases 100 cases Additional evidence filed along with petition dated 6.7.2011 under Rule 46A. 56 69 Additional evidence filed along with petition dated 1.8.2011 4 2 Additional evidence filed along with petition dated 25.8.2011 - 4 Total 60 75 Confirmations directly received by AO before completion of assessment 13 - 73 75 5.4 The AR submitted that in all 148 confirmations were received of lorry hire payments out of 185 cases selected by the AO. The reasons for filling additional evidence have been explained before the CIT(A) and the reasons given in the petition filed is extracted in para 4.1 of the CIT(A) order. The same are reiterated. The additional evidence was forwarded to the AO by the CIT(A). The AO submitted his remand report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to others. The CIT(A) observed that there is no truth in the allegation against the assessee that the net income is low, or that the operating costs are high 5.8 The AR further submitted that the CIT(A) upheld the disallowances at 1% in the place of 5% and the reasons given by the CIT(A) are as under: a) The total number of items picked up for verification are 185 100+85) b) Out of the above the assessee could obtain confirmations in respect of 148 items c) In other words the assessee obtained confirmations for 80% of 185 items picked for verification for (80% of 185 = 148). d) Since the AO disallowed 5%, according to the CIT(A) 80% of 5% (=4%) should be treated as proved. Since the assessee could not obtain confirmations for the remaining 37 items, the CIT(A) upheld 1% disallowance. 5.9 The AR submitted that the hire of trucks is transparent and are verifiable. The assessee's records contain all details of trucks hired trips made and payees are all identifiable. Full details are available as stated at point 13 at page 5 of the appellate order. The assessee could not obtain 100% confirmations of all lorry hire payments from the owners for the remaining 37 cases because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hers are not verified. On further appeal, both by the assessee as well as the Department, the Tribunal confirmed the disallowances sustained by the CIT(A). On the said analogy the amount of disallowance if any can only be restricted to 37 cases picked up and verified and not to the entire amount. The amount covered by the 37 cases is Rs. 6,93,759. The break-up of the total freight charges during the financial year ended 31st March, 2008 is given as follows: Division Amount (Rs.) Transport Division 548,10,11,052 XPS Division 198,95,82,073 Supply Chain Solutions Division 42,39,84,685 Seaways Division - Shipment Expenses 10,87,386 Total 789,56,65,196 5.11 The learned AR submitted that most of the payment of freight charges at Transport division are made in cash, as the payees in the Transport division are vehicles generally hired from the market and are not regular vendors. However at the XPS and Supply Chains Solutions divisions, most payments for freight charges are paid by cheques, as the payees are regular vendors and carry the consignments of the assessee on regular basis. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO made the disallowance on the following reasons: a) That the net income declared by the appellant as a percentage of gross receipts is low b) That enquiries were made by addressing 35 notices to the vehicle owners u/s 133 (6) and that above 50% of letters sent has been returned unserved. c) Therefore the appellant did not discharge the burden of proof cast on it to prove the expenses. d) That the similar addition was made in the last year's assessment for A.Y. 2008-09 and the issue was pending in appeal before the Commissioner (Appeals) 6.1 The AR submitted that the entire Freight expenses were paid to the Owners/ drivers who's trucks were taken on hire for transporting of goods. The payments were made spread over 1289 branches all over the country with 147 accounting centres. The payments were made for hiring of trucks for 5,60,309 contracts on a trip to trip basis. The net income to gross receipts of the assessee is more than what other transporters have declared. The operating results of the company are much better and comparison to other transporters in the Transport business. That the enquiry in respect of 35 cases which were done gave no reasonable time to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e details of 19 cases only on 20-12-2011 for further information. Immediately, the same was verified and copies of RC books for 19 cases were submitted on 26-12-2011. e) As regards confirmation, letters were addressed to the owners requesting for confirmation which were not received before the completion of assessment. f) The owners of the Lorries stay out station and are spread all over the country and it is not easy to contact them. g) This enquiry was made in the year December, 2011 for the financial year 2008-09 hence any response from the lorry owners is bound to take time. h) There is always a possibility of change of address, sale of truck or connected reasons which could delay any reply to the AO's enquiry. 6.4 The AR submitted that in the background of the above facts petition was filed to admit the confirmations were subsequently received as additional evidence. The CIT(A) admitted the additional evidence. In admitting the additional evidence the CIT(A) came to the conclusion that: a) adequate time was not given by the AO to obtain confirmations; b) the assessee filed confirmations and proof in respect of all 35 cases; c) the disallowance was made on the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eight charges is low in the case of the assessee, in comparison to others. The CIT(A), therefore, found that there is no truth in the allegation against the assessee that the net income is low or that the operating costs are high. 6.7 The AR further submitted that the CIT(A) upheld the disallowance at 1% in the place of 5%. The learned CIT(A) referred to the assessment year 2008-09 and made similar calculations and held that since in 8 cases confirmations were not available, the freight expenses should be disallowed at 1% in the place of 5% as stated by the AO. The reasons for the assessee's inability to produce confirmations in 8 cases have already been explained. In fact, copies of RC books for the lorries taken on hire have been produced and all relevant details are available showing that the trucks were taken on hire, they were put to use and hire charges were paid to them. Hence, the omission to produce confirmation from 8 persons could not have been taken as basis for disallowing 1%. The AR contended that the hire of trucks is transparent and is verifiable. The assessee's record contain all details of trucks hired, trips made and payees are all identifiable. In the facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9-10 i.e., 20% (37 185 for A.Y. 2008-09 and 8 35 for A.Y. 2009-10). As the AO made disallowance at 5% of freight charges, the CIT(A) has reduced it to 20% of 5% i.e., 1% which is in proportion to non- confirmation letters to total confirmation letters called for. Being so, the CIT(A) considered the disallowance at 20% of 5% = 1%. Admittedly, the Department not carried on detailed enquiry. There was enquiry on random basis. Considering the result of random enquiry, the CIT(A) sustained disallowance of 20% of the disallowance made by the AO. 6.12 In our opinion, this kind of approach to disallow an expenditure cannot be sustained in its entirety. The Department is not disputing incurring of expenditure and, on the other hand, only disputing the quantum of expenditure. The expenditure is duly supported by vouchers with full details of expenses and details of trucks and details of goods transported and other details like date of hiring, no. of days hired, rate of hiring, date of payment, number of trucks and the assessee furnished entire details of addresses. When these details are available with the department, it is left to the Department to examine the same. It is needless to men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be incurred in the course of his business or trade and such expenditure may be incurred voluntarily and without any necessity and such expenditure is incurred, even voluntarily for promoting the business interest and to earn profit, the assessee is entitled to claim deduction under sub section (1) of 37, though there is no compelling necessity to incur such expenditure. It is also observed that payment itself not established and, secondly it is not the case of the assessee before the assessing authority that the particulars of the persons to whom the amounts were paid could be furnished without detriment to the business of the assessee. According to the DR the payment is based on "insufficient evidence", and it is based on irrelevant considerations. Allowance or disallowance of a claim under section 37(1) should depend upon existence or otherwise of the four conditions as follows: 1. The expenditure in question should not be of the nature described under the specific provisions of ss. 30 to 36. 2. The expenditure should not be of nature of capital expenditure 3. It should not be a personal expenditure 4. The expenditure have been laid out for expended wholly and exclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to obtain confirmation letters on the following reasons: (a) The time lag between the date of hiring and the date of enquiry, (b) They could have changed their addresses or sold the truck, or stopped their business (c) The owners of the lorries not having any interest in the matter to reply as it does not relate to them (d) Most of the lorry owners/drivers are either uneducated or semi educated and do not understand the notices (e) The lorry owners having furnished the details earlier at the time of engaging the vehicle will not have any interest thereafter. (f) The assessee would have in many cases stopped engaging the same lorry and (g) lastly they may not be interested in replying to the income-tax department for their own personal reasons. 6.21 Being so, non-confirmation by them cannot be a reason to find fault with the assessee and to disallow the expenditure incurred by the assessee. 6.22 In CIT v. Sigma Paints Ltd. (1991) 188 ITR 06 (Bom), their Lordships of the Hon'ble Bombay High Court held and observed at pages 7 8 of the Reports as under: " ..... Shri Patel, learned counsel for the respondent- assessee, has invited our attention to the fact that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts, had been produced by the assessee-company before the Assessing Officer. The payment vouchers contained full details of the nature of transaction. In other words, the details of all transactions in respect of which the freight payment had been paid by the assessee-company are duly recorded in the payment vouchers and other evidence. 6.24 The AR submitted that vouchers clearly mentioned the details of trips. In view of the above facts, we are unable to accept the contention of the learned Departmental Representative that the genuineness of the payment was not established by the assessee. In our opinion, genuineness of the payments was established by the assessee. 6.25 We may note at the cost of repetition that the decision of the Hon'ble Bombay High Court in CIT vs. Sigma Paints Ltd. (1991) 188 ITR 6 (Born), clearly supports the case of the Assessee Company. In that case there was payment of secret commission. The assessee company, in that case, had produced various details and records maintained by it relating to commission payments. The details of sales transactions entered into with various mill companies, in respect of which secret commission had been paid, were produced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of the A.P. High Court, and directed disallowance of commission at 15% of cash payments. Being so, out of the disallowance of Rs. 23,04,086 made by the AO the CIT(A) confirmed the disallowance at 15% amounting to Rs. 3,45,613 and ordered relief for the remaining sum of Rs. 19,58,473. The AR contended that the entire amount should have been allowed as a deduction and the disallowance should not have been made of 15% of the cash payments of commission. 8. Regarding the disallowance of commission for A.Y. 2009-10, the AR submitted that the total amount debited towards commission is Rs. 82,15,297. Out of the above amount the amount paid by crossed account payee cheques is Rs. 76,66,777. Full particulars of the cheque payments were furnished to the AO. These cheque payments were verified by the AO. The remaining sum of Rs. 5,48,520/- was paid in cash and these are all small payments ranging between Rs. 1000 to Rs. 2000. The AO disallowed the entire cash payments. 8.1 The AR submitted that the CIT(A) relied upon the orders of the Tribunal in ITA No. 1214/Hyd/04 batch, dt. 25/1/2012 for A.Ys. 2000-01 to 2005-06 which also considered the judgement of the A.P. High Court, and di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 91,62,550. For the next assessment year 2009-10, the assessing officer disallowed only 30% of this expenditure while for the year under appeal 100% was disallowed. Perhaps in the next year it must have occurred to the AO that disallowance at 100% would be unjust and unreasonable. 9.1 The AR submitted that the basis of the disallowance made is that no details are available is factually incorrect. It is also incorrect to state that they are without any supporting evidence. It is a fact that these expenses were incurred in cash en-route as no one can make payments in cheques en-route while in transit. No one will accept such cheque payment when the payer is unknown and travelling en-route. It is obvious that the AO has not seen on the reverse of the trip contract voucher which gives the brake up of the en-route expenses. Toll Tax payments are also included in this expenditure and not separately claimed as assumed by the AO. The order of the CIT(A) deals with this issue at pages 32 to 39 of the order. The following expenses falling under fixed en-route are fully supported by external vouchers. Head of expenditure Amount (Rs.) Toll tax payments 4,06,58, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the disallowance is not warranted at all. In fact the CIT(A) should have deleted the entire addition instead of confirming 15% disallowance, as estimated disallowance for a portion of expenses which could be unvouched. In any event the disallowance at 15% is excessive and uncalled for. The inconsistency of disallowance made under this head can be gauged from the following: a) Disallowance for A.Y. 2008-09 100% of expenditure b) Disallowance for A.Y. 2009-10 30% of expenditure c) Disallowance as per order of CIT(A) 15% of expenditure 10.2 The AR submitted that the expenditure was incurred for the purpose of business and the break-up of the expenditure was shown on the reverse side of Trip Contract Vouchers. The disallowance was made because of an erroneous impression that the details of expenditure incurred are not available. Since the basic exemption for making a disallowance is erroneous and considering the nature of expenditure that entire expenditure deserves to be deleted. 11. For the above propositions, the learned AR relied on the judgement of the Gujarat High Court in the case of CIT vs. Swaminarayan Vijay Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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