2022 (3) TMI 1644 - AT - Income Tax

Disallowance on account of coal handling charges - additional payments which are called as coal handling charges have been paid in the course of carrying on the transportation business and thus incurred wholly and exclusively for the purpose of business - HELD THAT - Both sides agreed that the disallowance is not made on the premise of 40(a)(ia) of the Act the observation made by Ld. AO with respect to non-deduction of tax at source was only a passing-remark. Stepping further the consensus generated from the submission of both sides is that the AO has made disallowance for non-production of adequate evidences by the assessee in support of claim. We observe that neither the assessee could get proper opportunity to furnish sufficient evidences before the Ld. AO nor it was adequately represented before the CIT (A) due to non-participation by the counsel. We also observe that the AR has made a fair willingness to adduce the evidences to the AO so that the Ld. AO shall be taking a proper conclusion. We therefore consider it appropriate to remit the matter back to the Ld. AO who shall give adequate opportunity to the assessee to submit the evidences. Appeal of assessee is allowed for statistical purposes.

Summary

The core legal issues considered by the Tribunal in this appeal are:

1. Whether the delay of 1324 days in filing the appeal before the Tribunal is liable to be condoned given the circumstances explained by the assessee.

2. Whether the expenditure of Rs. 14,97,686/- claimed as "coal handling charges" paid to three persons, who are tipper owners, is allowable as a business expenditure under section 37 of the Income Tax Act, 1961, despite the non-filing of income tax returns by these payees.

3. Whether the disallowance of the said expenditure by the Assessing Officer (AO) and its confirmation by the Commissioner of Income Tax (Appeals) [CIT(A)] on the ground of insufficient evidence and invoking of section 40(a)(ia) is justified.

Issue 1: Condonation of Delay in Filing Appeal

Legal Framework and Precedents: The Tribunal relied on the principle established by the Hon'ble Supreme Court in Collector, Land Acquisition Vs. MST Katiji and Others (1987) 167 ITR 471, which allows condonation of delay if sufficient cause is shown. The Karnataka High Court and ITAT precedents were also cited to support the principle that delay caused by non-communication or non-awareness of disposal can be condoned.

Court's Reasoning: The assessee's counsel had filed the appeal before the CIT(A) but did not appear or inform the assessee about the hearing or disposal. The assessee only became aware of the disposal upon receipt of a penalty notice in 2022, nearly four years later. The appeal to the Tribunal was filed within 60 days of this knowledge. The Tribunal found this to be a sufficient cause for delay and noted absence of mala fide intent.

Application of Law to Facts: The Tribunal applied the principle of natural justice and equity, recognizing that the assessee was not at fault but was kept uninformed due to counsel's failure. The delay was thus excused.

Conclusion: The delay in filing the appeal was condoned, allowing the appeal to be heard on merits.

Issue 2: Allowability of Coal Handling Charges as Business Expenditure

Legal Framework and Precedents: Section 37(1) of the Income Tax Act allows deduction of any expenditure incurred wholly and exclusively for the purpose of business. The burden lies on the assessee to prove genuineness and business purpose of expenditure. Section 40(a)(ia) disallows expenditure if tax is not deducted at source (TDS) on payments to specified persons, but this was not the primary basis of disallowance here.

Court's Reasoning: The assessee claimed Rs. 14,97,686/- as coal handling charges paid to three tipper owners, supported by PAN details, bank statements evidencing payments through account payee cheques, and audited accounts. The AO doubted the genuineness due to non-filing of returns by payees and lack of demonstrable, irrefutable evidence. The AO suspected the payments were disguised additional transportation charges aimed at avoiding TDS compliance. The CIT(A) confirmed the disallowance, focusing on section 40(a)(ia) despite the AO not invoking it formally.

Key Evidence and Findings: The assessee provided payee details, PANs, amounts, and mode of payment. However, the AO found the evidence insufficient to establish the expenditure as genuine and wholly for business. The payees' failure to file returns was noted but not determinative.

Application of Law to Facts: The Tribunal noted that the disallowance was primarily due to lack of adequate evidence rather than TDS non-compliance. The assessee was not given a proper opportunity to produce further evidence before the AO, nor was the appeal properly represented before the CIT(A) due to non-appearance of counsel.

Treatment of Competing Arguments: The assessee argued the expenditure was genuine and incurred wholly for business, backed by books of accounts and bank statements. The AO and CIT(A) doubted the genuineness but did not direct the assessee to produce additional evidence before disallowing the claim. The Revenue conceded that the disallowance was not formally under section 40(a)(ia) but due to evidentiary deficiency.

Conclusion: The Tribunal found merit in the assessee's contention that the claim was not properly adjudicated due to lack of opportunity to produce evidence and non-participation at the first appeal stage. It remanded the matter to the AO for fresh adjudication after affording the assessee adequate opportunity to submit evidence supporting the expenditure.

Issue 3: Validity of Disallowance under Section 40(a)(ia)

Legal Framework: Section 40(a)(ia) disallows expenditure if tax is not deducted at source on payments to specified persons. However, this provision requires formal invocation and specific findings.

Court's Interpretation: Both parties agreed that the AO's disallowance was not formally under section 40(a)(ia). The CIT(A) erroneously relied on this provision in confirming the disallowance. The Tribunal clarified that since the disallowance was made solely on the ground of insufficient evidence and not on TDS non-compliance, the reliance on section 40(a)(ia) was misplaced.

Conclusion: The disallowance cannot be sustained on the basis of section 40(a)(ia) as it was not invoked by the AO and the facts do not support such invocation.

Significant Holdings and Core Principles Established:

"The disallowance is not made on the premise of 40(a)(ia) of the Act, the observation made by Ld. AO with respect to non-deduction of tax at source was only a passing-remark."

"Neither the assessee could get proper opportunity to furnish sufficient evidences before the Ld. AO, nor it was adequately represented before the Ld. CIT (A) due to non-participation by the counsel."

"We consider it appropriate to remit the matter back to the Ld. AO who shall give adequate opportunity to the assessee to submit the evidences."

"The assessee is directed to avail the opportunity given by Ld. AO without fail and place the evidences in support of his claim."

The Tribunal thus preserved the principle that genuine business expenditure must be allowed if adequately proved and that procedural fairness requires opportunity to produce evidence before disallowance. It also emphasized that disallowance under section 40(a)(ia) requires formal invocation and cannot be inferred from passing remarks.

Final Determinations:

- The delay in filing the appeal before the Tribunal was condoned due to sufficient cause and absence of mala fide.

- The disallowance of Rs. 14,97,686/- on account of coal handling charges was set aside and the matter remanded to the AO for fresh adjudication after providing opportunity to produce evidence.

- The reliance on section 40(a)(ia) by CIT(A) was found to be erroneous as the AO did not invoke it and the disallowance was based on evidentiary insufficiency.

- The appeal was allowed for statistical purposes with directions to the AO and the assessee to comply with the opportunity for fresh examination.