2016 (3) TMI 1489 - AT - Income Tax

Addition u/s 40(a)(ia) - assessee had paid hire charges - payments made without deduction of TDS - AO could not examine as to whether the payments as claimed to be paid less than Rs.20, 000/- to each truck was correct or not to verify the applicability of the provisions of section 40(a)(ia) - HELD THAT - As undisputed claim of the assessee that all the amounts involved on this issue were paid during the year under consideration and no amount was unpaid and remaining payable at the end of the year. In such a situation assessee relied upon the decision of Vector Shipping 2013 (7) TMI 622 - ALLAHABAD HIGH COURT wherein it was held that provisions of section 40(a)(ia) can be invoked only in the case of payments which were unpaid or outstanding at the end of the year and not to those which were paid during the year. Though there are certain other Hon ble High Court s decisions which are against the assessee we have been informed that there is no decision of Hon ble Jurisdictional High Court on this proposition. The Hon ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. 1973 (1) TMI 1 - SUPREME COURT has held that when there are two views are possible the view favouring the assessee should be applied. In these circumstances in our considered opinion the decision rendered in the case of Vector Shipping (supra) support the case of the assessee since it is not the case of the revenue that any amount involving in this issue was outstanding at the close of the year. In our opinion the assessee deserves to succeed on this issue itself. In these circumstances we set aside the orders of the authorities below and decide the issue in favour of the assessee. Bogus expenses - purchase bills could not be produced - disallowance being repair and maintenance expenses on own trucks and for hired trucks - HELD THAT - There is no provision to suggest that if bills and vouchers are not produced expenses have to be disallowed. It may be mentioned that a reasonable amount of expense has to be allowed even if provision of section 145(3) are applied to make a best of judgment assessment to assess a reasonable profit. It was submitted that in transportation business normally profit of 2-3% is reasonable. Assessee has disclosed profit at 5% as such even if an estimate is to be made no addition is called for CIT(A) observed in his order that the Assessing Officer has disallowed various amounts on the ground that bills and vouchers were not produced. Ld A.R. has not denied this fact. Therefore the disallowance under the various heads respectively as noted above were justified and confirmed by ld CIT(A). We hold that the assessee has already disclosed 5% of profit. However for want of submission of all bills and vouchers CIT(A) restricted the disallowance. Disallowance u/s 40(a)(ia) on account of repairs and maintenance on own trucks and hired trucks - We find that the assessee could not produce necessary evidences as claimed that 80-90% are on account of spares parts on which TDS was deductible. CIT(A) did not agree with this contention of the assessee as the payment was made in cash which is not amenable to verification. Before us it was argued that the repairs are made in roadside garage and the cash payment was done. Here is the case that the AO has not invoked the provisions of section 145(3). Therefore we uphold the findings of CIT(A) and reject this ground of the assessee. Higher rate of depreciation @ 30% in respect of trucks trailers and excavators - HELD THAT - We find that the ITAT Kolakata in the case of M/s.Bothra Shipping Services 2015 (1) TMI 742 - ITAT KOLKATA considered the issue and after discussing various case laws in the said order held that payloaders JCBs and 400V loaders can be classified as plant and machinery for the purpose of depreciation and not as motor bus motor lorry or any transport/goods vehicle JCB is entitled to higher rate of depreciation claimed by the assessee. Hence we uphold the findings of the ld CIT(A) in allowing higher rate of depreciation. This ground is rejected. Addition in respect of diesel expenses - CIT(A) deleted addition - HELD THAT - CIT(A) in the impugned order has discussed the issue at length and after considering the remand report furnished by the Assessing Officer in this regard held that the assessee has made payments to two partied for business purposes towards purchase of diesel and truck tyres and therefore they are allowable as business expenditure. D.R. could not controvert the findings of ld CIT(A). Therefore we uphold the same. Hence this ground of revenue is dismissed.

Summary

The core legal questions considered in this appeal pertain primarily to the applicability of section 40(a)(ia) of the Income Tax Act, 1961, regarding disallowance of expenses for failure to deduct tax at source (TDS), the legitimacy of disallowances made due to non-production of purchase bills and vouchers, and the entitlement to higher depreciation rates on certain assets. Additionally, the scope of disallowance concerning diesel expenses and the correctness of interest calculation on assessed income were also examined.

The principal issue revolves around whether the disallowance of hire charges amounting to Rs.4,73,89,710/- under section 40(a)(ia) was justified. The Assessing Officer (AO) disallowed this amount on the ground that tax was not deducted at source on payments made to transporters for hire charges. The AO observed that the assessee failed to furnish detailed information about the payments, including vehicle details, party names, and PANs, which impeded verification of TDS applicability. The AO also noted discrepancies such as inclusion of vehicles like scooters and motor cycles, which are not typically used for hire in the transport business, thereby casting doubt on the genuineness of the payments. The assessee contended that payments per trip were below Rs.20,000/-, hence not liable for TDS deduction under section 194C, and that no formal contract existed with truck owners, making the provisions inapplicable.

The first appellate authority (CIT(A)) confirmed the disallowance, rejecting the assessee's contention that the payments were below the threshold limit and that no contract existed. The CIT(A) relied on the AO's remand report and noted the absence of required details and discrepancies in vehicle numbers. The CIT(A) further observed that the Supreme Court's dismissal of the Special Leave Petition (SLP) in the Vector Shipping case did not constitute binding precedent, as the Tribunal had held that the Allahabad High Court's decision in that case was obiter dicta and not ratio decidendi.

On appeal before the Tribunal, the assessee relied heavily on the Vector Shipping decision by the Allahabad High Court, which held that section 40(a)(ia) applies only to payments outstanding or unpaid at the end of the financial year and not to payments made during the year. The assessee asserted that all hire charges were paid within the year, with no outstanding liability. The Tribunal noted the absence of any binding decision from the jurisdictional High Court on this issue and referred to the Supreme Court's principle that where two views are possible, the view favorable to the assessee should be adopted. Applying this principle, the Tribunal held that since no amount was outstanding at the end of the year, the disallowance under section 40(a)(ia) was not justified and set aside the orders of the lower authorities on this issue.

Consequently, other arguments of the assessee related to the nature of payments and the absence of contracts were deemed academic and not adjudicated further.

The next significant issue concerns disallowance of expenses related to repair and maintenance of owned and hired trucks, and purchase of tyres and tubes, on the ground that purchase bills and vouchers were not produced. The AO disallowed amounts totaling Rs.3,40,089/- approximately for these heads. The assessee contended that bills and vouchers for 80-90% of expenses were submitted, but some could not be verified. It was argued that expenses recorded in books should not be disallowed in entirety merely due to non-production of some vouchers, and that a reasonable profit margin should be allowed under section 145(3) for best judgment assessment. The CIT(A) confirmed the disallowance, noting the absence of complete documentary evidence. The Tribunal upheld the CIT(A)'s order, observing that the assessee had disclosed a profit of 5%, which was reasonable, and that the limited disallowance was justified due to incomplete evidence.

Regarding disallowance under section 40(a)(ia) on account of repairs and maintenance expenses paid in cash to roadside garages, the assessee contended that these payments were genuine and not liable for TDS deduction. However, the AO did not invoke section 145(3) to estimate income, and the CIT(A) rejected the claim due to lack of verifiable evidence. The Tribunal concurred with the CIT(A), affirming the disallowance.

The revenue's appeal challenged the CIT(A)'s directions to allow higher depreciation rates on JCBs, motor lorries, trucks, excavators, and trailers, and the deletion of disallowance of diesel expenses not supported by third-party bills. The Tribunal referred to a precedent from the Kolkata Bench of the Tribunal, which held that certain heavy machinery like JCBs and loaders qualify as plant and machinery eligible for higher depreciation rates under the Income Tax Rules, rather than being treated as motor vehicles. Following this reasoning, the Tribunal upheld the CIT(A)'s direction to allow higher depreciation rates.

On the issue of diesel expenses, the CIT(A) had allowed payments made to specified parties for diesel and truck tyres as business expenditure after considering the remand report. The Department failed to controvert this finding, and the Tribunal dismissed the revenue's appeal on this ground.

In summary, the Tribunal's significant holdings include:

1. The disallowance under section 40(a)(ia) of hire charges paid during the year is not sustainable where no amount remains unpaid or outstanding at the end of the year. The Tribunal stated: "In our opinion, the assessee deserves to succeed on this issue itself." This aligns with the principle that section 40(a)(ia) applies only to payments unpaid or outstanding at year-end, as supported by the Vector Shipping decision.

2. Expenses recorded in books of accounts should not be disallowed in entirety solely due to non-production of some bills and vouchers, provided a reasonable profit margin is maintained. The Tribunal upheld limited disallowances where documentary evidence was lacking but recognized the disclosed profit of 5% as reasonable.

3. Higher rates of depreciation are allowable on heavy machinery such as JCBs and loaders, classified as plant and machinery, not as motor vehicles, consistent with prior Tribunal rulings.

4. Payments for diesel and tyres made to third parties with supporting evidence are allowable as business expenses.

5. The Tribunal applied the Supreme Court's principle favoring the assessee when two views are possible in tax matters, reinforcing the need to interpret taxing provisions strictly against the revenue in the absence of clear statutory mandate.