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2016 (7) TMI 382 - ITAT MUMBAI

2016 (7) TMI 382 - ITAT MUMBAI - TMI - Disallowance under section 40A(3) - Power of CIT(A) to enhance the assessment - principles of natural justice - Held that:- Section 251(2) of the Act stipulates that the learned CIT(A) shall not enhance an assessment, or a penalty, etc. unless the appellant has had a reasonable opportunity of showing cause against such enhancement. As per the relevant portion of the learned CIT(A)ís finding in the impugned order we find that the learned CIT(A) did not affor .....

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Act, comprising the total actual payment of handling charges plus sweeping labour charges and restore the matter to his file for de novo consideration and adjudication thereon after affording the assessee adequate opportunities to make submissions, file details, documents, etc. required in this regard. - Decided in favour of assessee for statistical purposes. - Disallowance under section 40(a)(ia) - payments made by the assessee for audit fees, legal fees and professional fees for non-deduc .....

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ad included the same in their respective returns of income; was also brushed aside without being addressed by the learned CIT(A) while recording his finding. We, therefore, in the interest of equity and justice set aside the findings of the authorities below and restore this issue to the file of the learned CIT(A) for de novo examination and adjudication thereon in accordance with law by way of a speaking order, after affording both the AO and the assessee, adequate opportunity of being heard an .....

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le in allowing 70% of the expenditure claimed and in disallowing only 30% thereof, considering the business activities of the assessee. From the details on record, we find that apart from raising this ground of appeal, the assessee has failed to place on record before us any material evidence to controvert the factual findings rendered by the authorities below on this issue. In this view of the matter, we find no reason to interfere with or deviate from the finding recorded by the learned CIT(A) .....

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, briefly, are as under: - 2.1 The assessee, a firm engaged in business as clearing house agent (CHA) filed its return of income for A.Y. 2008-09 on 30.09.2009 declaring income of ₹ 8,20,590/-. The case was taken up for scrutiny and the assessment was completed under section 143(3) of the Income Tax Act, 1961 (in short 'the Act') vide order dated 29.12.2011 wherein the income of the assessee was determined at ₹ 53,40,357/- in view of the following disallowances: - (i) Unexpla .....

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.1 of this order, and enhanced the disallowance on the issue at (i) above from ₹ 30,40,357/- made by the AO to ₹ 81,05,294/- under section 40A(3) of the Act. 3. Aggrieved by the order of the CIT(A)-24, Mumbai dated 25.03.2013, the assessee has preferred this appeal raising the following grounds: - 1) On the facts and circumstances of the case the learned Assessing Officer erred in disallowing 20% of cash paid on account of stevedoring expenses paid on behalf of your appellants princi .....

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eeping labour charges ) U/S 40A (3) of the Income Tax Act. Your appellant prays that total disallowance of ₹ 81,05,294/- on this- ground be deleted. 2) The Learned Assessing Officer and Commissioner Appeal erred in disallowing Legal fees of ₹ 10,27,560/- Audit Fees of ₹ 55,000/- and Professional Fees of ₹ 2,91,242/- under section 40(a)(ia) of the Income Tax Act. Your appellant prays the this fees are already paid during the year. Your appellant prays that the above expens .....

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ellant. Your appellant prays that disallowance of 30% out of clearing and forwarding expenses be deleted. 4) Your appellant craves to add, alter or amend any of the grounds of appeal at or before hearing. 4. The case was fixed for hearing on various dates and on most occasions either none appeared on behalf of the assessee or letters were filed on behalf of the assessee seeking adjournments for various reasons like paper book is under preparation, grounds of appeal filed to be revised, amended, .....

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section 40A(3) 5.1 In this ground, the assessee assails the impugned order of the learned CIT(A) as erroneous in enhancing the disallowance of ₹ 30,40,357/- made by the Assessing Officer (AO) @20% of cash paid expenses on account of stevedoring expenses paid on behalf of the assessee s principal to ₹ 81,05,294/- on totally different items, being the actual payment of loading charges of ₹ 69,16,056/- and sweeping labour charges of ₹ 11,89,238/-. It is submitted that the a .....

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learned CIT(A) in appellate proceedings had called upon the assessee to file details of stevedoring charges, handling charges and sweeping labour charges. On an examination thereof, the learned CIT(A) was of the view that in respect of stevedoring charges of ₹ 75,32,257/- since it appeared that payments were made by the assessee to the labourers directly, no payment to a single person was made in excess of ₹ 20,000/- and therefore the AO s addition was not upheld. It is submitted th .....

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harges). It is prayed by the learned D.R. that since the assessee has not furnished any material evidence to controvert the finding of the learned CIT(A), the enhanced disallowance of ₹ 81,05,295 under section 40A(3) of the Act be upheld. 5.3.1 We have heard the learned D.R. for Revenue and perused and carefully considered the material on record. The finding/decision of the learned CIT(A) on this ground at para 4.3 to 4.4.5 of the impugned order is extracted hereunder: - 4.3 Decision :- 4. .....

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on behalf of the principals whose goods arrive at docks from time to time. Assessee incurs expenses on behalf of its principals for getting goods cleared from docks and bills these expenses along with its agency charges to the principals as per the terms of agreement with the principals. Assessee incurs various types of expenses at the docks, namely, loading and unloading charges, transport charges, stevedoring charges, etc. for clearing the goods. Assessing Officer noticed during the course of .....

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doring and handling charges have been paid to gang leader (15 to 20 gangs each consisting of 13 to 15 labourers who work on clearing consignments of goods). Assessee has also paid banking cash transaction tax on withdrawals of cash from the banks. Assessing Officer held that assessee violated the provisions of section 40A(3) of I.T. Act, 1961 and since payments in cash exceeded ₹ 20,000/-, disallowance u/s 40A(3) of I.T. Act, 1961 was justified in the facts of the case. 4.3.2 It appears fr .....

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business. It is further observed that assessee has shown outstanding creditors in its books to whom cash payments have been made and assessee has accounted for gross receipts in its books because TDS is claimed by the assessee in return of income and computation of total income on gross basis. During the course of appellate proceedings assessee was issued a show cause notice dated 14.3.2013 and assessee was asked to furnish details and documents regarding the stevedoring charges, labour handlin .....

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am to either load or unload goods in/from the ship at the docks. It has been submitted that these payments are made as per Dock Labour Laws and are paid in cash immediately after the completion of work. Assessee has also filed Xerox copies of vouchers prepared by the assessee and the labour payment sheets giving details of loading and unloading expenses gang wise and ship wise on various dates. For example, assessee has paid ₹ 1,47,139/- to Sitaram P. Malik dt. 25/5/2008 for sweeping labou .....

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ng ₹ 20,000/- in a day to the team leader who ultimately distributes to the team members. Section 40A(3)is amended from A.Y. 2009-10 onwards and any violation of the provisions attracts tottal disallowance of the amount and not 20% of it. 4.3.3 The assessee submitted during the appellate proceedings that in the earlier year the CIT(A) deleted similar disallowance made by the Assessing Officer. At this juncture it is relevant to see the decision of the CIT(A), the same is as under: - CIT(A) .....

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se refer to Section 40A. This section says that while computing the income under the head "Profits & Gains of Business or Profession" the provisions of Sections 40 A will be applicable. Section 40A(3) is one of the sub-section of Section 40 A. While computing a taxable income under the head "Profits & Gains of Business or Profess/on" the provision of Section 40A(3) are invoked. Our client has not claimed any expenditure to which the Assessing Officer has made referenc .....

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. Counsel and on the basis of facts and details brought on record and the submissions made above, it is clear that no such disallowance can be made. Accordingly, the same is deleted and this ground of appeal is allowed." 4.3.4 From the above, it is understood that the CIT(A) has deleted the disallowance made by the Assessing Officer as the Assessing Officer was not empowered to estimation of 20% of total payments made in cash. He did not qualify any other issue. I was also of the same view .....

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ade by the assessee to some parties on behalf of the principals contravening the provisions of sec. 40A(3). It is also to be mentioned here, the assessee has shown the gross receipts which include the total amounts received by the assessee, the same are as under :- Gross Receipt Rs:- 1. M/s E. D & F Man Commodities India P. Ltd. 6510327.00 2. M/s Ispat Industries Ltd. 10899281.00 3. M/s State Trading Corpn. Ltd. 40729638.00 Gross Total Amount Rs.... 58139246.00 Less : Expenditure paid on beh .....

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ent for final payment of bills. 4.3.6 It is very clear from the above, that the assessee received amounts from the principals and the same are reflected in the above statement. In fact, the assessee should have shown/ accounted all gross receipts in its trading/ P&L A/c but the assessee did not show these amounts. The assessee has excluded these amounts received from the principals and payments made to the persons in cash in its financial statements and consequently in the return of income; .....

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t to the assessee only and not to the individual parties. Therefore, the assessee is statutorily obliged to adhere to the provisions of the Act while conducting his business affairs, particularly in the context of payment of cash in excess of ₹ 20,000/- as the same is in violation of provisions of sec. 40A(3). Thus, the contention of the assessee that it made payments on behalf of principals and the assessee was not liable to be visited with the provisions of sec. 40A(3) are misplaced and .....

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hout any basis. To verify the issue of cash payments made by the assessee I have called for the details of headwise viz. stevedoring expenses, labourer payment and handling charges. I have also made noting in the order sheet which is as under :- 21/3/13 Shri Jayant B. Shah, CA & AR appeared & case discussed. He furnished the details of cash payments, ledger extracts, & vouchers & it is seen from the details amounts paid basically to a gang leader and intum he distributed the paym .....

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to a person under the heads handling charges and labour charges. However, with respect to stevedoring expenses of ₹ 75,32,257/- it appears that the assessee made payments directly to labourers as there is no gang leader's name appearing in the vouchers. Thus, it is construed that the assessee made payments less than ₹ 20,000/- to a single person in respect of stevedoring expenses of ₹ 75,32,252/- but in case of two items of expenditure viz ₹ 69,16,056/- for Handling .....

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k draft exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure." 4.4.3 It is also important to note that the provisions of sec. 40A(3) have undergone a substantial change from A.Y. 2008-09 wherein the changes made are that there are no exceptions to the violation of provisions u/s 40A(3). In other words the provisions have become more stringent than before. Thus, if any payment made above ₹ 20,000/- in cash to a person in a day such amount will at .....

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T V/S. Grewal Group Of Industries-P&H-110 ITR 278 iii) CIT V/S. Kishan Chand Mahesh Dass-P&H-121 ITR 232 4.4.5 In the result, the ground of appeal is not only dismissed but disallowance is enhanced. 5.3.2 On a perusal of the finding/decision of the learned CIT(A) it is seen that he has rendered a finding to the effect that the decision of the AO in disallowing under section 40A(3) of the Act an amount of ₹ 30,40,357/- @20% of payments of stevedoring charges is erroneous and baseles .....

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3) of the Act was not sustainable and accordingly deleted. This issue is not before us in the present appeal. 5.3.3 The issue in dispute before us in this ground is in respect to the enhancement of income by the learned CIT(A) to the extent of ₹ 81,05,294/- under section 40A(3) of the Act comprising the extent of actual payments of handling charges paid, ₹ 69,16,056/- and ₹ 11,89,238/- on account of sweeping labour charges. It is seen from para 4.4.1 of the impugned order, that .....

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of the Act. We find that it is clear from the impugned order that when the learned CIT(A) was of an adverse view in the matter, he ought to have, but did not put the assessee on notice to show cause why the said enhancement of ₹ 81,05,294/-, comprising the total of actual payments of handling charges and sweeping labour charges, under section 40A(3) should not be made in its hands. 5.3.4 As per the provisions of section 251(1)(a), the learned CIT(A) while disposing an appeal against an ord .....

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unity whatsoever, let alone reasonable opportunity of showing cause against such enhancement and in our considered view this failure on the part of the learned CIT(A) being in violation of the basic principles of natural justice would render his enhancement unsustainable in law. We, therefore, in the interest of substantial justice set aside the learned CIT(A) s finding enhancing the assessee s income by ₹ 81,05,294/- under section 40A(3) of the Act, comprising the total actual payment of .....

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hat the authorities below erred in disallowing legal fees of ₹ 10,27,565/-, audit fees of ₹ 55,000/- and professional fees under section 40(a)(ia) of the Act. It is contended that since these fees are already paid during the year and the parties to whom these fees have been paid have disclosed these amounts in their returns of income, the above expenses be allowed as the disallowance of ₹ 13,39,322/- in this regard be deleted as it is unsustainable. 6.2 The learned D.R. placed .....

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aforesaid decision was correctly upheld by the learned CIT(A). 6.3.1 We have heard the learned D.R. for Revenue and perused and carefully considered the material on record. The issue before us is with respect to the disallowance of ₹ 13,39,322/- made and sustained by the authorities below under section 40(a)(ia) of the Act in respect of payments made by the assessee for audit fees, legal fees and professional fees for non-deduction of tax at source on such payments. At the outset it must .....

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Advocate, Lawyer, etc. had included the same in their respective returns of income; was also brushed aside without being addressed by the learned CIT(A) while recording his finding. We, therefore, in the interest of equity and justice set aside the findings of the authorities below and restore this issue to the file of the learned CIT(A) for de novo examination and adjudication thereon in accordance with law by way of a speaking order, after affording both the AO and the assessee, adequate oppor .....

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be deleted, since the nature of the expenses are such that it has to be paid in cash to dock authorities during the course of its business activity. 7.2 The learned D.R. placed strong reliance on the decision of the authorities below. According to the learned D.R., these cash expenses claimed to be incurred for clearing and forwarding activities, in the nature of entry permit charges for the assessee s employees/labourers for entry into Bombay Docks and JNPT at Nava Sheva for work are supported .....

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