TMI Blog2013 (11) TMI 1695X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. During the year, the assessee used its own trucks as well as hired trucks from outside the parties, for which the freight payments were made. The AO observed that in certain cases, the assessee-company had made freight payments to brokers in cash in excess of limits prescribed under section 40A(3) of the Act. The AO issued show cause notice to the assessee as to why such payment should not be disallowed under section 40A(3). The explanation given by the assessee was not accepted by the AO for the reasons that the provisions of section 40A(3) were applicable in the relevant assessment years, where the assessee incurred any expenditure and in respect of which, the payment was made in excess of ₹ 20,000/- other than by way of account payee cheque or draft, 20% of such expenditure was to be to be disallowed as deduction. The AO also observed that only exceptions available have been prescribed under Rule 6DD of the IT Rules, 1962, and the assessee was allowed exception with regard to the payment in excess of limit prescribed under Rule 6DD(j) in respect of payment made on bank holidays. The AO also noted that Rule 6DD(j) was not on the statute as it has been omitted w.e.f. 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the order of the learned CIT(A), which reads as under: 5. Appellant in its written submissions argued that Disallowance U/s. 40A(3) I. We are in the business of hiring of trucks as well as providing our own trucks for transportation of goods for our customers which include Groups Companies like HUL, Kalpatharu Power, Reliance etc., with whom we fix freight charges to be paid by them depending upon the destination for providing or arranging Trucks for transporting their goods by Trucks . As stated the transportation of goods for clients is done by us; (i) by our own fleet of Trucks and (ii) by hiring out side Trucks (Transportation of goods by arranging/hiring outside trucks accounts for our major turnover freight income, approx. 78%) Thus, to the extent of transportation of clients goods by own Trucks, it is our own transportation work. However, when the transportation of goods for clients is done by us by hiring outside trucks, our role for all practical purposes is of agent for our client. We collect the agreed freight charges from our clients and in turn pay/reimburse the freight charges to truckwalas/brokers towards transporting goods of our clients. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsportation as transporter from its own fleet of trucks approx. 22%, Hence, it can very well be said that mainly we are acting as agent from arranging trucks for our clients. The Chart-Ill shows gross income earned by the company by operating own trucks and. by hiring outside trucks. On perusal of the said chart you will find that, we have earned difference of freight received and paid ranging from 2.79% to 3.83% on the total freight income received and which, is in the nature of commission income for hiring trucks for our clients. As stated hereinabove, as well as observed and narrated in the judgement referred above, just for accounting convenience entire freight income including in respect of outside trucks as well as freight payment expenses have been routed through books of accounts and shown as turnover and expenses. Otherwise this could have been very well reduced from turnover and expenses and shown in the books of accounts and difference of freight paid and received in the nature of commission income could have been shown as income. If accounting treatment has been given as stated above provisions of section 40A(3) would not have been initiated. The ratio of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction of the assessee firm. The payments made to the vehicle owners therefore would not constitute assessee's business expenditure for the purpose of computation of profit and gains of any business carried on by the assessee-firm in accordance with the provision of Income Tax Act. The CIT(A) is wrong in observing that the Assessing Officer found that the statutory audit report is not disclosing the full facts specially on section 40(A)(2)(b) and section 40A(3) whereas the learned counsel for the assessee clearly demonstrated before us that the audit report under section 44AB, the auditor disclosed the details with regard to section 40A(2)(b) of the Act, It is pertinent to note that fixing of rate between the beedi manufacturers and the assessee-firm has nothing to do with the nature of relationship. It may be possible that as a matter of convenience the rates might have fixed by both these persons. In this Judgement it was held as under:- After considering the totality of the facts and circumstances of the case, the disallowance made under section 40A(3) of the Act for the assessment year under consideration cannot be sustained. Hence the addition made on this a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. After unloading goods, they are available for hiring but they are not known to us and our broker and language is also a barrier. Their destination being far off long haul Journey ^requires to expend heavily on toll taxes, diesel, lodging and boarding, contingencies etc. and hence they are not willing to come unless payment of entire stipulated freight advance is paid in cash. In view of peculiar circumstance of the transport Industry, broker/driver/owner insist for entire stipulated freight payment in cash only and sometime show their inability to book our goods, if cash payment terms are not agreed upon. However, in our case, business being voluminous, we require more number of vehicles for our clients everyday and made to agree to their condition of cash payment. Not agreeing to their condition of cash payment may result in not getting the vehicle and in turn delaying/defaulting in delivering the goods of client in time and loosing business. However, while making payment in cash exceeding stipulated amount, we ensure about genuineness and identity of the party, so that provisions of section 40(A)(3) are complied with in spirit. B. Further to substantiate our con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tical difficulties, the brokers insist for freight payment in cash for onward payment to drivers/driver cum owners of the Truck in the circumstances mentioned herein in para 3 above. As stated above, the brokers who hire trucks for us act as agent for us and the section 40A(3) read with Rule 6DD permits the same and hence the payments made exceeding ₹ 20,000/- (and ₹ 35,000/- after 1/10/2009) ought not-to have been disallowed by A.O. We request your honour to appreciate our submission as to payments made in cash exceeding the limits stipulated in section 40A(3) in view of facts and circumstances narrated herein above as well as in the light of judgements cited herein above and pray your honour to delete the additions made in various assessment years in appeal before you. Without prejudice to our grounds of appeal contained in para I II (1 to 3) and III of our of submission dt. 21/3/2012, we submit that; a. As submitted we have furnished the confirmation of the recipient of freight having PAN. It can be very well said that the freight received by them from us might have been shown by the recipients as their income. And in the scenario of disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 40A(3) are clearly applicable. 6.2 The alternate argument of the appellant that if disallowance u/s. 40A(3) is made in his case, the GP will go abnormally high is also not acceptable. The disallowance made u/s. 40(A)(3) is in the nature of a technical disallowance for violation of specific provisions of Income Tax Act. The object of these provisions is to check evasion of taxes so that the payment is made from the disclosed sources. It is not for estimation of income of appellant. Therefore, the argument that GP will increase abnormally after making disallowance u/s. 40A(3) is not acceptable. 6.3 In view of above mentioned facts and for reasons given by AO in detail in the assessment order as mentioned above, I hold that the disallowance made u/s. 40A(3) for all the 4 years is justified. Disallowance of ₹ 10,69,889/for A.Y. 2007-08, ₹ 7,05198/- for A.Y. 2008-09, ₹ 6,92,47,389/- for A.Y. 2009-10 and ₹ 94,85,912/- for A.Y. 2010-11 are confirmed. Ground no.2,3 4 of the appeals are thus dismissed for all the 4 years. 6. The learned AR of the assessee submitted before us that since in all the years the issue involved is identical, therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture and exigencies during the trips. For this, reliance was placed para 2.2. of the assessment order. It was further submitted that as per clause- k of Rule 6DD of the IT Rules, no disallowance u/s.40A(3) can be made where cash payment was to be made to an agent who in turn was required to make cash payment on behalf of the assessee. It was submitted that as per Black s Law Dictionary, broker means an agent who acts as on intermediary or negotiator, especially between prospective buyers and sellers. Therefore, it was submitted that it is established beyond doubt that the concerned payments were made by the assessee to its agents/brokers. When the payments were made to brokers and the fact that the ultimate recipient of the payment viz. the drivers/owners of the trucks have demanded cash payments is not disputed, exception carved out as per Rule 6DD(k) clearly gets invoked and no disallowance u/s.40A(3) is called for and the same be deleted. He placed reliance on the decision of the ITAT, Ahmedabad bench in the case of Vijaykumar P. Desaid (Individual HUF) ITA No.46 to 57/Ahd/2013 and 85 to 96/Ahd/2013 consolidated order dated 29.8.2013, and also on the decision of the Hon b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable to the assessee. The learned CIT(A) has also observed that the arguments of the assessee that the payments were made to truck drivers, who insisted for payment in cash was not exceptional case, because the assessee has not made payments to individual truck owners but to various brokers through whom the trucks were engaged, and therefore, the case of the assessee was not covered by the exceptions mentioned in Rule 6DD. The alternative arguments of the assessee that if the disallowance is made under section 40A(3), the GP will go abnormally high, was also not accepted by the learned CIT(A) on the ground that the disallowance under section 40A(3) of the Act was a technical disallowance for violation of specific provisions of Income Tax Act. Before us, the learned AR of the assessee has relied on the decision of the Ahmedabad Bench of the Tribunal in the case of Vijaykumar P. Desai (Individual HUF) (supra), wherein the Tribunal has held as under: 6. We find that on this aspect, it is noted by the learned CIT(A) that as per the remand report of the AO, the AO had issued notices u/s 133(6) of the Act to all eighteen persons whose names were available in the seized mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision in that case is squarely applicable to the facts of the assessee s case. Hence, respectfully following the above-cited decision of the Tribunal, we set aside the orders of the lower authorities, and delete the disallowance under section 40A(3) of the Act, and this ground of the appeal of the assessee is allowed. 10. In the Revenue s appeals, the sole issue involved is that the learned CIT(A) erred in law and on facts in deleting the following additions made on account of disallowance u/s.40(a)(ia) of the I.T.Act. Asstt.Year Amount (Rs.) 2007-2008 54,00,379/- 2008-2009 51,55,864/- 2009-2010 1,26,94,479/- 2010-2011 76,08,948/- 11. The AO observed that the assessee-company has made freight payments in some cases without deducting TDS as per the provisions of section 194C of the Act. He asked the assesseecompany to explain the reasons for the same. After considering the replies of the assessee, the AO disallowed the ₹ 54,00,379/- for A.Y.2007-2008, for A.Y. 2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in the case of ITO Vs. Bhoruka Roadlines Ltd., (2009) 117 ITD 311 (Mum) wherein it was held that when the truck drivers and truck owners are separately paid for each truck without any agreement with the agent supplier, provisions of 194C are not applicable. Reliance was also placed on the decision of the Punjab and Haryana High Court in the case of CIT Vs. Ess Kay Construction Co. (2004) 267 ITR 618 (P H) wherein it was held that there was no direct contract between original contractor and the ultimate payees, therefore, would not result the contract being executed for the application of section 194C(2). Further reliance was also placed on the decision in the case of CIT Vs. D. Rathinam, (2011) 197 Taxmann 486, CIT Vs. Bhagwati Steels, (2011) 198 Taxman 275(P H), Mythri Transport Corp. Vs. ACIT, (2010) 124 ITD 40 (ITAT Visakhapatnam). It was submitted that in these judgments, characteristics of sub-contract has been spelt out clearly. The truck owners cannot be considered as subcontractor of the assessee, hence there was no liability on the part of the assessee to make TDS from payments made to them and there would be no question of applicability of section 40(a)(ia). Thus, it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation of goods. Appellant company alone was responsible for executing these contracts. It was only for fulfillment of these contracts that vehicles were hired from outside parties. In such a case it cannot be held that these outside parties were sub-contractors of the appellant. This view derives support from the decision of Hon'ble ITAT, Mumbai in the case of Ratnakar Sawant, Dinesh N. Shah Co. vs. ITO in ITA No.2941(Mum.) of 2011. In this case, Hon'ble ITAT made the following observation: We have carefully considered the rival submissions and also the findings given in the impugned orders. The assessee is an individual, who has undertaken a contract to provide forklift on hire to his principals, on which he has received hire charges. Besides his own forklift vehicles, he has also hired forklift vehicles from the outside parties for which he has paid hire charges to them: and has been claimed as expenditure. In such a case, the assessee is solely responsible for executing the contract with the persons to whom he has given forklift vehicles on hire and it is only for fulfillment of this contract that he has also engaged the forklift vehicles from the outside partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year without TDS. For coming to this conclusion Hon'ble ITAT, Ahmedabad Bench followed the decision of Special Bench in the case of Merilyin Shipping Transports vs. ACIT in ITA No. 477/Vi7J2008. I therefore, hold that AO is not justified to make disallowance u/s. 40a(ia) for various years in respect of amounts which have been already paid during the year. Respectfully following the above mentioned decision of ITAT, Ahmedabad Bench in the cake of N.K. Jewellers, AO is directed to delete disallowance of ₹ 54,00,379/- for A.Y. 2007-08. Similarly, the disallowance of ₹ 51,55,864/- for A.Y. 2008-09, ₹ 1,26,94,479/- for A.Y. 2009-10 and ₹ 76,08,948/- for A.Y. 2010-11 are also directed to be deleted. Ground No.5 of the appeal is allowed for all the 4 years. 13. The learned DR fully justified the order of the AO. He also placed reliance on the decision of the ITAT, Ahmedabad Bench in the case of Mukesh Travels Co. Vs. ITO, (2011) 10 taxmann.com 143 (Ahd) wherein it was held that as assessee was not having sufficient vehicles of its own for providing contracted service, it obtained services of others to complete assignment. The assessee did not deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT Vs. United Rice Ltd., 322 ITR 594 (P H); iii) CIT Vs. Ess Kay Construction Co., 267 ITR 618 (P H); iv) M/s. Parishram Transport Vs. ITO, ITA No.351/Ahd/2009 and 255/Ahd/2010; v) Gujarat Roadlines Vs. ITO, ITA No.3023/Ahd/2008. 15. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the AO has observed that the assessee had made following payment of freight charges, during the year in which no TDS was deducted by the assessee. Asstt.Year Amount (Rs.) 2007-2008 54,00,379/- 2008-2009 51,55,864/- 2009-2010 1,26,94,479/- 2010-2011 76,08,948/- The contention of the assessee was that the assessee had entered into contract with companies such as Hindustan Lever Ltd., Reliance, Kalpataru etc. for whom the transporting of goods was done by the assessee under contract. The assessee was liable to carry out the work of transportation of goods itself, and was not allowed to sub-contract the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. HPCL. Section 194 C of the Act makes it clear that TDS is deductible only in the case when the recipient contractors renders the work of carriage of goods or passengers by any mode of transport other than railways. In the case before us, it is evident that the assessee had only hired out the vehicles and rendered the services of transportation of goods i.e. LPG cylinders by itself at its own risk and reward. At this juncture we may peep into the decision of the Hon ble Madras High Court in the case of CIT Vs Poompuhar Shipping Corporation Ltd. [2006] 282 ITR 3 (Mad). The gist of the aforesaid decision is reproduced herein under: Under section 194C of the Income-tax Act, 1961, the tax is to be deducted when a contact is entered into for carrying out any work in pursuance of a contract between the contractor and the entities mentioned in sub-section (1) of section 194C. The term hire is not defined in the Income-tax Act. So, we have to take the normal meaning of the word hire . Normal hire is a contract by which one gives to another temporary possession and use of property other than money for payment of compensation and the latter agrees to return the property after the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase before us from the contract executed between the appellant and M/s. HPCL contained in page No.2 to 27 of the paper book. This contract in Para 9 also specifically provides that the appellant shall not sub-let any work entrusted to him. Further, relevant ingredients in the contract to establish that the appellant is assigned the job of transportation and it had performed the job of transportation by itself can be summarized as under:- Item No.1 vehicle for transportation:- The appellant is assigned with the work of transportation by M/s. HPCL and it has to provide the details of the vehicles pressed for the operation. The appellant has to transport the cylinders according to the schedule and route stipulated by M/s.HPCL. The appellant has to ensure that the trucks provided for transportation of LPG cylinders shall comply with all legal formalities. The appellant shall also arrange for the applicable insurance policies. The applicant shall also ensure the drivers of the vehicles have proper authorization to drive the trucks with such hazardous products as per the Motor Vehicles Act. The appellant shall also ensure that the trucks pressed for operation are road-worthy co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material to establish that the owner of the vehicles have performed any work other than hiring their vehicles to the appellant. For the above said reasons we allow the appeal of the assessee in its favour and delete the addition of ₹ 1,05,83,555/- made by the learned AO which was further confirmed by the learned CIT(A). 18. Further, the Ahmedabad Bench of the Tribunal in the case of Gujarat Roadlines Vs. ITO (supra) has held as under: 4. We have heard the rival submissions, perused the orders of the authorities below and considered the material on record. On perusing the assessment order it is evident that the assessee had hired the vehicles in order to transport the goods of its clients. The assessee apparently is a transport contractor who transports the goods of its clients to the destination preferred by the clients. In order to carry out such work the assessee engages trucks of various other organizations and truck owners by hiring of the vehicles along with the infrastructure. Thus, the work of transportation has been carried out by the assessee and not by the owners of the trucks. The owners of the trucks had only hired their vehicles to the assessee by receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts. Godowns and to our customers all over the country. The freight rates and transit time allowed against each destination is mentioned in Annexure-l. The Minimum guaranted load shall be 9mt per lorry under 9mt slab, any load lifted above 9mt shall be Eligible for additional freight on prorate basis. Similarly for 15mt slab. Minimum guaranteed load shall Be 15mt per lorry for load lifted above 14mt. Any load lifted above 15mt shall be eligible for additional freight of this slab on prorate basis. 2. The monthly quantity required to be transported will depend on our requirements and it may vary from month to month and will be offered for transportation at our discretion. We do not guarantee any minimum volume of work for any destination. 3. Loading of material at our Silvassa works will be done by us and its unloading at destination shall be arranged by our customers. However, in case of any unloading charges/varai charges paid by the transporter, it will be reimbursed on presentation of receipt for the actual charges paid. These receipt are to be enclosed with acknowledged copy of Lorry Receipts sent to us for billing purpose. 4. After collection of material, the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roi (if any), wherever it is required and then collect the same from us after submitting supporting documents. In case of others, buyer shall arrange clearance of material from octroi posts through their nominated agents. Transporter has to contact the agent of the buyer on contact numbers given by our logistics Department. 6. Our consignments are sent on FREIGHT PRE PAID basis to our customers and to our own Depots where proper receipt of material giving details of date and time of delivery of material should be obtained. In case of Lorry Receipt routed through bank for negotiation purpose, the acknowledgement for receipt of the material is to be obtained only on consignee copy. The acknowledgement can be obtained preferably on consignee copy or otherwise on driver s copy of LR in normal cases. 7. In case company sends goods on Freight T0-pay basis on the request of the party. all freight settlement will be done by yourselves and consignee directly. Our company will not be responsible for the payment of freight or any disputes arising from this transaction. C. Period of Contract: The Contract will be valid from 01.03.2008 to 30.06.2008. The contract may be ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th terms and conditions of the contract or in case of loss of material, the security deposit shall be liable to be forefeited and our decision in this regards shall be final and binding to transporter. Security deposit shall be refunded only after successful completion of contract. Security deposit will not carry any interest. G. Penalty for non placement or delayed placement of trucks : Sterlite reserves the right to arrange for transportation from any other transport company in the event of the contracted transporter failing to place the trucks within the specified time in which the additional cost and risk will be of defaulting transport. Penalty of ₹ 500/- per trucks will be charged for non-placement of the truck the same will be deducted from defaulting transporter s bill. H. Insurance : Insurance for vehicle is the sole responsibility of the owner. However, insurance of material being transported will be done by sterlite. In case of loss of material in transit, documents required for lodging insurance claim shall be furnished by the transport company within the stipulated time period as mentioned in clause E. I. Shortage: The quantity a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arbitrator so appointed shall be final and binding on both the parties to the contract. P. Claims Disputes: Any claim of Dispute arising out of contract shall be subject to the jurisdiction of court of Dadra Nagar Haveli, Silvassa and shall be binding to both the parties in the contract. Q. Extra Delivery Charges: In case of lifting of the loads from our two plants i.e. from Chinchpada Plant from Piparia plant in one truck for same destination, you will be paid ₹ 500/- extra for liftment of the load from second location. Similarly, in case of delivery of our material loaded in one truck but unloaded at two or more than two places, you shall be paid ₹ 500/- extra for every extra delivery made i.e. extra delivery charges will be applicable from 2nd delivery onwards. R. Other Terms: 1. Transporter shall place his owned dedicated attached trucks as per the list submitted. Each lorry should be in good working condition with smooth platform, stepney and tarpaulin. Every truck should have proper statutory documents related to the RTO Authority these documents are required to be produced at our factory gate on demand for verification purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of delivery to any different destination/s made other than the destinations mentioned in the contract, rate transit time approval is to be obtained by transporter from our Manager (Commercial) in such cases prior to billing. 9. For safe delivery of our finished goods consignments, you should take care of following points while placement of the trucks. You shall submit list if your owned dedicated attached vehicle to us. We will load only those vehicles which are available in the list. In case of addition of new fleets, you will have to give us list of such vehicles in advance. Your office staff should properly cross check the engine number, chassis number registration number of the vehicle mentioned on the registration documents with every truck physically. Your office staff should take proper tracings of vehicle s chassis number it should be preserved in your records. Your office staff should check authenticity of every truck before placement. The vehicle supplied to us should be genuine should have reliable owner having land line mobile for contact. You shall also try to place trucks having mobile phone with drivers. All vehicles placed f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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