Case Law Details
A Kishore Rao and Others Vs DCIT (ITAT Bangalore)
Bangalore ITAT Deletes Ad-Hoc Transport Expense Disallowance – AO Cannot Expect ‘Perfect Vouchers’ for Every Highway Expense Across India
The Bangalore ITAT deleted the entire ad-hoc disallowance made out of transport business expenses and held that merely because complete petty vouchers were not available, huge operational expenses could not be disallowed when the transportation activity itself was accepted as genuine. The assessee, engaged in nationwide chassis transportation business, had incurred substantial expenses towards fuel, tolls, driver bata, enroute expenses, travelling and transportation charges through local agents and coordinators across the country. The AO invoked section 145(3) and disallowed 10% of such expenses on the ground that complete original bills and vouchers were not maintained. The CIT(A) reduced the disallowance to 8%.
The Tribunal observed that in the transport industry, practical business realities cannot be ignored. Expenses are incurred at multiple locations by drivers, cleaners and local coordinators and are later consolidated by agents for reimbursement. The assessee had furnished ledger accounts, reimbursement statements, sample fuel bills, driver sheets and bank statements, and all payments were admittedly made through banking channels. Importantly, neither the AO nor the CIT(A) brought any evidence to show that the money paid to agents had returned to the assessee or that the expenditure was bogus. The ITAT emphasized that “suspicion, however strong, cannot take the place of evidence.”
The ITAT further noted that the Revenue had not brought any comparable cases or profitability analysis to justify the arbitrary estimation of 10% or even 8%. On the contrary, the assessee’s NP ratio during the year was better than the average NP ratio of earlier and subsequent years. The Tribunal held that once transportation receipts and business operations were accepted as genuine, substantial disallowance of core operational expenses would lead to absurd results because transport business cannot run without fuel, toll, driver and enroute expenses.
Relying on the Supreme Court ruling in S.A. Builders, the Tribunal reiterated that the Revenue cannot sit in the “armchair of the businessman” and dictate how business should be conducted. Accordingly, the ITAT deleted the entire disallowance sustained by the CIT(A) and allowed the assessee’s appeal in full.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The present appeal filed at the instance of the assessee is directed against the learned Commissioner of Income Tax- Appeal (hereafter ld. CIT(A)), under section 250 of the Income Tax Act, 1961 (hereafter- the Act) for the Assessment Year 2016-17.
2. The interconnected issue raised by the assessee through grounds Nos. 1 to 9 is that Learned CIT(A) erred in confirming the rejection of books u/s section 145(3) of the Act made by the AO without pointing out any specific or material defects therein, and further erred in sustaining the arbitrary and ad-hoc estimation/disallowance of expenditure.
3. The facts in brief are that the assessee is a HUF and engaged in transportation business. The assessee transport chassis from the manufacturer premises to various dealers across the country. For the year under consideration, the assessee from the transportation service has shown gross receipt of Rs. 22,34,78,203.87/-. Againt the impugned receipt the assessee had claimed major expenses under the heads commission expenses of Rs. 67,80,400/-, enroute expenses of Rs. 5,90,66,202/-, sundry expenses of Rs. 16,49,946/-, travelling expenses of Rs. 2,21,07,891/- and transportation charges of Rs. 12,79,96,307/- only. The expenses being enroute expenses, sundry expenses, travelling expenses and transportation charges were claimed to be incurred through the agents namely M/s Unique Trans and Shri Paramjit Singh Sandhu, and later reimbursed by the assessee to them. The assessee furnished ledger accounts and copies of certain bills raised by the agents. However, according to the AO, no proper original bills and vouchers were maintained or produced in support of the expenses claimed. Therefore, the AO proposed to disallow the enroute expenses, sundry expenses, travelling expenses and transportation charges aggregating to Rs. 21,08,20,847/- in the absence of proper supporting evidences.
4. In response to the show cause notice, the assessee submitted that the expenditure under the head enroute expenses, sundry expenses, travelling expenses and transportation charges includes expenses such as fuel charges, toll charges, drivers, travelling expenses and transportation related expenses which were essential for carrying on transportation business and without incurring such expenses, transportation activity itself could not be carried out. The assessee submitted that complete disallowance of such expenses would result in an absurd situation of earning income without incurring business expenditure.
4.1 The assessee further submitted that all payments to the agents were made through account payee cheques and copies of bank statements as well as agent bank statement were also furnished in support. It was argued that the assessee should not be penalized merely because the agents may not have properly maintained their records or disclosed the expenses in their returns.
4.2 The assessee also submitted that invoices raised by the agents for reimbursement of expenses were produced before the AO. It was further explained that the business operations were spread throughout the country and therefore it was practically difficult to maintain every original bill and voucher for petty expenses incurred during transportation. The assessee stated that drivers were not educated and sometimes bills were misplaced. However, the assessee had produced sample fuel bills, driver sheets, reimbursement statements and other supporting documents.
4.3 The assessee further submitted that reimbursement of expenses to agents was a regular business practice followed consistently over the years. It was also clarified that tax was deducted at source on commission payments, whereas no TDS was deducted on reimbursement portion since the same represented pure reimbursement of expenses.
4.4 However, the AO was not satisfied with the explanation furnished by the assessee. The AO held that except for few diesel bills, neither the assessee nor the agents maintained proper bills and vouchers in support of the huge expenditure claimed under enroute expenses, travelling expenses, sundry expenses and transportation charges. The AO observed that the reimbursement claims were based only on summary sheets prepared by the agents and not supported by complete documentary evidence.
4.5 The AO further held that merely making payments through banking channels to agents does not establish the genuineness of the final expenditure incurred by them. According to the AO, the agents were only representatives of the assessee and therefore the assessee was duty bound to maintain complete records and vouchers for all expenses claimed in the profit and loss account.
4.6 The AO finally concluded that since proper verification of the expenses was not possible due to non-maintenance of complete bills and vouchers, it could not be accepted that the entire expenditure was incurred wholly and exclusively for business purposes. Therefore, invoking section 145(3) of the Act, the AO disallowed 10% of the total expenses amounting to Rs. 21,08,20,346/- and made an addition of Rs. 2,10,82,034/- under section 37 of the Act.
5. The aggrieved assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee submitted that it is engaged in the business of transportation of chassis from manufacturers to dealers situated across the country. Considering the nature and spread of the business operations, it is commercially expedient and industry practice to carry out activities through local agents and coordinators. These agents incur various expenses which are classified as enroute expenses, transportation charges, travelling expenses and sundry expenses on behalf of the assessee. Thereafter, the agents submit bills, vouchers and summary statements for reimbursement. The assessee submitted that all reimbursements to the agents were made through proper banking channels and complete bank statements evidencing such payments were furnished before the AO during the course of assessment proceedings. Sample copies of bills and vouchers submitted by the agents were also produced before the AO for verification. However, the learned AO failed to appreciate the practical realities of the transportation industry and proceeded to make ad hoc disallowance merely on presumptions and surmises without bringing any material on record to establish that the expenditure was bogus or not incurred for the purposes of business.
6. The assessee further submitted that the AO failed to understand that the agents first incur the expenditure on behalf of the assessee and thereafter seek reimbursement after submission of bills and summary sheets. The assessee, having long-standing experience in this line of business, verifies the supporting documents viz-a-viz other factor such as distance covered, route etc before approving reimbursement. No prudent businessman would approve or reimburse fake expenses, as the same would directly reduce his own profits. Therefore, once the expenditure has been incurred during the course of business operations and reimbursement has been made after verification, the genuineness of the expenditure cannot be doubted merely because the expenses were routed through agents.
6.1 The assessee also submitted that in the transportation business, the agents coordinate with drivers, vendors and local parties situated across different parts of the country. Most of the persons involved in such operations are not directly dealing with the principal but only with the agents. Therefore, the agents maintain the day-to-day accounts of such expenditure and thereafter submit consolidated statements to the assessee for reimbursement. Hence, the allegation of the AO that the assessee did not maintain direct bills and vouchers in its own name is contrary to the practical manner in which the transportation industry functions.
6.2 The learned AO has also not disputed the factum of payment, nor has he brought any evidence on record to show that the payments made to the agents have come back to the assessee or were utilized for non-business purposes. In absence of any such adverse material, the expenditure cannot be disallowed merely on suspicion. The AO has accepted that payments were made through account payee banking channels and even the agents have confirmed the transactions. Therefore, without disproving the underlying business purpose or pointing out any specific defect in the supporting documents, the ad hoc disallowance made by the AO is unsustainable in law.
6.3 The assessee further submitted that the AO cannot sit in the armchair of the businessman and decide how much expenditure should have been incurred for business purposes. Once there exists a nexus between the expenditure and business operations, the same is allowable u/s 37(1) of the Act. Reliance in this regard is placed on the decision of the Hon’ble Supreme Court in the case of S.A. Builders Ltd. v. CIT (A) & Anr reported in 288 ITR 1 and the decision of the Hon’ble Delhi High Court in CIT v. Dalmia Cement reported in 254 ITR 377 wherein it has been held that the Revenue cannot substitute its own business wisdom in place of the assessee’s commercial decision. The assessee therefore prayed to the learned CIT(A) that the reimbursement of enroute expenses, sundry expenses, travelling expenses and transportation charges through agents is wholly genuine, incurred during the ordinary course of business, supported by banking transactions and business records, and allowable u/s 37(1) of the Act. The ad hoc disallowance made by the learned AO without identifying any specific bogus expenditure or defect in the books of account deserves to be deleted.
6.4 However, the learned CIT(A) in principle rejected the assessee’s argument and confirm the finding of the AO. However, the learned CIT(A) reduced the disallowances of enroute expenses, sundry expenses, travelling expenses and transportation charges from 10% to 8%. The relevant observation of the learned CIT(A) reads as follows:
“On careful consideration of the facts of the case, assessment order and submissions made by the appellant, it is noted that although the appellant contends that books were audited and regularly maintained, mere audit does not preclude the AO from invoking section 145(3) if correctness and completeness of accounts are not satisfactorily established. In the present case, the AO has clearly recorded reasons demonstrating inability to verify the genuineness of a substantial portion of expenditure due to absence of documentary evidences and trip-wise correlation. Therefore, I am of the opinion that section 145(3) has been correctly invoked by the AO.
However, it is equally settled law that once books are rejected, estimation must be reasonable and based on surrounding facts. The AO disallowed 10% of such unverifiable expenses on ad hoc basis. While the deficiencies in records justify estimation, the rate adopted appears on the higher side considering the nature of business, volume of transactions and the fact that payments were admittedly made through banking channels. Considering the totality of facts and the degree of non verifiability in the present case, a disallowance of 8% of unverifiable expenditure would meet the ends of justice. Accordingly, the disallowance of unverifiable expenditure is restricted to 8% instead of 10%.
Further, the appellant’s reliance on the decision in R.G. Buildwell Engineers Ltd. is misplaced and distinguishable on facts for the following reasons:
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- The assessee in that case was engaged in civil construction and had claimed routine site expenses, whereas the present appellant is engaged in transportation services with substantial, route-wise expenses routed through agents by way of high-volume reimbursements.
- The expenses in R.G. Buildwell, such as bricks, labour and machinery repairs, had, inter alia, a history of being consistently allowed in past scrutiny assessments, whereas in the appellant’s case no such consistent past acceptance of the present pattern of agent level reimbursement expenses has been demonstrated. Here, the major expenses are first incurred by agents and then reimbursed in consolidated amounts, and it has emerged from the record that the agents did not maintain, or at least did not produce, reliable and verifiable primary documents in support of a large portion of these claims, thereby materially weakening the evidentiary value of the reimbursement bills.
- Further, while the Supreme Court upheld deletion of ad hoc disallowance in R.G. Buildwell on the footing that the books were not rejected and no specific defects were found in the manner of incurring or recording the expenditure, in the present case the AO has identified concrete deficiencies in documentation and verifiability of the impugned expenses in the assessment order.
In view of these material factual differences, the legal ratio of R.G. Buildwell Engineers Ltd. on deletion of an ad hoc disallowance in a civil contract context cannot be mechanically extended to the present transportation-cum-agent reimbursement model.
While payments through banking channels lend credibility to the fact of payment, they do not by themselves establish the allowability of expenditure under section 37 unless the nexus with business and genuineness is established. Hence, this contention of the appellant is also rejected.
In view of the above discussion, the invocation of section 145(3) is upheld while the ad hoc estimation is justified, but the rate of estimation for disallowance is restricted to 8% of total unverifiable expenditure. Accordingly, Ground Nos. 1, 3, 4, 5, 6 and 7 are partly allowed subject only to the above modification in the rate of estimation.”
7. Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us.
8. The learned AR before us submitted that the assessee is engaged in transportation business across the country and therefore business operations are carried out through local agents and coordinators. The agents incur expenses such as fuel charges, toll charges, driver bata, travelling expenses and transportation expenses on behalf of the assessee and thereafter seek reimbursement. The learned AR submitted that all reimbursements were made through proper banking channels and complete bank statements, ledger accounts and sample supporting documents were furnished before the AO. The learned AR contended that neither the AO nor the learned CIT(A) has brought any material on record to show that the payments made to the agents had returned back to the assessee in any form. The learned AR further submitted that the Revenue authorities failed to appreciate the practical realities of the transportation business where maintaining every petty voucher is difficult. The learned AR also argued that the assessee has consistently followed the same modus operandi from A.Ys. 2018-19 to 2024-25 and the NP ratio declared during the year under consideration at 1.64% was higher than the average NP ratio of 1.51% for all these years. Therefore, according to him, there was no basis for making arbitrary disallowance at 10% or sustaining the same at 8% without any comparable case or supporting material. He further submitted that the Revenue authorities cannot sit in the armchair of the businessman and decide how business operations should be carried out.
9. The learned DR, on the other hand, strongly relied upon the orders of the AO and the learned CIT(A). He submitted that the assessee failed to produce complete original bills and vouchers in support of huge expenditure claimed under enroute expenses, travelling expenses, sundry expenses and transportation charges. According to the learned DR, the reimbursement claims were mainly supported by summary sheets prepared by the agents and not by proper third-party evidences. He submitted that mere payment through banking channels does not automatically establish genuineness of expenditure u/s 37 of the Act. The learned DR further argued that the assessee was duty bound to maintain proper supporting records for all expenses claimed in the books of account. Therefore, according to him, the AO was justified in invoking section 145(3) of the Act and making reasonable estimation of unverifiable expenditure, which was further reduced by the learned CIT(A) from 10% to 8% after considering the facts of the case.
10. We have heard the rival contentions of both the parties and perused the materials available on record. The limited controversy before us is whether the learned CIT(A) was justified in sustaining ad hoc disallowance at the rate of 8% out of enroute expenses, sundry expenses, travelling expenses and transportation charges after invoking the provisions of section 145(3) of the Act.
10.1 At the outset, we note that the assessee is engaged in the business of transportation of chassis from manufacturer premises to various dealers spread across the country. The very nature of transportation business requires coordination at different locations through local agents and coordinators. The material available on record clearly demonstrates that the impugned expenses such as enroute expenses, travelling expenses, transportation charges and sundry expenses were first incurred by the agents on behalf of the assessee and thereafter reimbursed by the assessee through banking channels. The assessee had furnished ledger accounts, reimbursement statements, sample fuel bills, driver sheets and bank statements before the AO. The payments to the agents were admittedly made through account payee banking channels. Neither the AO nor the learned CIT(A) has disputed the actual movement of funds from the assessee to the agents.
10.2 We further note that the entire disallowance has been made primarily on the ground that complete original bills and vouchers for each expenditure incurred at different places across the country were not maintained or produced. However, considering the peculiar nature of transportation business, such expectation from the assessee has to be examined from the standpoint of practical business realities. In transport business, expenses such as diesel charges, toll charges, driver bata, enroute expenses and petty travelling expenses are incurred at multiple places by drivers, cleaners and local coordinators. The assessee has explained that such expenses are first incurred by the agents and thereafter consolidated reimbursement statements are submitted for settlement. In our considered opinion, the explanation furnished by the assessee is commercially plausible and consistent with the manner in which transportation business is ordinarily carried on.
10.3 More importantly, we find that neither the AO nor the learned CIT(A) has brought any material on record to demonstrate that the reimbursement made to the agents had returned back to the assessee in cash or in any other form. There is no allegation of inflation of expenditure through accommodation entries, fictitious entities or circular movement of funds. The Revenue has also not doubted the identity of the agents or the genuineness of banking transactions. In absence of any evidence showing that the impugned expenditure was bogus or that the funds were siphoned back to the assessee, mere non-availability of complete vouchers for every petty expense cannot by itself justify substantial ad hoc disallowance. Suspicion, however strong, cannot take the place of evidence.
10.4 We also note that the AO has not brought any comparable material on record to establish that the assessee had declared abnormally low gross profit or net profit as compared to similarly placed concerns engaged in transportation business. No comparable case has been referred to either in the assessment order or in the order of the learned CIT(A) for adopting ad hoc disallowance at the rate of 10% or even 8%. The estimation made by the AO is purely arbitrary and without any scientific or rational basis. Even after invoking section 145(3), the estimation of income or disallowance of expenditure cannot be made on pure guesswork without reference to past history or comparable cases.
10.5 On the contrary, the material placed before us shows that the assessee has consistently followed the same business model and same method of accounting in earlier assessment years i.e. A.Y. 2018-19 to 2020-21 as well as in subsequent assessment years i.e. A.Y. 2022-23 to 2024-25. The Revenue has not brought any material on record to show that such modus operandi was ever doubted in those years. We further notice that the assessee has declared NP ratio of 1.64% during the year under consideration, which is higher than the average NP ratio of 1.51% declared by the assessee across A.Ys. 2018-19 to 2024-25. Therefore, the allegation of inflation of expenditure does not find support even from the profitability trend of the assessee. If the expenditure claimed by the assessee was genuinely inflated or bogus, the same would normally reflect in abnormal fall in profitability. However, no such abnormality has been demonstrated by the Revenue.
10.6 We further find merit in the contention of the assessee that once the Revenue accepts the transportation receipts and business operations as genuine, complete disallowance or substantial ad hoc disallowance of operational expenses essential for carrying out such transportation activity would lead to absurd results. Transportation business cannot be carried on without incurring fuel expenses, toll charges, travelling expenses, driver expenses and transportation related expenditure. The AO himself has accepted that transportation activities were actually carried out by the assessee. Therefore, without bringing positive material to show inflation or falsity of expenditure, ad hoc disallowance merely for want of complete vouchers is not sustainable.
10.7 We are also unable to approve the approach of the learned CIT(A) in sustaining disallowance at 8% merely on equitable considerations. Once the learned CIT(A) himself accepted that the payments were made through banking channels and considering the nature of business the rate adopted by the AO was excessive, there still remained no rational basis for sustaining disallowance at 8%. The reduction from 10% to 8% appears to be only an estimate without any supporting reasoning, comparative analysis or material evidence. Such ad-hoc disallowance cannot be sustained in appellate proceedings.
10.8 We also note that the Revenue authorities cannot sit in the armchair of the businessman and dictate the manner in which business operations should be carried out. The assessee, considering the spread and nature of transportation business across the country, chose to operate through local agents and coordinators for smooth execution of transportation activities and reimbursement of operational expenses. Such commercial decisions are part of business prudence and unless the Revenue demonstrates that the arrangement is sham, colourable or lacks business purpose, the same cannot be disregarded merely because the AO is of the view that the business should have been conducted in some other manner. The Hon’ble Supreme Court in the case of S.A. Builders Ltd. v. CIT (A) & Anr.(supra) has clearly held that the Revenue cannot substitute its own wisdom for that of the businessman in deciding the reasonableness or necessity of business expenditure.
10.9 Considering the totality of facts, nature of business carried on by the assessee, consistent accounting pattern followed over several years, stable and better NP ratio during the year under consideration, reimbursement through banking channels, absence of any finding regarding cash being returned to the assessee and absence of any comparable material supporting estimation, we are of the considered opinion that the authorities below were not justified in sustaining ad hoc disallowance out of the impugned expenditure. Accordingly, we hereby set aside the finding of the learned CIT(A) and direct the AO to delete the disallowance sustained by the learned CIT(A). Thus, the grounds raised by the assessee are allowed.
11. In the result, the appeal filed by the assessee is hereby allowed.
Order pronounced in court on 27th day of May, 2026
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