Dy. CIT Vs Niten Hasmukhbhai Shah
ITAT BENCH ‘C’, AHMEDABAD
ITA No. 1982/Ahd/2009
Assessment Year: 2006- 2007
Decided on: 27 May 2011
Order
Per: D K Tyagi, JM:
This is Revenue’s appeal against the order of Commissioner of Income-tax(Appeals)-XX, Ahmedabad in appeal No CIT(A)-XX/118/08- 09 dated 17-03-2009 for the assessment year 2006-07.
2. The Revenue has taken following ground:-
“1. The Ld. CIT(A)-XX, Ahmedabad has erred in law and on facts in deleting the addition of Rs.89,68,871/- made by the AO by invoking the provisions of section 40(a)(ia) of the I.T. Act, without properly appreciating the facts of the case and the material brought on record by the A.O.
1.2 In doing so, the Ld. CIT(A)-XX, Ahmedabad has erred in law and on facts in holding that there was no continuous contract, oral or written, between the assessee and M/s. Rupal Roadways, without properly appreciating the facts of the case as discussed by the AO in detail in the assessment order.
1.3 In doing so, the Ld. CIT(A)-XX, Ahmedabad has erred in law and on facts in not appreciating that the case of the assessee was squarely covered by the provisions of section 194C(3)(i) substituted by the Finance (No.2) Act, 2004 with effect from 01.10.2004, with a view to prevent the practice of splitting of composite contract so as to escape the provisions relating to deduction of tax at source.
1.4 In doing so, the Ld. CIT(A)-XX, Ahmedabad has erred in law and on facts in not appreciating that since the LRs for transportation were issued in the name of M/s. Rupal Roadways, this clearly showed that the assessee had itself not carried out the work of transportation and clearing of lignite directly through the various truck owner/drivers, but the said work was entrusted by the assessee to M/s.Rupal Roadways and since the aggregate of payments to M/s. Rupal Roadways was much in excess of Rs.50,000/-, the assessee was required to deduct tax at source as per the provisions of section 194C(3) of the I.T. Act.
1.5 In doing so, the Ld. CIT(A)-XX, Ahmedabad has erred in law and on facts in not following the ratio of the decision in the case of Shree Chaudhary Transport Co. reported in 119 TTJ (jd) 3, which is clearly applicable to the facts of assessee’s case.”
3. The brief facts of the case are that assessee has paid freight and octroi amounting to Rs.89,68,871/- to various truck-owners/drivers during the year under appeal for transporting lignite to its Ahmedabad based customers from the mines owned by Gujarat Mineral Development Corporation (GMDC for short) situated at Pandhro. The Assessing Officer called or the detailed ledger account of the freight and octroi expenses and basic vouchers maintained by the assessee. After verification of the details AO issued show-cause notice as to why the sum of Rs.87,68,871/- should not be disallowed u/s 40(a)(ia) of the Act. The assessee made detailed written submission in response to the said showcause notice. It was contended in that reply that none of the payment is in excess of Rs.20,000/- and none of the aggregate payment to a single truck owner/driver is in excess of Rs.50,000/-. Hence, payments are not hit by the provision of section 194C(3) of the Act consequently the provision of section 40(a)(ia) shall also not apply. However, AO did not accept this explanation and held that as per provision of section 40(a)(ia) the amount of Rs.87,68,871/- is not deductible in computing the income chargeable under the head profit & gains of business and profession. Accordingly, disallowance of Rs.87,68,871/- was made u/s 40(a)(ia) by observing as under:-“The issue emerging on analysis of written submissions filed by the assessee from time to time and on examination of the books of accounts are discussed as under:-
‘3.1 The assessee has disclosed gross profit of Rs.21,36,052/- on total sales of Rs.5,44,29,107/- which works out to 3.92% as against G.P. of 3.95% disclosed in the immediate preceding year. In the year relevant to Asst. Year 2004-05, the assessee has disclosed GP at 7.17%. As regards downfall in the rate of GP as compared to Ast. Year 2004-05, the assessee’s main business was dealing in different kinds of acids and chemicals whereas trading of lignite was very nominal. However, from the year relevant to Asst. Year 2005-06, the assessee has switched over to business of lignite. In this year, the trading in acids and chemicals was very nominal. Thereafter, in the year under consideration, the assessee has exclusively carried out trading business of lignite only. It is also explained that the price of lignite is publicly open. Lignite is sold by GMDC at the disclosed price. So the margin is very low in comparison of acids and chemicals. Considering the explanation and factual position submitted by the assessee and also taking into account the fact that the sales have increased from Rs.1.63 crores in the year relevant to Asst. Year 2005-06 to Rs.5.44 crores in the year under consideration. The book results are therefore accepted.
3.2 On perusal of trading and Profit & Loss A/c, it is noticed that the assessee has claimed freight and octroi expenses at Rs.89,68,871/-. In this regard, a detailed copy of account of freight and octroi expenses was called for which was furnished by the assessee vide written submission dated 5.12.2008 furnished on 10.12.2008. On perusal of the said account, it is found that the assessee has been making payment of freight in cash on daily basis and almost all the entries for payment are found to be in the range of Rs.9,000/- to Rs.9,500- i.e. below Rs.10,000/-. This account was examined with reference to books of accounts and bills and vouchers produced. On examination of the vouchers and bills produced, it is found that each voucher in respect of each entry debited in the account is supported by a L.R. issued by Roopal roadways, a transport contractor and lignite clearing agent, Station Road,Bhuj. Since it was found that the assessee has not deducted tax at source in respect of the transportation and clearing work got carried out through Roopal Roadways, vide order sheet noting dated 18.12.2008 and vide this office letter No.DCIT(OSD)/R- 12/NHS/2008-09 dated 18.12.2008, the assessee was required to show cause as to why dis allowance u/s.40a(ia) of the I.T. Act should not be made in respect of freight payment of Rs.89,68,871/-. The extract of the noting is reproduced here-under:-‘
‘No. DCIT(OSD)R-12/NHS/2008-09
Date: 18-12-2008
To
Shri Niten Hasmukhbhai Shah
Prop of M/s. jaianm Trading Company
A5-H, Trade Centre, Stadium Navrangpura, Ahmedabad
Sir, Sub: Assessment proceedings for A.Y.2006-07
P.A. No.ADHS8372J
Please refer to the above.
2. You have filed your return of income for A.Y. 2006-07 on 30.12.2006 disclosing total income at Rs.6,28,804/-. The case was selected for scrutiny assessment, accordingly notice u/s.143(2) of the I.T. Act, 1961 was issued 7.11.2007 and served upon you on 17.11.2007 by DCIT, Cir.12, Ahmedabad. Subsequently the case was assigned to the undersigned. Therefore, a formal notice u/s.143(2) and noticed u/s.142(1) along with detailed questionnaire were issued on 5.6.2008. In response thereto, you have filed your written submission and information from time to time. On perusal of the written submission and on examination of books of accounts, following issues are noticed:
i) On perusal of freight and octroi expenses account, it is seen that you have paid freight of Rs.89,68,871/- in cash on various dates. Further, on perusal of bills and vouchers, it is noticed that in majority of the cases, the LRs are from Roopal Roadways and the payment has been made in cash. It is explained that the freight paid is in respect of lignite transported from GMDC to Ahmedabad for which the payment has been made in cash. But for such payments, no TDS has been made. You have not deducted tax at source at the time of payments. Please show case as to why dis allowance u/s.40(a)(ia) of the I.T. Act should not be made in respect of freight payment of Rs.89,68,871/-
ii) … … …
3. You are requested to attend to my office on 22.12.2008 at 2.30 p.m. and furnish your explanation on the issues raised herein above. Please treat this letter as notice u/s.142(1) of the I.T. Act, 1961. Please note that in case of non compliance, it will be presumed that you having nothing to explain in the matter and the issues raised herein above are acceptable to you. Accordingly, the assessment will be finalized in the manner indicated as above.
(S E A L)
Yours faithfully,
(LALIT P JAIN)
Dy. Commissioner of Income-tax,
(OSD)-Range-12, Ahmedabad.’
3.2.1 In response to thereto, the assessee vide his written submissions dated 22.12.2008 has submitted as under:
‘In the course of assessment proceedings, your Honor have asked the assessee to justify its claim of freight and octroi expenses of 89,68,871/- with specific reference to section 40(a)(ia).
The assessee most respectfully submits as under:-
1. The copy of the ledger account of freight and octroi expenses for the previous year relevant to Asst. Year 2006-07 as appearing in the audited books is attached herewith.
2. The close scrutiny of the said account reveals the following facts:
(i) All the payments have been made in cash
(ii) None of the payment is excess of Rs.20,000/-
(iii) None of the aggregate payment is in excess of Rs.50,000/-/
The provisions of section 40(a)(ia) can be invoked only when the payments made are hit by the provisions of Section 194C.
The assessee most respectfully invites your kind attention to Section 194C(3)(i) and its first proviso:
(QUOTE)
(3) No deduction shall be made under sub-section (1) or subsection (2) from (i) the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor or subcontractor, if such sum does not exceed twenty thousand rupees.
Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the Financial Year exceeds fifty thousand rupees, the person responsible for paying such sums referred to in sub-section (10 or, as the case may be sub-section (2) shall be liable to deduct income-tax (under this section:].”
(UNQUOTE)
Now reverting to the facts of the case, the analysis of the ledger account clearly shown that the payments made on account of freight and octroi expenses are below the limit of Rs.20,000/- qua each payment and Rs.50,000/- qua aggregate payment to one individual i.e. Financial Year and are not hit by the rigour of section 194C(3).
As the payments are not hit by section 194C(3), the provisions of section 40(a)(ia) shall not apply. In view of the facts of the case and relevant law, the assessee most humbly requests your Honour to drop the proposal of making addition of Rs.89,68,871/-“
3.3.2 The assessee’s submission has been carefully considered but the same is not found convincing. On examination of the vouchers for payment, it is found that each entry for payment of freight and octroi is supported by the voucher prepared by the assessee and LR of Roopal Roadways. Further, the assessee with its reply has again given the extract of freight and octroi expenses account from the ledger maintained by it. In the detailed extract, the assessee has given LR number of the transporter as also the truck number against each entry. On examinations of the voucher files, it has been found that almost in all cases the payment has been made against the LR of Roopal Roadways. On perusal of the vouchers and LRs, it is seen that payment of freight has been made in cash on per metric ton rate basis. The actual amount paid therefore has been worked out on the basis of the weight of lignite transported at the prevailing rate of freight. These facts clearly reveal that the assessee had entrusted the work of transportation and clearing and forwarding of lignite to Roopal roadways who is a transport contractor and lignite clearing agent right from April 20005 to March 2006 i.e. for the entire Financial Year. During the course of hearing while examination of the books of accounts and vouchers, photo copies of vouchers prepared by the assessee and LRs of Roopal Roadways have been obtained, on sample basis for all the 12 months. Out of the photo copes so obtained, following vouchers and LRs are made part of the assessment order.
