Iqra Steel & Tubes P. Ltd, Mumbai vs Assessee

The aforesaid appeal has been filed by the Assessee, against order dated 28.03.2012, passed by Commissioner of Income Tax(CIT), u/s 263 for the A.Y. 2007-08. The assessee has raised following as revised grounds of appeal before us.

"1. The learned Commissioner of Income Tax (Administration) [CIT (Adm)] erred in assuming jurisdiction under section 263 of the Income Tax Act, 1961 [Act] when conditions precedent to invoke foregoing section are not satisfied in Appellant's case.

ITA No. 2773/Mum/2012 2 Assessment Year: 2007-08

2. CIT(A) further erred in this connection holding that:-

a) there is no material to show that AO propose to examine issue by applying provisions of section 40A(3);

b) AO had not applied his mind to applicability of section 40A(3);

c) assessment order dated 17.12.2009 was not passed after due application of mind by AO;

d) assessment record does not contain written reply of Appellant in response to section 154 notice dated 31.05.2010; and

e) view taken by AO does not constitute one possible view.

3. Appellant craves leave to add to and/or amend and/or delete and/or modify and /or alter the aforesaid revised/modified grounds of appeal as and when the occasion demands.

4. All the aforesaid grounds of appeal are independent, in the alternative and without prejudice to one another."

2. The brief facts of the case are that, the assessee company is dealer in building materials, including steels, brackets, HR sheets, MS beams, coils, pipes etc. It has filed its return of income on 11.10.2007, at an income of Rs.16,23,460/-. The said return was selected for scrutiny u/s 143(2). During the course of the assessment proceedings, the assessing officer had noted that assessee had shown purchases of Rs.29,80,08,189/-, as against the purchase of Rs.12,82,17,861/- in the immediately preceding year. The said purchases also included the transport expenses. The assessing officer required the assessee to furnish the ledger account of the parties to whom transportation charges were paid. On the perusal of the same he noted that, 75% of the total transportation charges was paid in cash. He also noted down the list of the parties to whom cash amount was paid, which was illustrated in the following manner:-

ITA No. 2773/Mum/2012 3 Assessment Year: 2007-08

Link Road Carrier Cash 25450 Sohal Transport Co. Cash 2347409 Kaka Transport Co. Cash 217466 New Bombay Patiala Transport Co. Cash 26512 Chawla Transport Co. Cash 118500 Okara Roadways Cash 297192 Maharashtra Gujrat Toad Carriers Cash 28910 Ahuja Roadlines Cash 26690 Terry Transport Co. Cash 18900 H P R Freight Carrier Cash 48953 Shree Balaji Roadlines (India) Ltd. Cash 273742 Bombay Gobindgarh Roadways Cash 1062439 Jagjeet Goods Carriers Cash 29370 Guruteg Bahadur Transport Co. Cash 18970 Sai Transport Corporation Cash 62499 Khalsa Roadways Cash 149337 Bombay Gujrat Transport Service Cash 162144 New Shukla Freight Carriers Cash 60774 Charu Transport Company Cash 27170 Total 5002427

As mentioned in the assessment order, the AO has verified the bills and vouchers relating to the transport expenses which were voluminous in nature. After detail scrutiny and verification, he noted that some of the transport expenses are not fully supported with bills and vouchers. Accordingly, he made an ad hoc disallowance of Rs.1,25,000/- All these facts have been stated at page 2 of the assessment order. Finally the assessment was completed u/s 143(3), vide order dated 17.12.2009.

ITA No. 2773/Mum/2012 4 Assessment Year: 2007-08

3. Thereafter, on 21.03.2012, Ld. CIT issued a show cause notice, u/s 263, wherein he pointed out that, cash payment of transport charges to parties charges was made in cash, however, the assessing officer has not looked into aspect of violation of section 40A(3). Thus, AO should have examined the deduction on account of transport charges from the angel of section 40A(3) and disallowed the excess payment by making the disallowance of 20%. Accordingly, he was of the opinion that the order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue. In response the assessee submitted that all the details of transport expenses and party-wise details was given in the tax audit report with a qualification that there is no violation of section 40A(3). It was also explained before the AO that no payment was made to the transporters at a time in excess of Rs.20,000/- in cash. In fact some payments were also made through cheques. The entire matter of transport charges and cash payment was examined, aspect including the books of account, bills and vouchers and explanation thereof. It was also explained before CIT that, most of the purchases of the assessee company is from outside Maharashtra, therefore, the assessee company used to make payment to the truck owners or the driver at the time of taking the delivery of goods as they insisted upon cash payment for incurring the transportation expenses like diesel, food etc. It was also submitted that the legal position of section 40A(3) as it stood the A.Y. 2007-08 was that, if the payment of a cash is less than 20,000/-, then no disallowance is called for. The aggregate payment of Rs.20,000/- in a day has been brought in the statute w.e.f. 01.04.2009, i.e. A.Y. 2009-10 and for the prior assessment years, if the payment at a time is less than 20,000/- then it was not a ITA No. 2773/Mum/2012 5 Assessment Year: 2007-08

breach of the provision of section 40A(3). Besides this various legal submissions on revisionary jurisdiction and scope of section 263 was made. Another important factor which was brought to the notice of the Ld. CIT(A) that the AO on same reason had initiated the proceedings u/s 154, in response t o which the assessee has filed its detail submission that provision of section 40A(3) will not apply. Thereafter, the AO has not taken any adverse inference or passed any order. This means assessee's contention has been accepted.

4. However, the Ld. CIT rejected the assessee's contention, and held that AO has not applied his mind at the time of the passing of the assessment order as regard to the applicability of section 40A(3) on the transport expenses. Further assessee's reply in response to section 154 is also not available on record. Accordingly, he directed the AO to examine provision of section 40A(3) and see its applicability on the expenditure aggregating Rs.50,02,427/-. The final conclusion of the Ld. CIT is as under:-

"3.5 In view of the above discussion, it is held that the assessment order passed by the AO on 17.12.2009 was without application of mind and hence erroneous in nature. Since the AO had found 75% of the total transport expenses of Rs.50,02,427/- was made in cash, the assessment order has caused prejudice to the interest of revenue as disallowance of the expenditure was not made by applying the provision of section 40A(3) of the Act as is required by the facts of the case. In view of this, it is held that the assessment order dated 17.12.2009 as passed by the AO in this case is erroneous is so far as it is prejudicial to the interest of revenue. This assessment order is therefore set aside and the AO is directed to redo the assessment by applying the provisions of section 40A(3) of the Act to the aforesaid expenditure of Rs.50,02,427/- after giving opportunity of hearing to the assessee.

ITA No. 2773/Mum/2012 6 Assessment Year: 2007-08

5. Before us, learned counsel for the assessee submitted that during the course of the assessment proceedings, the assessee had furnished the entire party-wise details of transport charges along with the original bills which is evident from letter dated 23.10.2009 filed before the AO during the course of the assessment proceedings. [copy of which is appearing at page 37 and 38 of the paper book]. Besides this, the assessee had also filed the details regarding each and every payment to show that none of the payments have exceeded sum of Rs.20,000/- at a time. [The details in this regard are appearing at pages 41 and 42 of the paper book]. In support of his contention, he drew our attention to the copy ledger account of all the parties submitted during the course of the assessment proceedings including bills and vouchers to demonstrate that none of the payment exceeded 20,000/-. [These details are appearing from pages 43 to 106 of the paper book]. Thus, when these details have been furnished before the AO which has been specifically examined by him, then Ld. CIT under revisionary jurisdiction u/s 263 cannot hold that the assessment order is erroneous in law or prejudicial to the interest of the revenue. In support of his contention that prior to A.Y. 2008-09, the provision of section 40A(3) will not apply if the payment at a time does not exceed Rs.20,000/- and the amendment brought in section 40A(3) will not apply retrospectively, he strongly relied upon decision of the Allahabad High Court in the case of CIT Vs. Ashok Iron & Steels reported in 320 ITR page 101. He also referred to other catena of decisions on the point that, if the assessing officer had examine the issue and dealt the same and formed his opinion, then, CIT cannot cancel such an assessment order u/s 263 taking a different view. These judgments include the decision of Hon'ble Supreme Court in the ITA No. 2773/Mum/2012 7 Assessment Year: 2007-08

case of CIT Vs. Max India reported in (2007) 295 ITR 282 (SC) and Bombay High Court decision in the case of Ranka Jewellers Vs. Additional CIT reported in (2010) 328 ITR 148 (Bom). Thus, he submitted that impugned order passed by the Ld. CIT should be quashed.

6. On the other hand Ld. DR strongly relied upon the order of the Ld. CIT and submitted that AO has not made any specific inquiry or raised a query regarding applicability of section 40A(3), which is apparent when the payments have been made in cash. The Ld. CIT has only set aside the assessment order for examination only and therefore, there is no error in the order of the CIT. In support of his contention, he relied upon the decision of Kerala High Court in the case of P.V. Sreenijin Vs. CIT reported (2014) 47 taxman.com 61, wherein it has been held that where the entire material available with the AO has not been considered and certain expenditure has been allowed in excess, then the CIT has a jurisdiction u/s 263 to set aside the said assessment order or revise the assessment order.

7. We have heard the rival submissions, and also the relevant material placed on record. The sole ground for setting aside the assessment order passed u/s 143(3) is that, the assessing officer has not examined the transportation charges which was paid in cash from the angle of disallowance u/s 40A(3). As discussed above, it is evident from the material placed on record that during the course of the assessment order proceedings, the assessing officer has called for the entire details of transportation charges, which included party-wise ledger accounts, bill and vouchers, etc. specifically to examine the nature of cash payment made to the various transporters. From the perusal of ITA No. 2773/Mum/2012 8 Assessment Year: 2007-08

such ledger account and bills and vouchers which have been placed before the AO, it is seen that none of the payment made by the assessee at a time has exceeded Rs.20,000/- in cash. This fact is corroborated by the bills issued by transporters and also the vouchers issued by the assessee. These transportation charges are in the nature of advances paid to the drivers and transporters once the assessee books the trucks for the purpose of the purchases outside Maharashtra. If all these details have been verified and examined by the AO, then it cannot be held that AO has not made any enquiry or verified the evidences. If on verification the assessing officer has taken a view, then same cannot be substituted by the CIT, that disallowance should have been made excess by applying different provision, unless there is a categorical finding by the CIT that the view taken by the assessing officer or his opinion is unsustainable in law. This has to be demonstrated from the facts and material on record by the CIT. Here in this case, the Ld. CIT has not pointed out that there is any actual violation of section 40A(3) as per the law prevalent in the A.Y. 2007-08. Prior to A.Y. 2009-10, section 40A(3) provided that, where the assessee incurs any expenditure in respect of which payment is made for sum exceeding Rs.20,000/-, then no deduction shall be allowed. The statute did not envisaged that the aggregate amount of payments made to a person on a day should exceed Rs.20,000/-. This specific amendment has been brought in the statute w.e.f. 01.04.2009. This proposition that no disallowance u/s 40A(3) should be made if the payment at a time is less than prescribed limit, is fully supported by decision of Hon'ble Allahabad High Court in the case of CIT Vs. Ashok Iron and Steel Rolling Mills (supra) and decision of Orissa High Court in the case of CIT Vs. ITA No. 2773/Mum/2012 9 Assessment Year: 2007-08

Aloo Supply Company (1980) 121 ITR 680. Thus, the AO has rightly not invoked the provision of section 40A(3) while completing the assessment u/s 143(3). On these facts, it cannot be held that the assessment order passed by the AO is erroneous so far as it is prejudicial to the interest of the revenue. The Ld. CIT has not given any specific finding from the records as to how there is a violation of section 40A(3) with regard to the payments made by the assessee. Thus, we quash the impugned order passed by Ld. CIT u/s 263 and the grounds raised by the assessee is treated as allowed.

8. In the result, the appeal filed by the Assessee is allowed.

Order pronounced in the open court on this 25th day of February, 2015.

Sd/- Sd/- (N.K. BILLAIYA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 25.02.2015 *Srivastava Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT(A) Concerned, Mumbai The DR "I" Bench

//True Copy// By Order

Dy/Asstt. Registrar, ITAT, Mumbai.