2016 (2) TMI 397 - AT - Income Tax

Tribunal Rulings on Income Tax Disallowances: Section 40A(3), 68, 40(a)(ia), Truck Hire Charges

Asst. Commissioner of Income-tax, Circle 1 (1), Mangalore Versus M/s. Coastal Roadways

The Tribunal upheld the CIT(A)'s decision to delete the disallowance under Section 40A(3) of the Income Tax Act, stating that payments were made to ... Disallowance u/s 40A - Held that:- The official proclamation that sub-section (3) of section 40A is being substituted to nullify the loophole created by the judicial decisions, the legal position remains the same even after the said substitution. The newly substituted subsection (3) contains the phrase 'a payment or aggregate of payments made to a person in a day.' .This expression is analogous to the phrase 'in a sum' used in erstwhile Sec.40A(3) of the Act. The new provision contains 'in a day'. Therefore, the judicial interpretation of the expression 'in a sum', i.e., a single sum, would equally apply in interpreting the expression 'in a day' to mean a single day. Therefore the new sub-section (3) of the Act also will not apply when a payment to one person on a single day in the aggregate does not exceeding twenty thousand rupees. In other words, in each day, an assessee can make cash payment upto twenty thousand rupees, without any statutory bar. The CIT(A) in our view has therefore rightly given directions to the AO to verify if payment to one person on a single day exceeds ₹ 20,000/-. We do not find any infirmity in the order of the CIT(A). Unexplained cash credits u/s. 68 - Held that:- Once the firm has satisfactorily explained that the credit entries in the name of its partners represent the amount invested by them the burden of proof stood discharged and the amount cannot be treated as income of the firm under s. 68. In the light of the legal position stated above and in the light fact that the Assessee has satisfactorily shown receipt of cash from the partners the cash credit in question should be considered as satisfactorily explained. For the reasons given above, we do not find any grounds with the order of the CIT(A) in deleting the addition. Addition made u/s.40(a)(ia) - non deduction of tds - Held that:- Following the decision of the Hon’ble Supreme Court in the case of Vegetable Products Ltd. (1973 (1) TMI 1 - SUPREME Court), we hold that where two views are possible on an issue, the view in favour of the assessee has to be preferred. Disallowance of trick hire charges - Held that:- We are of the view that the disallowance is reasonable considering the quantum of expenditure for which there were no proper vouchers. The Assessee has not demonstrated that the quantum of expenditure on truck hire charges and receipts from plying trucks on hire in the present AY compares favourably with the expenditure on truck hire charges and receipts from plying of truck on hire in the past AYs. We therefore uphold the order of the CIT(A) on this issue. Issues Involved:1. Disallowance under Section 40A(3) of the Income Tax Act.2. Unexplained cash credits under Section 68 of the Income Tax Act.3. Disallowance under Section 40(a)(ia) of the Income Tax Act for non-deduction of tax at source.4. Adhoc disallowance of truck hire charges.Issue-wise Detailed Analysis:1. Disallowance under Section 40A(3) of the Income Tax Act:The Revenue challenged the CIT(A)'s decision to delete the disallowance made under Section 40A(3) of the Income Tax Act, which pertains to cash payments exceeding Rs. 20,000. The AO disallowed Rs. 1,51,11,864, asserting that the vouchers indicated payments to a single recipient, thus violating Section 40A(3). The Assessee argued that payments were made to individual lorry drivers, each below Rs. 20,000, and the aggregation on vouchers was for accounting convenience. The CIT(A) directed the AO to verify if individual payments exceeded Rs. 20,000 and exclude payments made on holidays. The Tribunal upheld CIT(A)'s decision, noting that the vouchers evidenced payments to individual drivers and that the legislative intent was to prevent splitting of payments to avoid Section 40A(3) disallowance.2. Unexplained Cash Credits under Section 68 of the Income Tax Act:The AO added Rs. 37,06,463 as unexplained cash credits in the capital account of a partner, Mr. H. Moidinabba, due to discrepancies between ledger and balance sheet entries. The Assessee explained that the capital was introduced by another partner, Mr. Abdul Raheem Hussain, through NRI bank account withdrawals. The CIT(A) accepted this explanation, finding that the same amount was introduced once and directed the deletion of the addition. The Tribunal concurred, citing that the source of funds was satisfactorily explained and supported by judicial precedents, which state that once a firm explains the source of partner's capital, the burden of proof is discharged.3. Disallowance under Section 40(a)(ia) of the Income Tax Act for Non-deduction of Tax at Source:The Assessee failed to deduct tax at source on truck hire charges and other payments totaling Rs. 1,02,32,864. The CIT(A) upheld the disallowance, rejecting the Assessee's reliance on the Special Bench decision in Merilyn Shipping, which held that Section 40(a)(ia) applies only to amounts payable as of March 31. The Tribunal noted conflicting High Court decisions on this issue but favored the Assessee's view, following the principle that where two views are possible, the one favorable to the Assessee should be adopted. Consequently, the Tribunal directed the deletion of the disallowance under Section 40(a)(ia).4. Adhoc Disallowance of Truck Hire Charges:The AO disallowed Rs. 10 lakhs from truck hire charges due to unsigned vouchers lacking party names. The Assessee argued that obtaining signatures from lorry drivers was impractical. The CIT(A) upheld the disallowance, and the Tribunal agreed, considering the quantum of expenditure without proper vouchers and the nature of the Assessee's business. The Tribunal found the disallowance reasonable and upheld the CIT(A)'s order.Conclusion:The Tribunal dismissed the Revenue's appeal and partly allowed the Assessee's cross-objection, providing detailed directions on each issue based on the merits and legal precedents. The judgment emphasizes the importance of documentary evidence, legislative intent, and judicial interpretations in tax assessments.