2025 (5) TMI 791 - AT - Income Tax

Tribunal reduces vehicle expense disallowance to Rs. 1,50,000, deletes TDS and cash payment disallowances under sections 194C, 40(a)(ia), 40A(3)

ITAT Delhi partially allowed the assessee's appeal regarding three disallowances. For vehicle expenses under section 37, the tribunal restricted ... Disallowance u/s 37 - vehicle expenses - AR contended that the expenditure had been incurred through Drivers, Cleaners, Employees in the course of transportation of goods from one place to another - HELD THAT:- Nothing has been brought on the record to controvert the finding of the lower authority and demonstrate that entire payments do not attract any offence being prohibited under any law. Keeping in view the facts in entirety and legitimacy of part expenses, we restrict this disallowance to Rs. 1,50,000/-. TDS u/s 194C - Disallowance u/s 40(a)(ia) - payments made to a third party on behalf of labourers without deduction of TDS - HELD THAT:- Making payment to one person on behalf of others, in the present case, will not attract TDS as the said person has not supplied manpower/labour. The payment arrangement was purely for business convenience and other labours were independent and their mustor roll was being maintained by the assessee. We have considered the entire facts and given a thoughtful consideration to the matter and are of the considered view that the assessee is not liable to deduct TDS. The genuineness of expenditure is not in dispute here. Hence, it is held that the disallowance u/s 40(a)(ia) of the Act is not justified. Therefore, the same is hereby deleted. The assessee gats consequential relief. Disallowances u/s 40A(3) - cash payments exceeding prescribed limits - HELD THAT:- We find merit in the submission of the Ld. AR. Making payment to one person on behalf of others, in the present case, will not attract TDS as the said person has not supplied manpower/labour. It is held that the sum paid through banking channel is not liable for the disallowance u/s 40A(3) and the limit for freight is Rs. 35,000/- under section 40A(3A). We delete the disallowance of packing expenses paid in contravention to the provisions of section 40A(3) of the Act. Hence, it is held that the disallowance u/s 40A(3) of the Act is not justified. Therefore, the same is hereby deleted. The assessee gats consequential relief. Appeal of assessee is partly allowed as above. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Appellate Tribunal in this appeal pertain to the validity and justification of various disallowances made by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) (CIT(A)) under the Income Tax Act, 1961 (the Act) for the Assessment Year 2014-15. The issues are:Whether the disallowance of Rs. 2,96,150/- under section 37(1) of the Act relating to vehicle expenses is justified.Whether the disallowance of Rs. 15,77,164/- under section 40(a)(ia) of the Act for payments made to a third party on behalf of labourers without deduction of tax at source (TDS) is valid.Whether the disallowance of Rs. 11,74,499/- under section 40A(3) of the Act on account of cash payments exceeding prescribed limits is appropriate, including sub-issues concerning payments to packers and freight payments.Whether the AO and CIT(A) failed to appropriately appreciate the evidence produced and hence wrongly disallowed expenses aggregating Rs. 30,47,813/-.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Disallowance under Section 37(1) of the Act - Vehicle Expenses of Rs. 2,96,150/-Relevant Legal Framework and Precedents: Section 37(1) permits deduction of any expenditure incurred wholly and exclusively for the purposes of business or profession unless specifically disallowed. The appellant relied on the precedent set by the Hon'ble Madras High Court in CIT vs. Coimbatore Salem Transport Company Pvt. Ltd. (1966) 61 ITR 480 (Mad), which held that vehicle expenses incurred in the course of business transportation are allowable.Court's Interpretation and Reasoning: The Tribunal noted that the expenditure was incurred on drivers, cleaners, and employees involved in transporting perishable goods, which is essential for the business. The expenses included repairs, maintenance, gate fees, and weighment charges, all of which are legitimate business expenses. The Tribunal found no evidence that these payments were illegal or prohibited by law.Key Evidence and Findings: The appellant demonstrated that these expenses were necessary for smooth transportation to avoid damage to perishable goods. The AO and CIT(A) had disallowed the full amount without adequately considering the nature and necessity of these expenses.Application of Law to Facts: Applying section 37(1), the Tribunal held that the expenses were incurred wholly and exclusively for business purposes and thus allowable. However, considering the facts and the record, the Tribunal restricted the disallowance to Rs. 1,50,000/- instead of the full amount, implying partial disallowance on some unspecified grounds.Treatment of Competing Arguments: The AO and CIT(A) had upheld the disallowance, but the Tribunal found the appellant's arguments and precedent more persuasive, leading to a reduction in disallowance.Conclusion: The disallowance under section 37(1) was partly justified; the Tribunal restricted the disallowance to Rs. 1,50,000/- and allowed the balance.Issue 2: Disallowance under Section 40(a)(ia) of the Act - Rs. 15,77,164/- Paid to Labourers via a Third PartyRelevant Legal Framework and Precedents: Section 40(a)(ia) mandates disallowance of expenses if tax is not deducted at source on certain payments to residents. The question was whether payments made to Mr. Rehmat Ali on behalf of various labourers attracted TDS provisions. The appellant cited decisions including Bhagyanagar Gas Ltd., Gujarat Narmada Valley Fertilisers Co. Ltd., and Dhaanya Seeds Pvt. Ltd., which clarified that TDS provisions apply only where there is a contract or agreement with the payee.Court's Interpretation and Reasoning: The Tribunal observed that Mr. Rehmat Ali acted as a conduit for payments to labourers without any contract or agreement with the appellant. The payments were partly in cash and partly by cheque, and the muster roll for labourers was maintained. The Tribunal held that since there was no contract with Mr. Rehmat Ali for supply of labour, the TDS provisions under section 194C or section 40(a)(ia) did not apply.Key Evidence and Findings: The appellant produced muster rolls and payment records demonstrating that labourers were independent and paid accordingly. The genuineness of the expenditure was undisputed.Application of Law to Facts: The Tribunal applied the principle that TDS obligations arise only when payments are made to contractors or service providers under contract. Here, the arrangement was for business convenience, not a contract with Mr. Rehmat Ali.Treatment of Competing Arguments: The AO and CIT(A) had disallowed the entire amount for non-deduction of TDS. The Tribunal rejected this, accepting the appellant's submissions and precedent authorities.Conclusion: The disallowance of Rs. 15,77,164/- under section 40(a)(ia) was deleted, and consequential relief was granted to the appellant.Issue 3: Disallowance under Section 40A(3) of the Act - Rs. 11,74,499/- on Account of Cash PaymentsRelevant Legal Framework and Precedents: Section 40A(3) disallows expenditure where payments exceeding prescribed limits are made in cash. The limit was Rs. 20,000/- per payment, later amended to Rs. 35,000/- for freight payments under section 40A(3A).Court's Interpretation and Reasoning: The Tribunal analyzed two parts of this disallowance:Payments of Rs. 5,03,580/- to Mr. Chetan Kumar Solanki (packer), where Rs. 3,38,580/- was paid by cheque and Rs. 1,65,000/- in cash. The cash payments were made in tranches below the prescribed limit, except Rs. 60,000/- which was supported by muster roll evidence.Payments of Rs. 6,70,919/- comprising freight payments (all below Rs. 35,000/- per payment), packing expenses based on muster rolls, and procurement expenses.The Tribunal held that payments made through banking channels are not liable for disallowance under section 40A(3). The cash payments were either below the prescribed limits or supported by muster rolls, indicating compliance.Key Evidence and Findings: The appellant produced muster rolls and payment records showing that no single payment exceeded the prescribed limit. The Tribunal noted the legal amendment increasing the cash payment limit for freight to Rs. 35,000/-.Application of Law to Facts: The Tribunal applied the amended limits and the nature of payments to conclude that the disallowance under section 40A(3) was not justified.Treatment of Competing Arguments: The AO and CIT(A) upheld the disallowance. The Tribunal disagreed, finding the appellant's evidence and legal submissions more compelling.Conclusion: The disallowance of Rs. 11,74,499/- under section 40A(3) was deleted, with consequential relief granted.Issue 4: Failure to Appreciate Evidence Leading to Disallowance of Rs. 30,47,813/-The appellant contended that the AO and CIT(A) failed to appreciate the evidence produced, resulting in disallowance of expenses without cognate reasons. The Tribunal, after detailed examination of the evidence and submissions, found merit in this contention for the disallowances under sections 40(a)(ia) and 40A(3), as discussed above. For the vehicle expenses under section 37(1), the Tribunal partially accepted the contention.3. SIGNIFICANT HOLDINGSThe Tribunal's crucial legal reasoning is preserved in the following excerpts:'Keeping in view the facts in entirety and legitimacy of part expenses, we restrict this disallowance to Rs. 1,50,000/-.' (Para 8)'Making payment to one person on behalf of others, in the present case, will not attract TDS as the said person has not supplied manpower/labour... The genuineness of expenditure is not in dispute here. Hence, it is held that the disallowance of Rs. 15,77,164/- under section 40(a)(ia) of the Act is not justified.' (Para 9)'It is held that the sum paid through banking channel is not liable for the disallowance under section 40A(3) of the Act and the limit for freight is Rs. 35,000/- under section 40A(3A) of the Act... Hence, it is held that the disallowance of Rs. 11,74,499/- under section 40A(3) of the Act is not justified.' (Para 10)Core principles established include:Expenditure incurred wholly and exclusively for business purposes, including vehicle expenses related to transportation of perishable goods, is allowable under section 37(1), subject to verification and reasonableness.Payments made to a third party on behalf of labourers do not attract TDS provisions under section 40(a)(ia) if there is no contract or agreement with the payee for supply of labour or services.Disallowance under section 40A(3) is not warranted where cash payments do not exceed prescribed limits or are supported by muster rolls; payments made through banking channels are not subject to disallowance under this provision.Final determinations:Disallowance of Rs. 2,96,150/- under section 37(1) restricted to Rs. 1,50,000/-.Disallowance of Rs. 15,77,164/- under section 40(a)(ia) deleted.Disallowance of Rs. 11,74,499/- under section 40A(3) deleted.Overall, the appeal was partly allowed, granting consequential relief to the appellant.