2025 (10) TMI 1226 - AT - Income Tax

Assessment decision: most transport expenses allowed, 88% adhoc disallowance rejected; 2% lorry addition under s.40(a)(ia) and s.145(3)

ITAT held that transport expenses claimed by the assessee were genuine and that the AO's adhoc disallowance (88%) could not be sustained merely because ... Addition u/s 69C - transport expenses as made by the learned AO by adhoc estimation at the rate of 88% of the expenses claimed in the Profit and Loss account - Disallowance of transport expenses u/s 40(a)(ia) for non-deduction of tax at source in terms of provisions of Section 194C HELD THAT:- Assessee furnished truck union certificate, certifying that lorries were hired from the truck unions, the copies of such certificate are available. The assessee has also filed the details of these vehicles as per transport department which are available. Therefore, in view of the above evidences placed by the assessee before the AO as well as the learned CIT (A) and before us also, we observe that the transport expenses were genuine. We also note that these expenses were not infact doubted by the learned AO but the AO has doubted that these trucks were not shown in the ‘VAHAN’ national Register E-services, Ministry of Road Transport & Highways, Government of India and therefore disallowance was made. We find merit in the contention of AR that this is a problem of updation of vehicle data’s in the Vahan portal in respect of various trucks/ lorries which were not updated and therefore, the said fault/anomaly cannot be attributed to the assessee. The assessee in fact transported goods and received income which were duly shown in the profit and loss and account and the corresponding expenses incurred on the hire of trucks were also claimed as expenses. Addition made by the learned AO on adhoc basis cannot be sustained. In our opinion the disallowance of expenses cannot be made on the sole ground that the vehicles are not appearing in the Vahan portal of Govt of India. In coming to the above conclusion, we are also supported the decision in case of Mahajan Fabrics (P.) Ltd. [2023 (2) TMI 430 - DELHI HIGH COURT] wherein the Hon'ble Court has held that where the assessee has claimed refund of ITC, necessary details required under section 16 were given, refund claim could not be denied on ground that details of all vehicles mentioned in invoices were not given or their registration with e-vahan portal were not established, though the decision was rendered in the context of Central goods and service tax Act, 2017, however, the ratio laid down is squarely applicable to the case at hand. We note that the books were not rejected u/s 145(3) of the Act which is mandatorily to be done for estimating the income/expenses of the assessee. Besides the basis of estimation was also very unfair and fallacious. The learned CIT (A) has gone a step ahead by giving further observations in the appellate order that the provisions of Section 194C were not complied and therefore, the disallowance was also to be made in terms of Section 40a(ia) of the Act. In our opinion, the learned CIT (A) has grossly erred in holding that disallowance was to be made alternatively u/s 40(a)(ia) of the Act which is not applicable in case of estimation of income. In the present case, we note that the NP declared by the assessee was 1.09%, whereas the NP in A.Y. 2013-14 was 3.52% and in A.Y. 2015-16, it was 84%. Therefore, taking into account the average of all these three figures of NP (net profit), the average NP comes to 2.75%. Since, the assessee has already declared NP of 1.07 %, it would be reasonable if the income is estimated by making disallowance of 2% of the total expenses towards any possible mistake / anomalies. Accordingly, we set aside the order of ld. CIT (A) and direct the ld. AO to make the addition at the rate of 2% of the expenses claimed in respect of lorry expenses which comes to Rs. 11,01,641/- and delete the remaining amount of Rs. 4,64,90,566/-. (4,75,92,207/- -11,01,641/-). The appeal of the assessee is partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether unexplained expenditure under Section 69C can be imposed by ad hoc estimation of 88% of claimed transport (lorry) expenses where vehicle particulars do not fully appear on the VAHAN portal but substantial documentary evidence of transport services and payments exists. 2. Whether, alternatively, disallowance under Section 40(a)(ia) (for failure to deduct tax at source under Section 194C) can be sustained where Section 194C does not apply to the transactions or individual payments to transporters were below the TDS threshold. 3. Whether books of account can be estimated for tax purposes without rejection under Section 145(3) and, if estimation is permissible, what is a reasonable basis for estimating taxable income/adjustment in transport-contract businesses (including applicability of earlier precedents on percentage-estimation of profit). 4. Incidental issues considered: validity of relying solely on non-availability of vehicle registration on the VAHAN portal to discredit claimed expenses; relevance of produced documentary confirmations (delivery challans, depot receipts, truck-union certificates, transport-department records); and implications for interest and penalty (Sections 234B/234C and 271(1)(c)). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Ad hoc estimation under Section 69C: legality and sufficiency of VAHAN-based reasoning Legal framework: Section 69C authorizes treating certain unexplained expenditures as income where sums are found to be genuinely unexplained. Assessment authorities may estimate or treat items as unexplained where claimed expenses are not satisfactorily substantiated. Precedent treatment: The Tribunal considered transport-sector decisions where courts/tribunals accepted modest percentage estimates of profit/income for transport contractors (examples noted include earlier ITAT benches approving 3-4% estimation in appropriate factual matrices). The Tribunal also relied on a High Court decision holding that denial based solely on non-registration on an e-portal was impermissible where other statutory particulars were furnished (decision in context of CGST refund but treated as analogous). Interpretation and reasoning: The Court examined the total record and found extensive contemporaneous documentary evidence - delivery challans, depotwise receipts showing truck numbers and dates, truck-union certificates, transport-department records and accounting entries - which corroborated that transport services were actually rendered and payments made. The non-appearance of certain vehicle numbers on the VAHAN portal was characterized as an updation/digitization anomaly attributable to the portal and not probative of nonexistent transactions. The Court emphasized that the AO did not conduct independent inquiries under sections such as 133(6)/131 or bring contrary material disproving the transactions; books were not rejected under Section 145(3). Given these facts, an 88% ad hoc disallowance was held to be arbitrary and unsustainable. Ratio vs. Obiter: Ratio - An ad hoc large-scale disallowance based solely on non-appearance of vehicle details in a government e-portal, without independent enquiry or rejection of books under Section 145(3), is impermissible where contemporaneous documentary evidence corroborates the expenditure. Obiter - Reference to the CGST-related High Court decision is used by analogy rather than as strictly binding on the income-tax provision. Conclusion: The addition under Section 69C on the basis that vehicles did not appear on the VAHAN portal was not sustained; a substantial part of the AO's estimation was set aside as unjustified. Issue 2 - Alternative disallowance under Section 40(a)(ia) for non-deduction of TDS under Section 194C Legal framework: Section 194C imposes TDS obligations on certain payments to contractors; Section 40(a)(ia) may disallow payments where tax deduction obligations under Chapter XVII-B are not complied with, subject to the statutory scheme and applicability thresholds. Precedent treatment: The Tribunal noted the CIT(A) applied Section 40(a)(ia) alternatively but treated this as erroneous in the factual matrix where Section 194C did not apply to the transactions or individual payments were below the threshold for TDS deduction. The Tribunal referenced transport-sector jurisprudence about assessing reasonable profit percentages rather than blanket disallowances under TDS provisions where inapplicable. Interpretation and reasoning: The Court held that invoking Section 40(a)(ia) in an alternative estimation context was legally inappropriate. Where Section 194C is not applicable to the transaction or the individual payments to transporters did not exceed the threshold requiring TDS, automatic disallowance is unwarranted. The Tribunal further stressed that alternative application of TDS-driven disallowance cannot replace the requirement of a reasoned estimation when assessing unexplained expenditure. Ratio vs. Obiter: Ratio - Disallowance under Section 40(a)(ia) cannot be sustained as an alternative to estimation where Section 194C does not apply or individual payments fall below TDS thresholds; TDS provisions cannot be used as a substitute rationale for an otherwise unsupported ad hoc estimate. Obiter - Observations on the impropriety of applying TDS provisions in estimation contexts reference factual permutations rather than laying down broad statutory interpretation beyond the facts. Conclusion: The alternate disallowance under Section 40(a)(ia) was held to be unsustainable in the present facts. Issue 3 - Requirement of rejection of books under Section 145(3) and principles for reasonable estimation of income in transport-contract businesses Legal framework: Section 145(3) permits rejection of books where they do not reflect true income; estimation of income is generally permissible only on reasonable, fact-based grounds, and normally after rejection of books or where books are unreliable. Precedent treatment: The Tribunal applied transport-sector precedents where tribunals directed estimations of profit at modest percentages (commonly 3-5% or specific percentages found reasonable on facts) rather than wholesale disallowance; the Court cited particular tribunal decisions that accepted 3-4% profitability for estimating income in transport contracting when books could not be otherwise relied upon. Interpretation and reasoning: The Tribunal found books were not rejected under Section 145(3), sample verification had been undertaken by the AO, and extensive contemporaneous documentary proof existed. Where estimation is necessary, it must be reasonable and factually grounded, taking into account declared net profit trends across assessment years. The Tribunal computed an average net profit across three years (1.09%, 3.52%, and 0.84% as recorded) yielding 2.75% and, applying equity and moderation, directed an upward estimation of 2% of the claimed lorry expenses to cover any possible anomalies rather than the AO's 88% estimate. This produced a modest addition while deleting the balance of the AO's disallowance. Ratio vs. Obiter: Ratio - Estimation of income must be reasonable, based on industry and case-specific data (including historical profit margins), and cannot be arbitrary; absent rejection of books under Section 145(3) and where corroborative records exist, only a modest, fact-based estimation may be applied. Obiter - Specific choice of 2% was fact-driven and illustrative of application of the principle rather than a universal benchmark. Conclusion: The AO's ad hoc 88% disallowance was replaced by a reasoned estimation of 2% of lorry expenses (resulting in a limited addition), and the remainder of the disallowance was deleted. Issue 4 - Consequential findings on interest and penalty Legal framework: Sections 234B and 234C impose interest for defaults in advance tax payments; Section 271(1)(c) permits penalty where claimed amounts cannot be substantiated and are false or misleading. Precedent treatment: The lower appellate authority had upheld interest and initiated penalty proceedings based on the AO/CIT(A)'s conclusions; the Tribunal's decision to set aside most of the addition necessarily impacts the factual basis for penalty and related interest to the extent computed on the reversed/additional amounts. Interpretation and reasoning: The Tribunal accepted the mandatory nature of interest for defaults where applicable but, by reducing the addition significantly, implicitly affected the quantum upon which such interest and penalty could attach. The Tribunal did not finally adjudicate penalty/interest in detail on the reversed quantum but its factual findings (genuineness of expenses, availability of corroborative documents, and improper AO estimation) undermine the initiation/confirmation of penalty to the extent premised on the large disallowance. Ratio vs. Obiter: Obiter - Observations on penalty and interest are consequential and fact-dependent; the primary ratio concerns the invalidity of the ad hoc estimation and improper application of TDS disallowance principles. Conclusion: Interest under Sections 234B/234C and penalty proceedings under Section 271(1)(c) cannot stand to the extent founded on the disproved ad hoc addition; any computation or adjudication should follow the revised assessment (addition fixed at 2% of lorry expenses).