Ita/81/2011 Of The Commissioner Of Income Tax v. M/S Rajmahal Silks

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 1 DAY OF SEPTEMBER 2020. PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD IT.A. NO.81 OF JZO1L BETWEEN: 1.THE COMMISSIONER OF INCOME-TAX C.R. BUILDING, QUEENS ROAD BANGALORE. 2 |THE ASSISTANT COMMISSIONER OF INCOME-TAX. CENTRAL CIRCLE-1(4), C.R. BUILDING QUEENS ROAD, BANGALORE. ... APPELLANTS (BY SRI. K.V. ARAVIND, ADV.,) AND: M/S. RAJMAHAL SILKSPARTNERSHIP FIRMNO.48/1, SANJEEVAPPA LANEAVENUE ROAD CROSSBANGALORE-560009. .. RESPONDENT (BY SRI. A. SHANKAR, SR. COUNSEL A/WSRI. M. LAVA, ADV.) | THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,196L ARISING OUT OF ORDER DATED 21.10.2010 PASSED IN ITA]NO.690/BANG/2010 FOR THE ASSESSMENT YEAR 2005-06,|PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO: (I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED THEREIN. (1) ALLOW THE APPEAL AND SET ASIDE THE ORDERS)PASSED BY THE ITAT, BANGALORE IN ITA NO.690/BANG/2010|DATED 21-1L0O-20L0O0 AND CONFIRM THE ORDER OF THE APPELLCOMMISSIONER CONFIRMING THE ORDER PASSED BY THE|DEPUTYCOMMISSIONEROF.INCOME|TAX,CIRCLE-2(1),BANGALORE, IN THE INTEREST OF JUSTICE AND EQUITY. THISITACOMINGONFOR.HEARING,|THISALOK ARADHE J.,DELIVERED THE FOLLOWING: DAY, JUDGMENT This appeal under Section 260A of the Income Tax)Act, 1961 (hereinafter referred to as the Act for short)has been preferred by the revenue. The subject matterof the appeal pertains to the Assessment year 2005-06.The appeal was admitted by a bench of this Court videorder dated 26.09.2011 on the following substantialquestions of law:| (1)Whetner the Tribunal was correct In|holding that a sum of Rs.1,53,32,679/-|and Rs.35,68,815/- expenses claimed|towards transportation cnarges were not|allowabledespitethetransporters|adducing evidence that they did not|execute these transactions and theholding that a sum of Rs.1,53,32,679/-|and Rs.35,68,815/- expenses claimed|towards transportation cnarges were not|allowabledespitethetransporters|adducing evidence that they did not|execute these transactions and the paymentsreceivedwere|onlybookentries which evidence was not taken|Into considerationIn|theDrODPerperspective and consequently recordedaperverse finding? (iI)Whether the Tribunal was correct In|holding thatthedisallowanceofRs.1,82,83,210/- was not Justified even|thoughtheSaneWascontraryCO Section 40a(ia) of the Act witnout|assigning any reason and consequently|recorded a perverse finding?holding thatthedisallowanceofRs.1,82,83,210/- was not Justified even|thoughtheSaneWascontraryCO Section 40a(ia) of the Act witnout|assigning any reason and consequently|recorded a perverse finding? (iI)Whether the Tribunal was correct In|holding that a sum of Rs.36,56,642/-|disallowed under Section 40A(3) of the|Act is liable to be allowed despite the|assessee not satisfying Rule 6DD of the|Income Tax Rules and consequently|recorded a perverse finding?holding that a sum of Rs.36,56,642/-|disallowed under Section 40A(3) of the|Act is liable to be allowed despite the|assessee not satisfying Rule 6DD of the|Income Tax Rules and consequently|recorded a perverse finding? 2D Facts giving rise to filing of this appeal in nutshell are that the assessee is a partnership firmcarrying on the Dusiness of export of silk waste and sale. (iI)Whether the Tribunal was correct In|holding that a sum of Rs.36,56,642/-|disallowed under Section 40A(3) of the|Act is liable to be allowed despite the|assessee not satisfying Rule 6DD of the|Income Tax Rules and consequently|recorded a perverse finding?holding that a sum of Rs.36,56,642/-|disallowed under Section 40A(3) of the|Act is liable to be allowed despite the|assessee not satisfying Rule 6DD of the|Income Tax Rules and consequently|recorded a perverse finding? 2D Facts giving rise to filing of this appeal in nutshell are that the assessee is a partnership firmcarrying on the Dusiness of export of silk waste and sale. of iron ore fines. A search was conducted under Section|137 of the Act on 14.12.2005 in the office as well as theresidential premises of M/s Rajmahal Silks Group and itspartners respectively. The assessing officer issued anotice under Section 153A of the Act. The assessee filed.the return of income on 21.07.2006 in response to thenotice under Section 153A of the Act for the Assessment.Year2005-06declaringatotalincomeRs.99,15,140/-. The Assessing Officer thereafter issueda notice under Section 143(2) of the Act on 13.07.2007.In response to the aforesaid notice, the assesseeproduced book of accounts and other necessarydocuments. The assessing officer determined the totalincome|ofthe|aSS@e@SSCas|Rs.2,55,15,140/-by disallowing the business expenditure under Section37(1) of the Act and passed an order under Section153Areac|withSection143(3)oftheAct.ON|31.17.700/7. of | 3.The assessee filed an appeal before the CommissionerOf Income.Tax(Appeals).The|Commissioner of Income Tax (Appeals) by an orderdated 30.03.2010 held that transportation expenses tothe extent of Rs.1,58,01,494/- was not genuine andtherefore, the same was not incurred for the purpose ofbusiness carried on by the assessee. It was further heldthat|transportationEXPDeNnsetO|theexTeny|ofRs.1,4/7,52,025/- and Rs.35,31,185/- paid to M/sM.M.Transport and S.Abdul Munaf were contrary toSection 40(a)(ia) of the Act. It was further held thatpayments were made in cash above the prescribed limitand therefore, there was violation of Section 40A(3) ofthe Act. Thus, total enhancement to the income onaccount of transportation expenses was made to thetune of Rs.2,15,84,704/- and the appeal was dismissed. —The assessee thereupon approached the Income TaxAppellate Tribunal (hereinafter referred to as ‘theTribunal’, for short). The Tribunal by impugned orderdated 21.10.2010 confirmed the addition of Rs.31 Lakhs/ made in respect of payment to M/s IBL Enterprises.However, remaining additions made by the AssessingAuthority as well as Commissioner of Income Tax(Appeals) were deleted and the appeal preferred by theassessee was partly allowed. In the aforesaid factualbackground, the revenue has filed this appeal. 4Learned.counsel.for.therevenuewhile|inviting the attention of this court to the order passed bythe assessing officer submitted that the assessing officeron meticulous appreciation of evidence on record hasrecorded a finding that assessee had adopted modusOperandi of siphoning of cash in the nature of bogustransportationchargesandthereby inflatingtheexpenditure. Thus, the amount shown to have beenexpended on account of transportation charges, whichwas paid to M/s M.M.Transports and Syed Abdul Munafwas treated as non business expenditure for Assessmentyear 2005-06. While referring to the order passed bythe Commissioner of Income Tax (Appeals), it is 4Learned.counsel.for.therevenuewhile|inviting the attention of this court to the order passed bythe assessing officer submitted that the assessing officeron meticulous appreciation of evidence on record hasrecorded a finding that assessee had adopted modusOperandi of siphoning of cash in the nature of bogustransportationchargesandthereby inflatingtheexpenditure. Thus, the amount shown to have beenexpended on account of transportation charges, whichwas paid to M/s M.M.Transports and Syed Abdul Munafwas treated as non business expenditure for Assessmentyear 2005-06. While referring to the order passed bythe Commissioner of Income Tax (Appeals), it is pointed out that the Commissioner of Income Tax(Appeals) by assigning cogent reasons has held thattransportation expenses incurred by the assessee arenot incurred for the purposes of business carried on bythe assessee and therefore are not allowable underSection 37(1) of the Act. It was also held that paymentswere made to the transporters in cash in violation of thelimit and therefore, the provisions of Section 40A(3) ofthe Act are applicable to the fact situation of the case. Itis argued that the Tribunal which is the final fact findingauthority in a cryptic and cavalier manner withoutassigning any reasons Nas directed deletion of additionsmade by Assessing Officer as well as Commissioner ofIncome Tax (Appeals) except confirming the addition ofRs.31 Lakhs. It is also pointed out that neither anyreasons Nave been assigned nor any Dasis have beendisclosed for deleting the additions. Therefore, the orderpassed by the Tribunal suffers from the vice of nonapplication of mind and the finding with regard to deletion of the addition made by Assessing Officer and.the Commissioner of Income Tax (Appeals) is perverse. —It is also argued that in the fact situation of the case,the matter deserves to be remitted to the Tribunal! fordecision afresh in accordance with law. 5.|On the other hand, learned Senior counsel forthe assessee submitted that the assessee had deductedthe tax at source and the return was filed thereafter on31.10.2005. It is further pointed out that the provisionof Section 40(a)(ia) was incorporated by Finance Act,2010, which is remedial / curative in nature andtherefore, in view of decision of the Supreme Court inFCIT VS. CALCUTTA EXPORT COMPANY’, 404 ITR|654 (SC),and therefore, the second’ substantial|question of law deserves to be answered in favour of theassessee and against the revenue. It is also urged thatprovision of Section 40A(3) is not applicable in case ofthe assessee as the firm has paid all payments throughaccount payee crossed cheques only. It is further submitted that disallowance made under Section 40A(3)can be only on the basis of profit and loss account andonly on those expenditures claimed in terms of Section28 to Section 37 of the Act and =the notionalpresumption of cash payments having been made,disallowance under Section 40A(3) of the Act is nonsustainable in law. In this connection, reference hasbeen made to Bank statement and ledger account toshow that all payments were made by account payeecrossed cheques. It is also argued that assessee at thetime of beginning to commence the work had givensome advance to transporters in certain transactions forincurring expenses on the exigencies of the business,the peak of the advances is already offered to tax andtherefore, the aforesaid payments were not claimed inprofit and loss account. It was also pointed out thatclaim made in profit and loss account are throughcheques and therefore, Section 40A(3) would not beapplicable. Alternatively it is submitted that advances have been made at the places where there is no bankingfacility. It is also urged that Commissioner of IncomeTax (Appeals) failed to appreciate that disallowance ifany under the provisions of Section 40A(3) of the ActShall be restricted to an extent of 20% of the amountexpended in excess of Rs.20,000/-. have been made at the places where there is no bankingfacility. It is also urged that Commissioner of IncomeTax (Appeals) failed to appreciate that disallowance ifany under the provisions of Section 40A(3) of the ActShall be restricted to an extent of 20% of the amountexpended in excess of Rs.20,000/-. 6.|It is also argued that existence of thetransporters has been proved, as they are assessed to.income tax in their respective jurisdictions. It is alsopointed that the transporters attended the proceedingsbefore the Assessing Officer And also filed the copies ofincome tax returns. It was further submitted that alleExXDpensincurred through theaforesaidCWOtransporters were transacted through banking channelsin compliance with the provisions of the Act. Thetransporters in their statement recorded under Section131 of the Act have accepted the fact that they haverendered transportation services to the assessee andthe assessee had discharged the onus by producing the transporters,Submittingtheir|confirmationsand|affidavits, their complete address and Permanentaccount Number etc. and had discharge the burden.Therefore, no addition could have been made by theAssessing Officer. It is also pointed out that theassessee has produced the material evidence to statethat entire expenses were claimed under Section 37(a)of the Act. It is also urged that the entire issue in thisappeal are only questions of fact and disallowance ofRs.1,82,83,210/- under Section 40(a)(ia) of the Act iscontrary to law and is covered against the revenue bydecision of the Supreme Court in CIT VS. CALCUTTAEXPORT COMPANY supra. It also pointed out that theassessee had produced all details and documents todemonstratetneincurrenceand.allowabilityofexpenditure under Section 37(1) of the Act. It is furthersubmitted that the Tribunal in paragrapn 8 and 14 of itsorder had assigned reasons and had rightly deleted allthe additions made by the assessing authority as well as CommissionerofIncome.Tax!(Appeals)exceptconfirming addition of Rs.31 Lakhs made by theassessing authority. Lastly, it was urged that policy oflaw is that there must be a point of finality in all legalproceedings, that still issues should not be reactivatedbeyond a particular stage and the lapse of time mustinduce repose in and set at rest judicial and quasijudicial controversies as it must in other spheres ofNnuman activity. In this connection, reliance nas beenplacedON|decisionoftheSupremeCourt|In“PARASHURAM POTTERY WORKS CO. LTD., VS.INCOME-TAX OFFICER’, (1977) 106 ITR 1 (SC).J |We have considered the submissions madeby learned counsel on both the sides and have perusedthe record. Before proceeding further, we may advert tothe well settled legal principles. It is trite law thatIncome Tax Appellate Tribunal is the fact findingauthority and it should normally record its conclusion onevery disputed question raised before it, setting out its reasons in support of its conclusion. However, it is notnecessary for the Tribunal to record reasons when theTribunal fully agrees with the order passed by theCommissionerofIncome.Tax(Appeals).|See:FCOMMISSIONER OF INCOME TAX, BANGALORE VS.K.Y.PILLITAH AND SONS’, (1967) 63 ITR 411 (SC|.The aforesaid principle was referred to approval in‘PATNAIK AND CO. LTD. VS, COMMISSIONER OFINCOME-TAX, ORISSA’, (1986) 161 ITR 365 (SC)and‘GANAPATHYAND|COMPANYVS,JHE|COMMISSIONER,INCOMETAXBANGALORE”,(2016) 381 ITR 363 (SC). 8.|In the backdrop of aforesaid well settledprinciples, the facts of the case in hand may beexamined. In order to claim deduction the assessee hasto prove that the payment was incurred wholly andexclusively for the purpose of business. The AssessingOfficer after considering the statements of Mr.AbdulRazak, Proprietor of M/s M.M. Transport and statement 8.|In the backdrop of aforesaid well settledprinciples, the facts of the case in hand may beexamined. In order to claim deduction the assessee hasto prove that the payment was incurred wholly andexclusively for the purpose of business. The AssessingOfficer after considering the statements of Mr.AbdulRazak, Proprietor of M/s M.M. Transport and statement of Syed Abdul Munaf inter alia held that the aforesaidindividuals.dicnotCally anyidentityCO.DFOVEthemselves. It was further admitted by them in theirstatement that they did not maintain books of accounts.They further stated that they have not done any.transportation work for any other person except theassessee. The Assessing Officer therefore, came to theconclusion that genuineness of the transportation doneby the aforesaid persons is doubtful and the expenditurecannot be considered as incurred wholly and exclusivelyfor purposes of business. The Commissioner of IncomeTax (Appeals) inter alia has held that payments made tothe transporters were made in cash and are notreflected in the return of income, confirmations and inthe affidavits filed in the course of the proceedings.Thus, it was held that the amount incurred asexpenditure in transportation charges represents theinflation of transportation expenses. It was also heldthat no material was produced to show in the form of weighing slip, vehicle used for transport of mineral, theOctroi receipts as well as the delivery challans etc. toprove that the quantity of minerals was_ actuallytransported by the transporters. Accordingly, it was heldthat the transportation expenses have not been incurredfor the purposes of business carried on by the assesseeand are not allowable under Section 37(1) of the Act. Ithas also been held that transporters were carrying onbusiness from Hospet and they were maintaining booksof accounts at Hospet. Therefore, the assessee was notrequired to pay cash to the transporters as they werenot carrying on the business in a remote area wherethere was no banking facility. It was further held thatpayments made to transporters on a particular dayexceeds Rs.20,000/- therefore, provision of Section40A(3) are applicable. The Commissioner of Income Tax(Appeals) enhanced the income’ of the assessmentunder appeal to the extent of Rs.2,15,84,/704/-. 9 |Paragraph 14 and 18 of the order passed by the Income Tax Appellate Tribunal reads as under: 14. We heard both sides in detail. The|Assessing Officer had made additions and the.CIT(A) has enhanced the additions mainly onthe ground of the statements extracted fromthe transport contractors who had renderedservices to the assessee in its business ofexporting iron ore. Both the authorities have.overlooked a very vital aspect of wholeepisode while accepting the denial of thetransporters of the receipts of any paymentsfrom the assessee. Those transporters havecategorically admitted before the authoritiesthat they had acted as the transporters of theassessee firm. On one side the concernedtransportersadmittedthattheyhave.rendered transport services to the assesseefirm and on the other hand those personsdenied any payments received from theassessee. This is patently contradictory.Tnerefore clarity of the evidence relied on bythe assessing authority and the CIT(A) Is—extremely doubtful. In addition to the abovecontradiction, it is to be seen that those. partieswhohave.deposedagainsttheadSSCSSCEhad|admittedthat|theywerecarrying on the transportation business on alarge scale. None of them have maintainedany of the accounts. None of them have filedany returns of income. Therefore, what istheir credibility? The assessing authority hasused the most unreliable witness to discountdown the arguments of the assessee firm. |Therefore, the approach adopted by theAssessing Officer is against all the cannons ofprudence. The CIT(A) also has perpetuatedthis in appreciating the so called evidencescollected against the assessee firm. What isthebasisforthelowerauthoritiesIn|preferring the statement of the transportersto the statement of the assessee? Are thetransporters are holier than the assessee?The revenue has no answer. 18. Accordingly, we _ delete ali thadditions made by the assessing authority aswell as by the CIT(A), except confirming theadditionofRs. 3]Lakhsmadeby theassessing authority. 10. Thus, it is evident that the Tribunal has|neither assigned any reasons nor has disclosed anybasis for directing deletion of additions made by theassessing authority as well as Commissioner of IncomeTax (Appeals) except confirming the addition of Rs.31Lakhs made by the assessing authority. It is alsopertinent to mention here that the Tribunal has notassigned any reasons on the issues raised before it andNas not given any reasons in support of its conclusion.The order passed by the Tribunal is cryptic and suffersfrom the vice of non application of mind. 11. The second substantial question of law.framed by a bench of this court is no longer respondentintegra and is covered by a decision of the SupremeCourt in Calcutta Exports Company supra and the samedoes not require any adjudication. Therefore, the sameis answered in favour of the assessee and against therevenue. Though we are conscious of the legal principletnat finality has to be attached to all legal proceedings, but in the peculiar facts of the case since, factualadjudication is required so far as substantial question oflaw Nos.1 and 3 are concerned, which has not beendone by the Income Tax Appellate Tribunal, which is thefinal fact finding authority, we are left with no option butto set aside the order passed by the Income TaxAppellate Tribunal insofar as it pertains to substantialquestions of law No.1 and 3 and remit the matter to theTribunal for decision afresh on issues covered bysubstantial question of law Nos.1 and 3. Therefore, it isnot necessary for us to answer the substantial questionsof law No.1 and 3. In view of preceding analysis, the appeal is)disposed of. SS| Sd/-—JUDGE. Sd/-—JUDGE.