Income Tax Appellate Tribunal - Hyderabad
Drs Logistics Private Limited,, ... vs Asst.Cit,Cir-1(2), , Hyderabad on 18 January, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA Nos. 1648/Hyd/2013
Assessment Year: 2009-10
DRS Logistics Pvt. Ltd., vs. Asst. Commissioner of
Secunderabad. Income-tax, Circle - 1(2),
Hyderabad.
PAN - AAACD7182R
(Assessee) (Respondent)
Assessee by : Shri M.V. Anil Kumar
Revenue by : Smt. U. Mini Chandran
Date of hearing : 26-12-2016
Date of pronouncement : 18-01-2017
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
This appeal filed by the assessee is directed against the order of CIT(A)- II, Hyderabad, dated 10/09/2013 for AY 2009-10 wherein the assessee has raised the following grounds of appeal:
" 1. The CIT (A) erred in law and facts of the case not considering the fact that persons to whom payments were made were made at places where your assessee had no bank account and in the course of transport business, the provision of section 40A(3) disallowance is not warranted.
2. Your Assessee submits the CIT(A) estimated Rs. 70,00,000/- as disallowance U/S 40A(3) without considering the nature of business and circumstance under which the expenditure is incurred, which is on high side.
3. Your Assessee submits that the CIT(A) ought to have deleted the addition of Rs. 5,84,04,127/- being the difference in the closing stock for year and previous year without finding any defects in books or method of valuation which was followed consistently in the previous years.2 ITA No. 1648/H/2013
DRS Logistics Pvt. Ltd.
4. Alternatively, your Assessee submits that CIT(A) direction that opening stock as ~ on 1-4-2009 should be taken as 6,13,97,833/- following the Hon'ble Supreme Court decision in the case of V.K.J. Builders & contractor Pvt Ltd Vs CIT 184 Taxman 357 (SC) be allowed.
5. The CIT(A) erred in law and facts of the case in confirming the addition of Rs. 65,80,441/- being notional interest estimated by the Assessing Officer ignoring the fact that there was no diversion of borrowed funds, your Assessees prays for deletion of the same.
6. The CIT(A) as well as the Assessing Officer erred in law and facts of the case in charging notional interest on assumption and presumption that funds have been diverted without giving any findings, ignoring the fact that the investment had been made in the previous year and no disallowance was made in the previous years, your assessee prays that the addition may be deleted.
7. Your Assessee submits that the CIT(A) ought to have appreciated the facts and nature of business disallowance at 7% of the expenses of Rs. 174,92,54,030/- is on high side and further submits that out of Rs. 174,92,54,030/-, Rs.
109,15,23,126 is subjected to TDS and Rs. 80,77,90,922/- are Cheque payments, only the balance amount Rs. 38,03,15,350/- is cash payment on which suitable percentage may be disallowed.
8.Alternatively, your assessee prays that the disallowance of percentage expenditure may be reduced to less than 7% on the amount actually paid in cash amounting to Rs. 38,03,15,350/-."
2. At the time of hearing, the ld. AR of the assessee submitted that ground Nos. 3 & 4 are not pressed by the assessee, hence, the same are dismissed as not pressed. The other grounds are being disposed of as under:
3. As regards ground Nos. 1 & 2 regarding disallowance u/s 40A(3) amounting to Rs. 70,00,000/- is concerned, on verification of cash book, the AO observed that payments were made on numerous occasion by the assessee wherein the said amounts exceed Rs.20,000/-. And the total of such payments amounted to Rs.1,88,95,204/-. He, therefore, was of the view that these amounts are clearly hit by the provisions u/s. 40A(3) of the I.T. Act and are to be disallowed. When the same was put forth to the AR of the 3 ITA No. 1648/H/2013 DRS Logistics Pvt. Ltd.
assessee, he agreed for the said disallowance. Hence, the AO disallowed the said amount of Rs. 1,88,95,204/-.
4. On appeal before the CIT(A), it was submitted that the Assessing Officer ought to have appreciated the fact that these are not single payments and under different heads. Majority of these expenses were incurred by the drivers or staff of the company and most of these expenses are incurred en-route during the transport. Further, it was submitted that the nature of expenses would be purchase of diesel, repairs, payment of toll gate and others and these expenses were incurred outside the head office or reimbursed at the branch. It was submitted that at the place of expenses there will be no bank account. Due to the nature of business, these expenses had to be met in cash.
5. After considering the submissions of the assessee, the CIT(A) observed that during the course of appellate proceedings, the assessee submitted the list of all the payments made in excess of Rs.20,000/-, which amounted to Rs.1,88,95,204/-. The type of expenses included were trip vehicle expenses, conveyance expenses, consultancy charges, legal expenses, local lorry hire charges, office godown maintenance, packing expenses, packing material expenses, vehicle maintenance etc. He noted that as per the details submitted, some of the entries in excess of Rs.20,000/- include several expenses of small amounts incurred en-route by the drivers, cleaners etc. for diesel, tollgate, etc., and all such expenses were clubbed and one entry was passed for each trip. The 40A(3) disallowances made for the last three years where the books of account were audited were as under:
S.No. AY Disallowance of cash Turnover
payments exceeding Rs. (Rs. in crores)
20,000/-
1 2006-07 14,88,116/- 116.40
2 2007-08 19,82,471 181.31
3 2008-09 69,17,063 261.66
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DRS Logistics Pvt. Ltd.
Keeping in view the nature of the business where incurring of cash expenses cannot be avoided, and keeping in view the past record of the assessee, the turnover for A.Y. 2009-10 at Rs. 231.41 crores, the CIT(A) sustained a roundsum amount of Rs.70,00,000/- u/s.40A(3) as against the disallowance made by the AO at Rs. 1,88,95,204/-.
6. Aggrieved by the order of CIT(A), the assessee is in appeal before us.
7. Ld. AR submitted that the AO has not doubted the genuineness of the expenditure. The expenses were incurred for the purpose of business and the assessee is in transport and logistic business, it necessarily has to incur the expenditures in cash. The drivers and staff had to incur the expenses like travelling conveyance, toll charges, sundry repairs, diesel etc. Considering the nature and circumstances under which the expenses had to be incurred in cash, the CIT(A) is wrong to disallow the expenses on estimation.
8. Ld. DR submitted that the assessee has good network in the transport and logistics, it is not necessary to incur the expenses in cash. He supported the order of AO.
9. Considered the rival submissions and perused the material facts on record. We observe from the assessment order that AO has disallowed the expenses by observing as "on verification of cash book, it is observed that payments were made on numerous occasions by the assessee wherein the said amounts exceed Rs. 20,000/-." From the above, it is clear that AO has disallowed just because the payments were more than Rs. 20,000/-. As per section 40A(3), where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque, exceeds twenty thousand rupees. In the given case, the assessee had incurred the 5 ITA No. 1648/H/2013 DRS Logistics Pvt. Ltd.
expenditure during transportation and logistics, in that process the drivers and staff incurred these expenses en-route to the destination like diesel, repairs, toll charges etc. One has to verify each payment and sub-payment, whether it crosses the limit of Rs. 20,000 in individual case. The accounts of the assessee are subject to audit in the earlier three years and the disallowances were 0.13%, 0.11% and 0.26% of the Turn Over. We cannot apply the law of percentage in the case of disallowances. It has to be actual. Hence, in our view, the details of expenditure could be verified and the payment of above Rs. 20,000/- should be verified. In case, it is found that the payment of above Rs. 20,000/- to any one person on a day, only these payments alone should be disallowed. We find it appropriate to remit the issue back to the file of the AO to determine the payment above Rs. 20,000/- to any person as per section 40A(3) of the Act and make the disallowance accordingly. Ground Nos. 1 & 2 are treated as allowed for statistical purposes.
10. As regards ground Nos. 5 & 6 regarding the addition of Rs. 65,80,441/- being notional interest, on verification of impounded material, the AO noticed that India Growth Fund (IGF), a unit scheme of Kotak SEAF India. Funds invested a sum of Rs.65 crores in the assessee company in the Financial Year 2007-08 vide agreement entered into on 06.02.2007 and the shares were allotted subsequently. From the balance sheet, it is seen that 'Advances' of Rs.8,86,92,075/- was made to group companies, directors and relatives. The AO was, therefore, of the view that the funds were diverted in the form of interest free advances to group companies, directors and their relatives. Accordingly, the AO computed the notional interest @ 14% and the same was put forth to the assessee's AR, to which the AR vide letter dated 05/12/2011 agreed and submitted calculation of notional interest income and the total of which comes to Rs. 65,80,441/-.
6 ITA No. 1648/H/2013DRS Logistics Pvt. Ltd.
11. Before the CIT(A), the AR of the assessee submitted that the Assessing Officer had estimated notional interest on mere surmises and assumptions of Rs. 65,80,440/- after calling for the interest calculation by it. This addition is on an agreed basis as claimed by the assessing officer. The Assessing Officer has not given any cogent reasons for the charge of notional interest. There is no borrowed funds being diverted as interest free loans to the sister concerns. It was submitted that there is no dispute to the fact that an amount of Rs.65 crores was invested by India Growth Fund (IGF) in the company and these funds do not bear any interest. The equity shares in the company have been allotted to IGF. Under these circumstances, the AR of the assessee submitted that the Assessing Officer is not correct in estimating notional interest and the same has to be deleted.
12. After considering the submissions of the assessee, the CIT(A) observed that there is no dispute on the fact that the assessee had received an amount of RS.65 crores from IGF and since this investment in the form of equity, no interest is paid. He noted that vide letter dated 01.12.2011, the assessee had submitted details of loans and advances given to group companies / relatives / directors to the ACIT.
(i) The advances given to group companies : Rs.6,77,11,827/-
(ii) The advances given to directors/relatives : Rs.1,83,87,029/-
---------------------
Rs.8,60,98,856/ ============ No interest is charged on the advances made to group companies/ directors/relatives. However, the assessee had paid interest on term loans / bank charges of Rs. 6,51,70,945/-.
12.1 In view of the above factual background, the CIT(A) confirmed the action of the AO by observing as under:
7 ITA No. 1648/H/2013DRS Logistics Pvt. Ltd.
" 10.4 The fundamental issue is whether these loans to group companies/directors/relatives were given for the purpose of business or otherwise is not brought on record. The assessee has not taken any defense on these lines. On one hand he has given interest free loans to group companies/directors/relatives and on the other hand he is paying interest on the loans taken from the banks. Had he not given loans to his friends and relatives there was no need to pay interest to banks. In this background, more particularly keeping in view that the accounts of the assessee are not audited, I find no infirmity in disallowance of the notional interest made by the AO. Accordingly, this ground of appeal is dismissed."
13. Ld. AR submitted that during the year, India Growth Fund (IGF) has invested Rs. 65 crores for the purpose of investment in shares, the assessee has subsequently issued shares. These funds do not carry any interest. Hence, there is no cost to the company. The assessee has invested the funds in the group companies on commercial expediency. The AO cannot charge notional interest when there is no cost to the assessee.
14. Ld. DR relied on the orders of AO and CIT(A).
15. Considered the rival submissions and perused the material facts on record. It is noted that AO has charged notional interest @ 14% on the advances given to group companies, directors and relatives considering the fact that IGF had invested money in the business. We agree with ld. AR that the money invested by IGF do not carry any cost to the company as the same was invested by IGF to subscribe to the shares in the company. The ld. CIT(A) has sustained the addition considering the fact that the assessee has incurred financial charges to the tune of Rs. 6.51 crores during the year. These financial charges are towards interest on term loan and other interest charges. We observe from the Balance Sheet that the term loans, working capital loans and vehicle loans ere existing loans (balance carried from previous year). There is no fresh loan taken this year, which the assessee would have diverted during this year. We also observe that the assessee has considerable reserves in the company and is in 8 ITA No. 1648/H/2013 DRS Logistics Pvt. Ltd.
good financial position, it is the discretion of the assessee to finance the group concerns on commercial expediency. With regard to advances to directors/relatives, we do not have details for which purpose they were given. Still, we do not see any reason to charge notional interest on the advances, when there is no cost to the company, in case the advances were paid utilizing the IGF investments. In this connection, we refer to the ratio laid down by the Hon'ble Supreme Court in the case of Hero Cycles (P) ltd., [2005] 63 Taxmann.com 308 (SC), which is as under:
"In the process, the Court also agreed that the view taken by the Delhi High Court in 'CIT v. Dalmia Cement (B.) Ltd.' [2002 (254) ITR 377] wherein the High Court had held that once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman.
Applying the aforesaid ratio to the facts of this case as already noted above, it is manifest that the advance to M/s. Hero Fibres Limited became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to M/s. Hero Fibres Limited to meet the working capital for meeting any cash loses.
It would also be significant to mention at this stage that, subsequently, the assessee company had off-loaded its share holding in the said M/s. Hero Fibres Limited to various companies of Oswal Group and at that time, the assessee company not only refunded back the entire loan given to M/s. Hero Fibres Limited by the assessee but this was refunded with interest. In the year in which the aforesaid interest was received, same was shown as income and offered for tax.
Insofar as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance 9 ITA No. 1648/H/2013 DRS Logistics Pvt. Ltd.
in the Bank account when the said advance of Rs. 34 lakhs was given. Remarkably, as observed by the CIT (Appeal) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilize those funds for giving advance to its Directors.
On the basis of aforesaid discussion, the present appeal is allowed, thereby setting aside the order of the High Court and restoring that of the Income Tax Appellate Tribunal."
Following the above ratio, we are inclined to treat the advances given to group concerns, is on commercial expediency and loan to directors as allowable as the company has enough reserves in the business to finance the same. Accordingly, ground Nos. 5 & 6 are allowed.
16. As regards ground Nos. 7 & 8 regarding disallowance of expenditure, the AO disallowed 10% of certain expenses claimed for the following reasons:
a) That the assessee claimed total expenses of Rs.
2,27,96,29,398/- under various heads debited to P&L A/c. under Schedule 14,15 & 16. However, it could produce the bills only for Rs. 53,03,75,370/-. He could not produce the bills for the balance amount of Rs. 1,74,92,54,028/-.
b) That the accounts of the assessee were not audited.
c) That several opportunities were given to the assessee to produce the bills/invoices.
d) Accordingly, 10% of the expenses for which movables were produced were disallowed by the AO.
17. On appeal, before the CIT(A) the assessee submitted that the disallowance is not warranted and that the disallowance of 10% is very high.
18. The CIT(A) tabulated the details submitted by the assessee as under:
S. Nature of Amount on Cheque Cash Total
No. expenses which TDS was payments payments
made
1. Operating 96,70,27,421 73,61,67,807 31,56,51,122 202,15,46,346
expenses
2. Benefits to 4,24,12,434 16,59,769 31,71,320 4,72,43,523
staff
3. Administra 8,20,33,271 6,99,63,350 5,84,92,908 21,05,39,529
tion and
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ITA No. 1648/H/2013
DRS Logistics Pvt. Ltd.
other
expenses
Grand 1,09,15,23,126 80,77,90,922 38,03,15,350 227,96,29,398
total
Referring to the above table, the CIT(A) observed that out of the total expenses incurred by the assessee of Rs. 2,27,96,29,398/-, the TDS was deducted on Rs. 1,09,15,23,126/-, cheque payment s were made of Rs. 80,77,90,922/-. The cash payments were to the tune of Rs. 38,03,15,350/-. Keeping in view the nature of business of the assessee and also the fact that the accounts were not audited and also that certain disallowances u/s 40A(3) were already made, the CIT(A) disallowed 7% instead of 10% adopted by the AO, thereby 3% relief was given to assessee. Accordingly, the disallowance made by the AO is restricted to Rs. 12,24,47,782/- as against Rs. 17,49,25,403/-.
19. Ld. AR submitted that CIT(A) has classified the expenses as per the table (supra) i.e. expenses incurred by cheque and cash. But, while giving relief, he has reduced the disallowance % on the total expenses. He submitted that it is appropriate to apply the % on the cash expenses alone.
20. Ld. DR submitted that enough relief was already given by the CIT(A) and relied on the orders of revenue authorities.
21. Considered the rival submissions and perused the material facts on record. The ld. CIT(A) has classified the expenses of Rs. 227.96 cores, out of which, the assessee had paid TDS for Rs. 109.15 crores and balance expenses were incurred through cheque and cash payments. Since, the accounts were not audited, we can infer that the assessee would have made the payment by cheque only for those which have proper bills etc. Cash expenses need to be verified. But, considering the complications involved and volume of the transactions, we agree with the CIT(A) that 7% of the expenses may 11 ITA No. 1648/H/2013 DRS Logistics Pvt. Ltd.
be disallowed. The CIT(A) has considered the total expenditure (cheque & cash), in our considered view, we restrict the disallowance to cash expenses alone. Hence, AO is directed to disallow the cash expenses to the extent of 7%. Thus, Ground Nos. 7 & 8 are partly allowed.
22. In the result, appeal of the assessee is partly allowed for statistical purposes.
Pronounced in the open court on 18 th January, 2017.
Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 18 th January 2017
kv
Copy to:-
1) DRS Logistics Pvt. Ltd., C/o M. Anandam & Co., CAs., 7A, Surya Towers, SD Road, Secunderabad - 500 003.
2) ACIT, Circle - 1(2), Hyderabad.
3) CIT(A) - II, Hyderabad 4 CIT - 1, Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.
6) Guard File