Facts of the Case

The assessee, engaged in the transport business, claimed freight and transportation expenses as business expenditure in its return of income. During scrutiny assessment under Section 143(3), the Assessing Officer disallowed a portion of these expenses on the ground that the payments were either not fully verifiable or allegedly violated provisions relating to tax deduction at source (TDS) applicable to contractors.

The AO treated the expenses as inadmissible and made additions to the income. The Commissioner of Income Tax (Appeals) upheld the disallowance. Aggrieved by the order of the CIT(A), the assessee preferred an appeal before the ITAT, Allahabad.

Issues Involved

  1. Whether freight and transport expenses incurred in the ordinary course of business were allowable under Section 37(1).
  2. Whether disallowance under Section 40(a)(ia) was justified for alleged non-compliance with TDS provisions under Section 194C.
  3. Whether the AO could disallow expenses without establishing that the payments were bogus or non-genuine.

Petitioner’s (Assessee’s) Arguments

  • The assessee contended that all expenses were genuine and incurred wholly and exclusively for business purposes.
  • Payments were made to transporters in the normal course of operations and supported by records.
  • There was no evidence that the expenses were fictitious or inflated.
  • The AO disallowed the expenses on mere suspicion without conducting proper verification.
  • Therefore, the disallowance was arbitrary and contrary to law.

Respondent’s (Revenue’s) Arguments

  • The Revenue supported the assessment order and contended that the assessee failed to fully substantiate certain payments.
  • It was argued that non-compliance with TDS provisions attracted disallowance under Section 40(a)(ia).
  • The Department maintained that the CIT(A) correctly upheld the additions.

Court Order / Findings

The ITAT Allahabad examined the facts and evidence on record and held that business expenditure cannot be disallowed merely on suspicion or for minor deficiencies where the genuineness of the transactions is not disproved.

The Tribunal observed that the transport business inherently involves multiple payments to truck operators and contractors, and such expenses are essential for carrying on business. In the absence of concrete evidence showing that the payments were bogus or not incurred for business purposes, disallowance under Section 37(1) was not justified.

Further, unless clear default under TDS provisions is established in accordance with law, invocation of Section 40(a)(ia) cannot be sustained.

Important Clarification

  • Genuine business expenses cannot be disallowed solely due to suspicion or incomplete documentation.
  • The burden lies on the Revenue to prove that expenditure is not genuine.
  • TDS-related disallowance requires clear evidence of statutory default.
  • Practical realities of the transport industry must be considered while evaluating expenditure claims.

Link to download the order –https://itat.gov.in/public/files/upload/1606305547-ITA%2013%20-%20J.B.pdf

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