DRS Logistics Private Limited, Secunderabad V. Asst.CIT,Cir-1(2), Hyderabad

ITA 1648/HYD/2013

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6238 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 1 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-01-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 24-05-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 29-11-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: U MINICHANDRAN
• Assessee Lawyers: M V ANIL KUMAR
• Keywords: Notional interest; Commercial expediency
• Section: 40A(3); 15

Judgement Text

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., SECUNDERABAD. PAN AAACD7182R VS. ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 1(2), HYDERABAD. (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 R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF CIT(A)- II, HYDERABAD, DATED 10/09/2013 FOR AY 2 009-10 WHEREIN THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF AP PEAL: 1. THE CIT (A) ERRED IN LAW AND FACTS OF THE CASE N OT CONSIDERING THE FACT THAT PERSONS TO WHOM PAYMENTS WERE MADE WE RE MADE AT PLACES WHERE YOUR ASSESSEE HAD NO BANK ACCOUNT A ND IN THE COURSE OF TRANSPORT BUSINESS, THE PROVISION OF SECT ION 40A(3) DISALLOWANCE IS NOT WARRANTED. 2. YOUR ASSESSEE SUBMITS THE CIT(A) ESTIMATED RS. 7 0,00,000/- AS DISALLOWANCE U/S 40A(3) WITHOUT CONSIDERING THE NATURE OF BUSINESS AND CIRCUMSTANCE UNDER WHICH THE EXPENDITU RE IS INCURRED, WHICH IS ON HIGH SIDE. 3. YOUR ASSESSEE SUBMITS THAT THE CIT(A) OUGHT TO H AVE DELETED THE ADDITION OF RS. 5,84,04,127/- BEING THE DIFFERE NCE IN THE CLOSING STOCK FOR YEAR AND PREVIOUS YEAR WITHOUT FI NDING ANY DEFECTS IN BOOKS OR METHOD OF VALUATION WHICH WAS F OLLOWED 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 TAX MAN 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 F OR DELETION OF THE SAME. 6. THE CIT(A) AS WELL AS THE ASSESSING OFFICER ERRE D IN LAW AND FACTS OF THE CASE IN CHARGING NOTIONAL INTEREST ON ASSUMPTION AND PRESUMPTION THAT FUNDS HAVE BEEN DIVERTED WITHOUT G IVING ANY FINDINGS, IGNORING THE FACT THAT THE INVESTMENT HAD BEEN MADE IN THE PREVIOUS YEAR AND NO DISALLOWANCE WAS MADE IN T HE PREVIOUS YEARS, YOUR ASSESSEE PRAYS THAT THE ADDITION MAY BE DELETED. 7. YOUR ASSESSEE SUBMITS THAT THE CIT(A) OUGHT TO H AVE APPRECIATED THE FACTS AND NATURE OF BUSINESS DISALL OWANCE AT 7% OF THE EXPENSES OF RS. 174,92,54,030/- IS ON HIGH S IDE 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 DI SALLOWED. 8.ALTERNATIVELY, YOUR ASSESSEE PRAYS THAT THE DISAL LOWANCE 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 ASSESS EE SUBMITTED THAT GROUND NOS. 3 & 4 ARE NOT PRESSED BY THE ASSES SEE, HENCE, THE SAME ARE DISMISSED AS NOT PRESSED. THE OTHER GROUND S ARE BEING DISPOSED OF AS UNDER: 3. AS REGARDS GROUND NOS. 1 & 2 REGARDING DISALLOW ANCE U/S 40A(3) AMOUNTING TO RS. 70,00,000/- IS CONCERNED, O N VERIFICATION OF CASH BOOK, THE AO OBSERVED THAT PAYMENTS WERE MAD E ON NUMEROUS OCCASION BY THE ASSESSEE WHEREIN THE SAID AMOUNTS E XCEED RS.20,000/-. AND THE TOTAL OF SUCH PAYMENTS AMOUNTE D TO RS.1,88,95,204/-. HE, THEREFORE, WAS OF THE VIEW TH AT THESE AMOUNTS ARE CLEARLY HIT BY THE PROVISIONS U/S. 40A(3) OF TH E I.T. ACT AND ARE TO BE DISALLOWED. WHEN THE SAME WAS PUT FORTH TO THE A R OF THE 3 ITA NO. 1648/H/2013 DRS LOGISTICS PVT. LTD. ASSESSEE, HE AGREED FOR THE SAID DISALLOWANCE. HEN CE, THE AO DISALLOWED THE SAID AMOUNT OF RS. 1,88,95,204/-. 4. ON APPEAL BEFORE THE CIT(A), IT WAS SUBMITTED TH AT THE ASSESSING OFFICER OUGHT TO HAVE APPRECIATED THE FAC T THAT THESE ARE NOT SINGLE PAYMENTS AND UNDER DIFFERENT HEADS. MAJO RITY OF THESE EXPENSES WERE INCURRED BY THE DRIVERS OR STAFF OF T HE COMPANY AND MOST OF THESE EXPENSES ARE INCURRED EN-ROUTE DURING THE TRANSPORT. FURTHER, IT WAS SUBMITTED THAT THE NATURE OF EXPENS ES WOULD BE PURCHASE OF DIESEL, REPAIRS, PAYMENT OF TOLL GATE A ND OTHERS AND THESE EXPENSES WERE INCURRED OUTSIDE THE HEAD OFFICE OR REIMBURSED AT THE BRANCH. IT WAS SUBMITTED THAT AT THE PLACE OF EXPEN SES THERE WILL BE NO BANK ACCOUNT. DUE TO THE NATURE OF BUSINESS, THE SE EXPENSES HAD TO BE MET IN CASH. 5. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E, THE CIT(A) OBSERVED THAT DURING THE COURSE OF APPELLATE PROCEE DINGS, THE ASSESSEE SUBMITTED THE LIST OF ALL THE PAYMENTS MAD E IN EXCESS OF RS.20,000/-, WHICH AMOUNTED TO RS.1,88,95,204/-. T HE TYPE OF EXPENSES INCLUDED WERE TRIP VEHICLE EXPENSES, CONVE YANCE EXPENSES, CONSULTANCY CHARGES, LEGAL EXPENSES, LOCAL LORRY HI RE CHARGES, OFFICE GODOWN MAINTENANCE, PACKING EXPENSES, PACKING MATER IAL EXPENSES, VEHICLE MAINTENANCE ETC. HE NOTED THAT AS PER THE D ETAILS SUBMITTED, SOME OF THE ENTRIES IN EXCESS OF RS.20,000/- INCLUD E 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) DISALLOW ANCES MADE FOR THE LAST THREE YEARS WHERE THE BOOKS OF ACCOUNT WER E AUDITED WERE AS UNDER: S.NO. AY DISALLOWANCE OF CASH PAYMENTS EXCEEDING RS. 20,000/- TURNOVER (RS. IN CRORES) 1 2006-07 14,88,116/- 116.40 2 2007-08 19,82,471 181.31 3 2008-09 69,17,063 261.66 4 ITA NO. 1648/H/2013 DRS LOGISTICS PVT. LTD. KEEPING IN VIEW THE NATURE OF THE BUSINESS WHERE IN CURRING 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 I S 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 LOGIS TIC BUSINESS, IT NECESSARILY HAS TO INCUR THE EXPENDITURES IN CASH. THE DRIVERS AND STAFF HAD TO INCUR THE EXPENSES LIKE TRAVELLING CON VEYANCE, TOLL CHARGES, SUNDRY REPAIRS, DIESEL ETC. CONSIDERING TH E NATURE AND CIRCUMSTANCES UNDER WHICH THE EXPENSES HAD TO BE IN CURRED IN CASH, THE CIT(A) IS WRONG TO DISALLOW THE EXPENSES ON EST IMATION. 8. LD. DR SUBMITTED THAT THE ASSESSEE HAS GOOD NETW ORK IN THE TRANSPORT AND LOGISTICS, IT IS NOT NECESSARY TO INC UR 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 THA T AO HAS DISALLOWED THE EXPENSES BY OBSERVING AS ON VERIFIC ATION OF CASH BOOK, IT IS OBSERVED THAT PAYMENTS WERE MADE ON NUM EROUS 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/-. A S PER SECTION 40A(3), WHERE THE ASSESSEE INCURS ANY EXPENDITURE I N RESPECT OF WHICH A PAYMENT OR AGGREGATE OF PAYMENTS MADE TO A PERSON IN A DAY, OTHERWISE THAN BY AN ACCOUNT PAYEE CHEQUE, EXC EEDS TWENTY THOUSAND RUPEES. IN THE GIVEN CASE, THE ASSESSEE HA D 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 S UBJECT 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 PA YMENT OF ABOVE RS. 20,000/- SHOULD BE VERIFIED. IN CASE, IT IS FOUND T HAT 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 TRE ATED AS ALLOWED FOR STATISTICAL PURPOSES. 10. AS REGARDS GROUND NOS. 5 & 6 REGARDING THE ADDI TION OF RS. 65,80,441/- BEING NOTIONAL INTEREST, ON VERIFICATIO N OF IMPOUNDED MATERIAL, THE AO NOTICED THAT INDIA GROWTH FUND (IG F), 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 ALLO TTED SUBSEQUENTLY. FROM THE BALANCE SHEET, IT IS SEEN TH AT 'ADVANCES' OF RS.8,86,92,075/- WAS MADE TO GROUP COMPANIES, DIREC TORS AND RELATIVES. THE AO WAS, THEREFORE, OF THE VIEW THAT THE FUNDS WERE DIVERTED IN THE FORM OF INTEREST FREE ADVANCES TO G ROUP COMPANIES, DIRECTORS AND THEIR RELATIVES. ACCORDINGLY, THE AO COMPUTED THE NOTIONAL INTEREST @ 14% AND THE SAME WAS PUT FORTH TO THE ASSESSEES AR, TO WHICH THE AR VIDE LETTER DATED 05/12/2011 AG REED AND SUBMITTED CALCULATION OF NOTIONAL INTEREST INCOME A ND THE TOTAL OF WHICH COMES TO RS. 65,80,441/-. 6 ITA NO. 1648/H/2013 DRS LOGISTICS PVT. LTD. 11. BEFORE THE CIT(A), THE AR OF THE ASSESSEE SUBMI TTED THAT THE ASSESSING OFFICER HAD ESTIMATED NOTIONAL INTEREST O N MERE SURMISES AND ASSUMPTIONS OF RS. 65,80,440/- AFTER CALLING FO R THE INTEREST CALCULATION BY IT. THIS ADDITION IS ON AN AGREED BA SIS AS CLAIMED BY THE ASSESSING OFFICER. THE ASSESSING OFFICER HAS NO T 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. T HE EQUITY SHARES IN THE COMPANY HAVE BEEN ALLOTTED TO IGF. UNDER THE SE CIRCUMSTANCES, THE AR OF THE ASSESSEE SUBMITTED THA T THE ASSESSING OFFICER IS NOT CORRECT IN ESTIMATING NOTIONAL INTER EST AND THE SAME HAS TO BE DELETED. 12. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE, 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 SIN CE THIS INVESTMENT IN THE FORM OF EQUITY, NO INTEREST IS PA ID. HE NOTED THAT VIDE LETTER DATED 01.12.2011, THE ASSESSEE HAD SUBM ITTED DETAILS OF LOANS AND ADVANCES GIVEN TO GROUP COMPANIES / RELAT IVES / DIRECTORS TO THE ACIT. (I) THE ADVANCES GIVEN TO GROUP COMPANIES : RS.6,7 7,11,827/- (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 GROU P COMPANIES/ DIRECTORS/RELATIVES. HOWEVER, THE ASSESSEE HAD PAI D INTEREST ON TERM LOANS / BANK CHARGES OF RS. 6,51,70,945/-. 12.1 IN VIEW OF THE ABOVE FACTUAL BACKGROUND, THE C IT(A) CONFIRMED THE ACTION OF THE AO BY OBSERVING AS UNDER: 7 ITA NO. 1648/H/2013 DRS LOGISTICS PVT. LTD. 10.4 THE FUNDAMENTAL ISSUE IS WHETHER THESE LOANS T O GROUP COMPANIES/DIRECTORS/RELATIVES WERE GIVEN FOR THE PU RPOSE OF BUSINESS OR OTHERWISE IS NOT BROUGHT ON RECORD. THE ASSESSEE HAS NOT TAKEN ANY DEFENSE ON THESE LINES. ON ONE HA ND HE HAS GIVEN INTEREST FREE LOANS TO GROUP COMPANIES/DIRECT ORS/RELATIVES AND ON THE OTHER HAND HE IS PAYING INTEREST ON THE LOANS TAKEN FROM THE BANKS. HAD HE NOT GIVEN LOANS TO HIS FRIEN DS AND RELATIVES THERE WAS NO NEED TO PAY INTEREST TO BANK S. IN THIS BACKGROUND, MORE PARTICULARLY KEEPING IN VIEW THAT THE ACCOUNTS OF THE ASSESSEE ARE NOT AUDITED, I FIND NO INFIRMIT Y IN DISALLOWANCE OF THE NOTIONAL INTEREST MADE BY THE A O. ACCORDINGLY, THIS GROUND OF APPEAL IS DISMISSED. 13. LD. AR SUBMITTED THAT DURING THE YEAR, INDIA GR OWTH FUND (IGF) HAS INVESTED RS. 65 CRORES FOR THE PURPOSE OF INVES TMENT 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 COMPAN IES ON COMMERCIAL EXPEDIENCY. THE AO CANNOT CHARGE NOTIONA L 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 TH E MATERIAL FACTS ON RECORD. IT IS NOTED THAT AO HAS CHARGED NOTIONAL INTEREST @ 14% ON THE ADVANCES GIVEN TO GROUP COMPANIES, DIRECTORS AN D 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 SUSTA INED THE ADDITION CONSIDERING THE FACT THAT THE ASSESSEE HAS INCURRED FINANCIAL CHARGES TO THE TUNE OF RS. 6.51 CRORES DURING THE YEAR. THE SE FINANCIAL CHARGES ARE TOWARDS INTEREST ON TERM LOAN AND OTHER INTEREST CHARGES. WE OBSERVE FROM THE BALANCE SHEET THAT THE TERM LOA NS, WORKING CAPITAL LOANS AND VEHICLE LOANS ERE EXISTING LOANS (BALANCE CARRIED FROM PREVIOUS YEAR). THERE IS NO FRESH LOAN TAKEN T HIS YEAR, WHICH THE ASSESSEE WOULD HAVE DIVERTED DURING THIS YEAR. WE A LSO OBSERVE THAT THE ASSESSEE HAS CONSIDERABLE RESERVES IN THE COMPA NY AND IS IN 8 ITA NO. 1648/H/2013 DRS LOGISTICS PVT. LTD. GOOD FINANCIAL POSITION, IT IS THE DISCRETION OF TH E ASSESSEE TO FINANCE THE GROUP CONCERNS ON COMMERCIAL EXPEDIENCY. WITH R EGARD TO ADVANCES TO DIRECTORS/RELATIVES, WE DO NOT HAVE DET AILS FOR WHICH PURPOSE THEY WERE GIVEN. STILL, WE DO NOT SEE ANY R EASON TO CHARGE NOTIONAL INTEREST ON THE ADVANCES, WHEN THERE IS NO COST TO THE COMPANY, IN CASE THE ADVANCES WERE PAID UTILIZING T HE IGF INVESTMENTS. IN THIS CONNECTION, WE REFER TO THE R ATIO LAID DOWN BY THE HONBLE 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 VIE W 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 EXPENDI TURE AND THE PURPOSE OF BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNOT JUSTIFI ABLY CLAIM TO PUT ITSELF IN THE ARM-CHAIR OF THE BUSINESSMAN OR I N THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECID E HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRC UMSTANCES OF THE CASE. IT FURTHER HELD THAT NO BUSINESSMAN CAN B E COMPELLED TO MAXIMIZE HIS PROFIT AND THAT THE INCOME TAX AUTH ORITIES 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 C ASE 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 ADDITI ONAL MARGIN TO M/S. HERO FIBRES LIMITED TO MEET THE WORKING CAPITA L FOR MEETING ANY CASH LOSES. IT WOULD ALSO BE SIGNIFICANT TO MENTION AT THIS STA GE THAT, SUBSEQUENTLY, THE ASSESSEE COMPANY HAD OFF-LOADED I TS SHARE HOLDING IN THE SAID M/S. HERO FIBRES LIMITED TO VAR IOUS COMPANIES OF OSWAL GROUP AND AT THAT TIME, THE ASSE SSEE COMPANY NOT ONLY REFUNDED BACK THE ENTIRE LOAN GIVE N TO M/S. HERO FIBRES LIMITED BY THE ASSESSEE BUT THIS WAS RE FUNDED WITH INTEREST. IN THE YEAR IN WHICH THE AFORESAID INTERE ST 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 CRE DIT 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 ALMO ST 15 CRORES AND, THEREFORE, THE ASSESSEE COMPANY COULD IN ANY C ASE, UTILIZE THOSE FUNDS FOR GIVING ADVANCE TO ITS DIRECTORS. ON THE BASIS OF AFORESAID DISCUSSION, THE PRESENT A PPEAL IS ALLOWED, THEREBY SETTING ASIDE THE ORDER OF THE HIG H 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 AR E ALLOWED. 16. AS REGARDS GROUND NOS. 7 & 8 REGARDING DISALLOW ANCE OF EXPENDITURE, THE AO DISALLOWED 10% OF CERTAIN EXPEN SES 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 BI LLS FOR THE BALANCE AMOUNT OF RS. 1,74,92,54,028/-. B) THAT THE ACCOUNTS OF THE ASSESSEE WERE NOT AUDIT ED. C) THAT SEVERAL OPPORTUNITIES WERE GIVEN TO THE ASS ESSEE TO PRODUCE THE BILLS/INVOICES. D) ACCORDINGLY, 10% OF THE EXPENSES FOR WHICH MOVAB LES WERE PRODUCED WERE DISALLOWED BY THE AO. 17. ON APPEAL, BEFORE THE CIT(A) THE ASSESSEE SUBMI TTED THAT THE DISALLOWANCE IS NOT WARRANTED AND THAT THE DISALLOW ANCE OF 10% IS VERY HIGH. 18. THE CIT(A) TABULATED THE DETAILS SUBMITTED BY T HE ASSESSEE AS UNDER: S. NO. NATURE OF EXPENSES AMOUNT ON WHICH TDS WAS MADE CHEQUE PAYMENTS CASH PAYMENTS TOTAL 1. OPERATING EXPENSES 96,70,27,421 73,61,67,807 31,56,51,122 202,15,46,346 2. BENEFITS TO STAFF 4,24,12,434 16,59,769 31,71,320 4,72,43,523 3. ADMINISTRA TION AND 8,20,33,271 6,99,63,350 5,84,92,908 21,05,39,529 10 ITA NO. 1648/H/2013 DRS LOGISTICS PVT. LTD. OTHER EXPENSES GRAND TOTAL 1,09,15,23,126 80,77,90,922 38,03,15,350 227,96,29,398 REFERRING TO THE ABOVE TABLE, THE CIT(A) OBSERVED T HAT 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 PAYMEN T S WERE MADE OF RS. 80,77,90,922/-. THE CASH PAYMENTS WERE TO TH E TUNE OF RS. 38,03,15,350/-. KEEPING IN VIEW THE NATURE OF BUSIN ESS OF THE ASSESSEE AND ALSO THE FACT THAT THE ACCOUNTS WERE N OT AUDITED AND ALSO THAT CERTAIN DISALLOWANCES U/S 40A(3) WERE ALR EADY MADE, THE CIT(A) DISALLOWED 7% INSTEAD OF 10% ADOPTED BY THE AO, THEREBY 3% RELIEF WAS GIVEN TO ASSESSEE. ACCORDINGLY, THE DISA LLOWANCE MADE BY THE AO IS RESTRICTED TO RS. 12,24,47,782/- AS AGAIN ST 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 DISALLOWANC E % ON THE TOTAL EXPENSES. HE SUBMITTED THAT IT IS APPROPRIATE TO AP PLY 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 AUTHORIT IES. 21. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD. THE LD. CIT(A) HAS CLASSIFIED THE EXPENS ES 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 A ND 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 O F THE TRANSACTIONS, WE AGREE WITH THE CIT(A) THAT 7% OF T HE 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 RESTRIC T THE DISALLOWANCE TO CASH EXPENSES ALONE. HENCE, AO IS DIRECTED TO DI SALLOW 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 RAH MAN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 18 TH JANUARY 2017 KV COPY TO:- 1) DRS LOGISTICS PVT. LTD., C/O M. ANANDAM & CO., C AS., 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., HYDE RABAD. 6) GUARD FILE