CMR Transport Contractors Co. Pvt.Ltd, Vijayawada V. The ACIT, Vijayawada

ITA 388/VIZ/2016

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 3791 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-05-2019
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2012-2013
• Appeal Filed On: 26-08-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K C DAS
• Assessee Lawyers: R PRASAD
• Keywords: Presumptive income; Business income; Earning of tax free income; Fair market value; Corroborative evidences; Commercial expediency

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . . , BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER& SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER ./ I.T.A.NO. 388 /VIZ/201 6 ( / ASSESSMENT YEAR:20 12 - 1 3 ) M/S CMR TRANSPORT CONTRACTORS CO.PVT. LTD. D.NO.54 - 18 - 3/4, NEAR ITI GATE BHARAT GAS LINE, SIVAPURAM COLONY VIJAYAWADA [PAN : AACCC6075E ] VS. ACIT, CIRCLE - 2(1) VIJAYAWADA ( / APPELLANT) ( / RESPONDENT) / APPELLANT BY : SHR I M.S.R.PRASAD, AR / RESPONDENT BY : SHRI K.C.DAS, DR / DATE OF HEARING : 0 9 . 04. 2018 / DATE OF PRONOUNCEMENT : 25 .0 4 .2018 / O R D E R PER D.S. SUNDER SINGH , ACCOUNTANT MEMBER : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME - TAX ( APPEALS) [CIT(A)], VI JAYAWADA VIDE ITA NO. 440 / CIT(A) / VJA / 2014 - 15 DATED 31 . 03 .201 6 FOR THE ASSESSMENT YEAR 20 12 - 1 3 . 2 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. 2. ALL THE G ROUNDS OF APPEAL ARE RELATED TO THE DISALLOWANCE OF EXPENDITURE U/S 40A(2)OF INCOME TAX ACT ON ACCOUNT OF VEHICLES HIRED FROM THE DIRECTORS AND THEIR RELATIVES . THE ASSESSEE FILED RETURN OF INCOME ADMITTING TOTAL INCOME OF RS.16,73,740/ - ON 16.11.2012 AND DECLARED THE TOTAL TURNOVER OF RS.6,94,04,125/ - . THE ASSESSEE IS ENGAGED IN THE BUSINESS OF TRANSPORT OF BITU MEN. DURING THE ASSESSMENT PROCEEDINGS, THE A SSESSING O FFICER(AO) OBSERVED THAT THE COMPANY OWNED 10 VEHIC LES WHICH ARE BEING USED BY THE C OMPANY FOR THE PURPOSE OF BUSINESS. THE COMPANY IS HEADED BY 3 D IRECTORS VIZ., SHRI CH.MALLIKARJUNA NA RAO, MS. C.V.N.RAJESWARI AND SHRI Y.SUBBARAO. THE DIRECTORS OF THE C OMPANY OWN SOME VEHICLES REGISTERED IN THEIR NAMES WHICH ARE TAKEN ON HIRE BY THE ASSESSEE COMP ANY AND UTILIZED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE ASSESSEE COMPANY HAS ALSO TAKEN VE HICLES ON HIRE FROM SMT.Y.SUNEETA, WIFE OF ONE OF THE DIRECTORS SHRI Y.SUBBA RAO. THE ASSESSEE COMPANY HAS ALSO TAKEN THE VEHICLES ON HIRE FROM OUTSIDERS. MAJORITY OF THE TRANSPORT ACTIVITY WAS CARRIED BY THE VEHICLES HIRED FROM THE DIRECTORS AND THEIR R ELATIVES AND THE MAJOR PART OF THE EXPENDITURE FOR THE FINANCIAL YEAR 2011 - 12 WAS ON ACCOUNT OF VEHICLES HIRED FROM THE DIRECTORS AND THEIR RELATIVES. THE TOTAL HIRE CHARGES DEBITED BY THE COMPANY WAS RS.4,75,01,963/ - AND T HE 3 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. COMPANY HAS PAID THE HIRE CHARGES TO DIRECTORS AND RELATIVES A SUM OF RS.3,80,11,601/ - AS PER THE DETAILS GIVEN BELOW: NAME OF DIRECTOR/RELATIVE OF DIRECTOR NUMBER OF VEHICLES TAKEN ON HIRE BY THE COMPANY FROM THEM FOR ATLEAST A PART OF THE YEAR HIRE CHARGES DEBITED TO PROFIT AND LOSS ACCOUNT OF THE ASSESSEE COMPANY DUE TO THE VEHICLES HIRED FROM THEM CH.MALLIKARJUNA RAO 8 RS.76,98,973/ - C.V.N.RAJESWARI 9 RS.1,09,47,487/ - Y.SUBBARAO 6 RS.77,27,357/ - Y.SUNEETA 8 RS.1,16,37,784/ - TOTAL 31 RS.3,80,11,601/ - THE ASSESSING OFFICER(AO) FURTHER OBSERVED THAT THE ASSESSEE COMPANY HAS PAID 90% OF THE TRANSPORT BILLS RECEIVED AS HIRE CHARGES TO THE DIRECTORS AND RELATIVES, WHEREAS, THE EXPENDITURE INCURRED WHILE HIRING VEHICLES FROM OUTSIDERS WAS ONLY 74.86% , T HEREBY THE COMPANY HAS PAID EXCESS CHARGES OF 15.14% COMPARED TO OUTSIDERS. OUT OF THE TOTAL TRANSPORT BILLS RECEIVED IN RESPECT OF VEHICLES HIRED FROM DIRECTORS AND RELATIVES AMOUNTING TO RS.4,22,35,112/ - , THE ASSESSEE COMPANY HAS PAID THE SUM OF RS.3,80,11,601/ - WHICH I S 90% OF THE BILLS RECEIVED BY THE COMPANY. SIMILARLY IN THE CASE OF OUTSIDERS, THE COMPANY HAS RECEIVED BILLS OF RS.1,26,77,431/ - AND THE HIRE CHARGES WERE PAID TO THE EXTENT OF RS.94,90,362/ - WHICH WORKS OUT TO 74.86%. FROM THE ABOVE INFORMATION, THE A O OBSERVED THAT THE ASSESSEE IS MAKING EXCESS PAYMENTS TO THE DIRECTORS AND THEIR RELATIVES THAN THE OUTSIDERS . HENCE, THE AO WAS OF THE VIEW THAT THE PAYMENTS MADE TO DIRECTORS AND THEIR RELATIVES ATTRACTS 4 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. DISALLOWANCE U/S 40A(2) OF I.T.ACT , SINCE THE PA YMENT MADE TO DIRECTORS AND THEIR RELATIVES IS EXCESSIVE AND UNREASONABLE COMPAR ED TO TH E FAIR MARKET VALUE OF THE HIRE CHARGES. THE AO FURTHER OBSERVED THAT THE DIRECTORS OWN LESS THAN 10 VEHICLES EACH AND THE INCOME WAS ADMITTED U/S 44AE OF I.T.ACT ON PRESUMPTIVE BASIS INSPITE OF THE FACT THAT THE RECEIPTS EXCEEDING THE LIMIT OF 44AB FOR COMPULSORY AUDIT IN EACH CASE OF DIRECTOR AND THEIR RELATIVES. THE AO CALLED FOR THE EXPLANATIO N OF THE ASSESSEE AS TO WHY THE EXCESS PAYMENT MADE TO THE DIRECTORS AND THEIR RELATIVES OVER AND ABOVE THE PAYMENTS MADE TO OUTSIDERS SHOULD NOT BE DISALLOWED AND ADDED BACK TO THE INCOME U/S 40A(2) OF I.T.ACT. THE LD.AR AR G UED BEF ORE THE AO THAT THE ASSESSEE HAS TO MAKE THE IMMEDIATE PAYMENT S TO THE OUT SIDERS AND HAS TO GIVE THE ADVANCES BEFORE COMMENCEMENT OF JOURNEY, WHEREAS IN THE CASE OF HIRING OF VEHICLES FROM THE DIRECTORS AND THEIR RELATIVES, THE VEHICLES ARE AT THE COMPLETE DISPOSAL OF THE ASSESSEE AND THE ASSESSEE COMPANY IS AT LIBERTY TO MAKE THE PAYMENT BEFORE 31 ST MARCH OF THE CONCERNED ASSESSMENT YEAR AS PER THE CONVENIENCE , THEREBY SAVING THE INTEREST COST AND HAVING THE BENEFIT OF THE VEHICLES AT I T S DISPOSAL. THEREFORE, THE LD.AR ARGUED BEFORE THE AO THAT AS PER THE COMPANY BOARD OF DIRECTORS RESOLUTION, THE COMPANY HAS AGREED TO MAKE THE PAYMENT OF 90% OF THE BILLS RECEIVED A S HIRE CHARGES TO THE DIRECTORS AND THEIR RELATIVES. 5 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. AO NOT BEING CONVINCED WITH THE EXPLANATION OFFERED BY THE ASSESSEE HELD THAT THE PAYMENT MADE TO THE DIRECTORS AND THEIR RELATIVE S IS IN EXCESS OF 15%MORE THAN THE HIR E CHARGES PAID TO THE OUTSIDERS, HENCE DISALLOWED 12% OF THE HIRE PAYMENTS MADE TO THE DIRECTORS AND THEIR RELATIVES U/S 40A(2) OF THE I.T.AC T AND ACCORDINGLY DISALLOWED A SUM OF RS.45,61,392/ - ON TOTAL PAYMENT S OF RS.3,80,11,601/ - . 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE WENT ON APPEAL BEFORE THE CIT(A) AND THE LD.CIT(A) OBSERVED THAT THE LORRY HIRE CHARGES PAID TO THE VEHICLES OF DIRECTORS AND THEIR RELATIVES IS EXCESSIVE, UNREASONABLE WHEN COMPARED WITH THE VEHICLES HIRED FROM OTHERS . T HE LD.CIT(A) OBSERVED THAT THE PAYMENTS MADE TO EACH DIRECTOR OR THE RELATIVE WAS RANGING FROM RS.76.98 LAKHS TO RS.116.37 LAKHS AS PER THE DETAILS GIVEN BELOW : NAME OF DIRECTOR / RELATIVE OF DIRECTOR NUMBER OF VEHICL ES TAKEN ON HIRE BY THE COMPANY FROM THEM FOR ATLEAST A PART OF THE YEAR HIRE CHARGES DEBITED TO PROF IT AND LOSS ACCOUNT OF THE ASSE SSEE COMPANY DUE TO THE VEHICLES HIRED FROM THEM CH.MALLIKARJUNA RAO 8 RS.76,98,973/ - C.V.N.RAJESWARI 9 RS.1,09,47,487/ - Y.SUBBARAO 6 RS.77,27,357/ - Y.SUNEETA 8 RS.1,16,37,784/ - TOTAL 31 RS.3,80,11,601/ - 6 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. T HE LD.CIT(A) FURTHER OBSERVED THAT TH OUGH PAYMENT MADE TO EACH DIRECTOR AND THE RELATIVE WAS MORE THAN RS.76 LAKHS AND COMPULSORY AUDIT CA SES U/S 44AB OF THE ACT THE DIRECTORS HAVE FILED THE RETURNS OF INCOME ON PRESUMPTIVE BASIS, INSPITE OF THE FACT THAT THE COMPANY HAS MADE EXCESS PAYMENT COMPARED TO THE OTHERS THEREBY REDUCED THE TAXES IN THEIR HANDS AND S IMULTANEOUSLY THE COMPANY HAS REDUCED ITS INCOME BY INFLATIO N OF EXPENDITURE . THE LD.CIT(A) HAS COMPARED THE PAYMENTS MADE TO THE DIRECTORS AND THEIR RELATIVES AND PAYMENTS MADE TO THE OUTSIDERS FOR VARIOUS ROUTES ON PER METRIC TON BASIS , MILEAGE BASIS AND OBSERVED THAT THE PAYMENTS MADE TO THE DIRECTORS IS EXCESS IVE AND ACCORDINGLY CONFIRMED THE ADDITION MADE BY THE AO. 4. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. APPEARING FOR THE ASSESSEE , THE LD.AR ARGUED THAT THE LD.CIT(A) ERRED IN COMPARING FREIGHT CHARGES PAID TO THE DIRECTORS VEHICLES WITH FREIGHT CHARGES PAID TO THE OTHER THIRD PARTY VEHICLES, IGNORING THE BUSINESS ADVANTAGES ACCRUED TO THE ASSESSEE SUCH AS CREDIT GIVEN TO THE ASSESS EE AND EXCLUSIVITY OF HIRING OF THE VEHICLES. THE LD.CIT(A) ERRED IN INVOKING THE PROVISIONS OF SECTION 40A(2) AS THE ASSESSEE HAS TAKEN INFORMED DECISION TO HIRE TANKERS OF THE DIRECTORS AND THEIR RELATIVES BASED ON THE FAIR MARKET 7 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. VALUE OF SIMILAR SERVI CES, FACILITIES OFFERED BY THIRD PARTIES AND DECISION IS TAKEN ON COMMERCIAL CONSIDERATIONS. THE LD.AR FURTHER ARGUED THAT T HE CIT(A) DID NOT CONSIDER THE MATERIAL EVIDENCE AVAILABLE IN THE FORM OF PRICE FIXED BY HPCL WHICH IS A PUBLIC SECTOR COMPANY FOLL OWING THE TENDER QUOTATIONS. THE LD.AR ARGUED THAT T HE LD.CIT(A) PLACED RELIANCE ON THIRD PARTY CASE WHICH IS INCORRECT AND WITHOUT FURNISHING THE DETAILS. S INCE THE ASSESSEE IS ENGAGED IN THE TRANSPORT OF BITUMEN, THE OTHER TRANSPORT VEHICLES IS INCOMPARA BLE . THE LD.AR FURTHER SUBMITTED THAT THE COMPANY HAS EARNED MORE THAN 60% OF THE TURNOVER BY HIRING VEHICLES FROM THE DIRECTORS AND THEIR RELATIVES BECAUSE OF EXCLUSIVITY OF VEHICLES AT THE DISPOSAL OF THE COMPANY. I N BIT UMEN TRANSPORT THE ASSESSEE HAS T O INCUR HIRE CHARGES ON R OUND TRIP PER KILO METER (RTKM) B ASIS AND THE COMPANY HAS GAINED SUBSTANTIAL BUSINESS AND MONETARY ADVANTAGE ON EXCLUSIVE HIRING OF VEHICLES OF THE DIRECTORS. THE LD.AR FURTHER EXPLAINED THAT IN CASE OF THIRD PARTY VEHICLES, THE VEHICLES WOULD BE USED FOR CARRYING OTHERS GOOD IN THE RETURN TRIP, WHEREAS IN THE CASE OF DIRECTORS VEHICLES, THE VEHICLES ARE EXCLUSIVELY USED FOR THE PURPOSE OF ASSESSEES BUSINESS. THE LD. AR INVITED OUR ATTE NTION TO THE RESOLUTION OF THE BOARD OF DIRECTORS FOR HIRING VEHICLES A ND ALSO THE QUOTATIONS RECEIVED FROM OUTSIDERS AND ARGUED THAT THE TERMS AND CONDITIONS OF HIRING THE VEHICLES FROM THE DIRECTORS AND THEIR RELATIVES 8 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. WAS MORE ADVANTAGEOUS EVEN THOUGH T HE COMPANY HAS PAID 90% OF HIRE CHARGES TO THE VEHICLES HIRED FROM THE DIRECTORS. 5 . ON THE OTHER HAND , LD.DR ARGUED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF BITUMEN TRANSPORT. FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE HAD HIRED VE HICLES FROM THE OUTSIDERS, DIRECTORS AND RELATIVES AND ALSO T HE COMPANY OWN ED VEHICLES. THE COMPANY HAS PAID 90% OF THE BILLS RECEIVED ON ACCOUNT OF TRANSPORT OF BITUMEN TO THE DIRECTORS AND THEIR RELATIVES. WHEREAS, THE EXPENDITURE INCURRED IN THE CASE OF OUTSIDERS WAS ONLY 74.86% WHICH IS LE SS THAN 15.14% OF THE TARIFF. FROM THE PAYMENTS MADE TO THE DIRECTORS AND OUTSIDERS, IT IS EVIDENT THAT THE COMPANY HAS PAID EXCESSIVE PAYMENTS TO THE DIRECTORS AND THEIR RELATIVES WHICH ATTRACTS PROVISIONS OF SECT ION 40A(2) OF I.T.ACT. THE LD.DR FURTHER SUBMITTED THAT THE LD.AR HAS REFERRED THE QUOTATIONS RECEIVED FROM GR TRANSPORT, MR.KISHORE BABU, VIJAYAWADA, VIJAYA LAKSHMI TRANSPORT AND SRI SATYA JYOTHI TRANSPORT WHICH ARE ENCLOSED IN THE P APER BOOK FROM PAGE N O.15 TO 18, BUT T HE ASSESSEE COMPANY HAS NOT OBTAINED ANY QUOTATIONS FOLLOWING ANY TRANSPARENT TENDER ING PROCESS AND SIMPLY OBTAINED QUOTATIONS FROM VARIOUS PARTIES TO SUIT ITS NEEDS , HENCE THE QUOTATION CANNOT BE TAKEN ON ITS FACE VALUE . THE TERMS AND CONDITIONS MENTIONED IN 9 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. THE BOARD OF DIRECTORS RESOLUTION TO MAKE THE PAYMENT OF 90% OF THE FREIGHT RECEIVED TO THE DIRECTORS IS SELF SERVING AND NOT BASED ON ANY EVIDENCE /COMPARABLE CASE OR FOLLOWING THE TRANSPARENT TENDERING PROCESS. THE RE IS NO WRITTEN AGREEMENT EITHER WITH THE OUTSIDERS OR WITH THE DI RECTORS FOR THE ADVANTAGES AS ARRIVED IN BOARD RESOLUTION AS EXPLAINED BY THE LD.AR . HENCE, THE CONTENTS OF THE QUOTATIONS AS WELL AS THE RESOLUTION OF THE BOA RD OF DIRECTORS IS NOTHING BUT SELF SERVING DOCUMENT S TO SUIT ITS NEEDS AND TO GIVE CONTRACT T O THE DIRECTORS AT HIGHER RATES, THEREBY EVADING THE TAX IN THE HANDS OF THE ASSESSEE COMPANY AS WELL AS THE DIRECTORS. PRIMA FACIE, THERE WAS NO SPECIFIC AGREEMENT WITH ANY OF THE DIRECTOR S AND THEIR RELATIVES TO HIRE THE VEHICLE EITHER ON WEIGHMENT BASIS OR FROM POINT TO POINT BASIS OR PERCENTAGE BASIS. NORMALLY TRANSPORT AGREEMENTS ARE ENTERED ON THE BASIS OF TONNAGE AND MILEAGE BASIS. IN THE INSTANT CASE THERE IS NO SUCH AGREEMENT WITH TH E DIRECTORS. THE BUSINESS ADVANTAGES EXPLAINED BY THE LD.AR ARE NOT BASED ON ANY AGREEMENTS. THEREFORE, EXCESS PAYMENTS MADE TO THE DIRECTORS REQUIRED TO BE DISALLOWED U/S 40A(2) OF I.T.ACT. THE LD.DR FURTHER STATED THAT THE ASSESSEE HAS REFERRED THE OBSE RVATION OF THE LD.CIT(A) IN PARA NO.5.1.2, WHEREIN, THE LD.CIT(A) OBSERVED WITH REGARD TO THE NORMAL PRACTICE OF HIR ING THE VEHICLES ON DISTANCE TRAVELLED IN KILOMETERS BASIS . THE CIT(A) HAS NOT TAKEN ANY BASIS 10 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. OR NOT RELIED ON THE CASE EXAMPLE GIVEN IN PARA NO.5.1.2., HENCE, THE SAME NEED NOT BE GIVEN MUCH CREDENCE . T HE LD.CIT(A) AND THE AO OBSERVED THAT THE COMPANY OWNED 10 VEHICLES, DIRECTORS AND THEIR RELATIVES ARE OWNING LESS THAN 10 VEHICLES IN EACH CASE AND THE INCOME WAS ADMITTED U/S 44AE OF I .T.ACT . B Y MAKING THE EXCESS P AYMENT OF 15% OF BILLS RECEIVED, T HE COMPANY IS AVOIDING TAX ON THE INCOME WHICH IT HAS RECEIVED AND REDUCING THE TAX IN THE HANDS OF THE DIRECTORS ALSO. THEREFORE, THIS IS A CLEAR TAX AVOIDANCE BUT NOT A COMMERCIAL EXPEDIEN CY. THEREFORE, THE LD.DR ARGUED THAT THE LD. CIT (A) HAS RIGHTLY UPHELD THE ORDER OF THE AO AND NO INTERFERENCE IS CALLED FOR . IN THE REJOINDER, THE LD.AR ARGUED THAT THE COMMISSIONER OF INCOME TAX RELIED ON THE DECISION IN 5.1.2 OF THE ORDER WHICH WAS NOT GIVEN TO THE ASSESSEE. THEREFORE, ARGUED THAT THE OBSERVATIONS OF THE LD. CIT (A) IN 5.1.2 SHOULD NOT BE GIVEN CREDENCE. 6 . WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, THE ASSESSEE IS ENGAGED IN THE BUSINESS OF TRANS PORTATION OF BITUMEN USING THE OWN VEHICLES, HIRED FROM DIRECTORS AND THEIR RELATIVES AND ALSO FROM OUTSIDERS. THE ASSESSEE HAS MADE THE PAYMENT TO DIRECTORS AND RELATIVES @ 90 % OF THE BILLS RECEIVED, WHEREAS T HE EXPENDITURE INCURRED ON VEHICLES HIRED FROM OTHERS WAS LESS THAN 74.86% OF THE BILLS 11 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. RECEIVED. THERE WAS A DIFFERENCE IN PAYMENT OF HIRE CHARGES O F THE DIRECTORS AND OUTSIDERS FOR THE SAME ROUTE AND FOR THE SAME AMOUNT OF QUANTITY OF TRANSPORT . IN THE CASE OF DIRECTORS AND RELATIVES, THE PAYMENT WAS HIGHER AND TO THE OUTSIDERS THE LESSER AMOUNT WA S PAID WITHOUT ADOPTING ANY STANDARD BASIS SUCH AS RATE PER KILOMETER OR PER METRIC TON FOR THE ROUTE ETC. IN THE CASE OF DIRECTORS THE TRANSPORT BILLS REC EIVED , WAS RS.4,22,35,110 / - AND THE HIRE CHARGES PAID WAS RS.3,80,11,6 00 / - . WHEREAS AGAINST THE HIRE CHARGES RECEIVED FOR ENGAGING THE OUTSIDERS VEHICLES THE TRANSPORTATION CHARGES RECEIVED WAS RS.1,26,77,431 / - AND THE HIRE CHARGES PAID WAS RS.94,90,362 / - WHICH WORKED OUT TO 74.86% . THE LD.AR PLACED HEAVY RELIANCE ON THE QUOTATIONS OBTAINED FROM I.E. FROM GR TRANSPORT, MR.KISHORE BABU, VIJAYAWADA, VIJAYA LAKSHMI TRANSPORT AND SRI SATYA JYOTHI TRANSPORT AND ARGUED THAT THE COMPANY HAS TO INCUR EXPENDITURE IN ADVA NCE AND HAS TO MAKE THE PAYMENT IMMEDIATELY ON COMPLETION OF JOURNEY TO OUTSIDERS , WHEREAS IN THE CASE OF THE DIRECTORS, THE COMPANY CAN MAKE THE PAYMENTS AT ITS CONVENIENCE, THEREBY SAVING INTEREST COST AND THE DISPOSAL OF VEHICLES AT THE COMPANY WERE THE MAIN REASONS FOR PAYMENT OF 90% OF FREIGHT CHARGES TO THE DIRECTORS AND THEIR RELATIVES . THE L D.A.R ALSO TAKEN OUR ATTENTION TO THE TERMS AND CONDITIONS FOR ENGAGING THE VEHICLES OF 12 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. THE DIRECTORS AND THE REASONS FOR TAKING THE VEHICLE S FROM THE DIRECTORS FR O M THE RESOLUTION OF THE BOARD OF DIRECTORS WHICH READS AS UNDER : THE BOARD IS INFORMED THAT THE ABOVE QUOTATIONS WERE OBTAINED FOR HPCL REFINERIES SITUATED IN VIZAG AND IOC REFINERIES SITUATED IN CHENNAI AS THE BUSINESS IS TOTALL Y CONNECTED TO HPCL REFINERIES AND IOC REFINERIES SITUATED ON THE COASTAL BELT NEAREST TO THE AP STATE. IT IS ALSO TO BE NOTED THAT THE PRICES WILL BE FLUCTUATING DEPENDING UPON DIESEL RATES. BESIDES THE ROUTES SPECIFIED ARE TOTALLY UNWORKABLE TO THE COMP ANY AS THEY ARE LIMITED AND COMPANY WISHES TO BUSINESS ON MANY MORE ROUTES THAN WHAT ARE SPECIFIED. FURTHER ALL THE VEHICLE OWNERS WHO QUOTED THE ABOVE PRICES REFUSED TO ENABLE THE COMPANY TO EXCLUSIVELY HIRE THEIR VEHICLES FOR THIRD PARTIES LIKE HPCL BY EXECUTING NECESSARY AFFIDAVITS / AGREEMENTS. IT IS ALSO INFORMED TO THE BOARD THAT NEGOTIATIONS ALSO DID NOT MATERIALIZE IN ANY POSITIVE RESULT TO THE COMPANY AS THE PERSONS WHO QUOTED THE ABOVE RATES ARE STICKING TO THEIR QUOTED PRICES AND ROUTES AND NOT AGREEING TO ANY OTHER TERMS AND CONDITIONS. TAKING THESE FACTORS INTO CONSIDERATION YOUR DIRECTORS ALONG WITH THEIR RELATIVE SMT. Y. SUNEETHA CAME FORWARD TO OFFER THEIR OWN VEHICLES FOR EXCLUSIVE HIRING TO THE COMPANY ON THE FOLLOWING MATERIAL TERMS AND CONDITIONS: 1. THE TRANSPORTATION OF BITUMEN CAN BE TO A NY DESTINATION OF THE CHOICE OF THE COMPANY. 2. THERE IS NO MINIMUM STIPULATION OF ANNUAL PAYMENT. 3. THE VEHICLES WILL BE UNDER THE EXCLUSIVE CONTROL OF THE COMPANY FOR OPERATIONAL PURPO SES. 4. IT WAS ALSO AGREED THAT THE VEHICLES CAN BE UTILIZED FOR EXCLUSIVE USAGE OF ANY PARTY LIKE OIL COMPANIES BY ENTERING INTO SUITABLE AGREEMENTS BY THE COMPANY FOR WHICH THE VEHICLE OWNERS WILL CO - OPERATE BY EXECUTIVE NECESSARY DOCUMENTS LIKE AGREEMENTS, AFFIDAVITS ETC.,. 5. THE HIRE CHARGES PAYABLE ARE FIXED AT 90% OF THE FREIGHT RECEIPT WITHOUT ANY REGARD TO DIESEL PRICE FLUCTUATIONS. 6. THE WAGES/ BHA THAS OF VEHICLE STAFF LIKE DRIVERS AND CLEANERS WILL BE INCURRED BY RESPECTIVE VEHICLE OWNERS WITHOUT ANY REFERENCE TO THE COMPANY. 7. THE REPAIRS AND MAINTENANCE OF VEHICLES INCLUDING ANY MAJOR REPAIRS ON ACCOUNT OF ACCIDENTS ETC., WILL BE INCURRED BY RESPECTIVE VEHICLE OWNERS WITHOUT ANY REFERENCE TO THE COMPANY. 8. . SIMILARLY ALL EXPENSES LIKE TOLL GATE PAYMENTS, OTHER PAYMENTS THAT MAY BE 13 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. REQUIRED TO BE MADE DURING THE RUNNING OF THE VEHICLE WHILE CARRYING THE LOAD SHALL BE BORNE BY THE RESPECTIVE DIRECTORS AND SMT. Y. SUNEETHA IN RESPECT OF THEIR OWN VEHICLES. 9.. TAKING INTO CONSIDERATION THE FINANCIAL POSITION OF THE COMPANY, THE COMPANY CAN SETTLE THE INDIVI DUAL ACCOUNTS OF THE VEHICLE OWNE RS AS PER ITS CONVENIENCE BUT NOT LATER THAN EXPIRY OF EACH FINANCIAL YEAR THE LD.CIT(A) CONFIRMED THE ADDITION AFTER CONSIDERING THE OBJECTIONS RAISED BY THE ASSESSEE AS UNDER : 5. I HAVE PERUSED THE SUBMISSIONS OF APPELLANT AND RELEVANT INCOME TAX MISCELLANEOUS RECORDS. 5.1. ADMITTEDLY, APPELLANT PAID DIFFERENT HIRE CHARGES (FREIGHT CHARGES) FOR THE VEHICLES OF DIRECT ORS AND RELATIVES VIS - A - VIS THAT OF OUTSIDERS FOR THE SAME FREIGHT PER METRIC TON PER KM. OF TRIP. SOME SAMPLE DETAILS ARE AS FOLLOWS : DETAILS OF FREIGHT CHARGES PAID DURING THE PERIOD 2011 - 12 FREIGHT PER M.TON (METRIC TON) S.NO. CUSTOMER NAME ROUTE RECEIVED BY APPELLANT PAID TO DIRECTORS / RELATIVE VEHICLES PAID TO THIRD PARTY VEHICLES RATIO OF PAYMENT TO OUTSIDERS ON FREIGHT RECEIPTS 1. GMR INFRASTRUCTURE VIZAG - CHITYALA 1680.00 1512.00 1380.00 82.14% 2. MITRA ENGINEERING VIZAG - MEDARAMETLA 1640.00 1476.00 1230.00 75% 3. SAI TEJA CONSTRUCTIONS VIZAG - ERECHERIA 1325.00 1192.00 920.00 69.4% 4. SRI GEETHANJALI ENTERPRISES VIZAG - BOYAPALEM 1360.00 1224.00 920.00 67.6% 5. SRINIVASA LAXMI CONSTRUCTIONS VIZAG - MANCHERIYALA 2300.00 2070.00 1656.00 72% 6. REAL CONSTRUCTIONS VIZAG - KARIMNAGAR 2045.00 1840.00 1560.00 76.3% 7. VIJMOHAN CONSTRUCTIONS VIZAG - SIDDIPETA 2200.00 1980.00 1512.00 68.7% 8. RAMKY INFRASTRUCTURES VIZAG - PATNA 5560.00 5004.00 4725.00 85% 9. SRI SAI RAM ENTERPRISES VIZAG - MEDIPALLI 2250.00 2025.00 1680.00 75% 10. VINERGY VIZAG - 1711.00 1539.90 1265.00 74% 14 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. INTERNATIONAL HYDERABAD 11. GAYATRI PROJECTS CHENNAI - KANNALA 2310.00 2079.00 1950.00 84.4% 12. M BUTCHAIAHA & CO. CHENNAI - MARTUR 1250.00 1125.00 882.00 70.5% FROM THE ABOVE TABLE, IT COULD BE NOTICED THAT APPELLANT PAID 90% OF ITS FREIGHT RECEIPTS TO THE DIRECTORS / RELATIVE VEHICLE (PER METRIC TON). HOWEVER, THE OUTSIDERS FOR THE SAME F REIGHT PER METRIC TON WERE PAID AT DIFFERENT RATES BUT LESS THAN 90%. 5. 1 . 1 . BUSINESS OF APPELLANT IS ESSENTIALLY TRANSPORTATION OF BITUMEN EITHER THROUGH ITS OWN VEHICLES OR VEHICLES OF DIRECTORS AND THEIR RELATIVES AND OUTSIDERS VEHICLES. THUS ALL VEHICLES IRRESPECTIVE OF OWNERSHIP SHOULD BE FIT FOR TRANSPORTATION OF BITUMEN IS THE BASIC COMMON FEATURE I.E. SPECIALLY DESIGNED FOR THAT PURPOSE. FREIGHT RATE PER METRIC TON PER KM. OF TRAVEL IS THE BASIS OF CHARGE IS NOT DISPUTED BY APPELLANT. WHEN APPELLANT FOR A PARTICULAR ROUTE OF TRANSPORTATION RECEIVED AMOUNT FROM CUSTOME R, WHY IT PAID HIGHER AMOUNT TO THE VEHICLES OF DIRECTORS AND THEIR RELATIVES VIS - - VIS VEHICLES OF OUTSIDERS FOR THE SAME ROUTE WITHOUT ADOPTING COMMON BASIS OF FREIGHT PER KM. PER METRIC TONNE IS NOT SATISFACTORILY EXPLAINED BEFORE ASSESSING OFFICER AS W ELL AS DURING APPELLATE PROCEEDINGS WITH SUPPORTING EVIDENCE. 5.1.3. IF THERE IS ANY DIFFERENCE IN RATE AMONG VEHICLES, THE REASONABLENESS OF PAYMENT HAS TO BE PROVED BY APPELLANT. VEHICLES OF OUTSIDERS WERE ALSO USED BY APPELLANT INDICATED THE (1) NON - AVAILABILITY OF ADEQUATE NUMBER OF VEHICLES WITH APPELLANT COMPAN Y INDUCTING THAT OF THE VEHICLES OF THE DIRECTORS AND THEIR RELATIVES AND (2) THE REQUIREMENT OF BUSINESS. THE FACT THAT APPELLANT ENGAGED OUTSIDERS VEHICLES FAIRLY EXTENSIVELY NEGATED THE CLAIM OF APPELLANT THAT APPELLANT'S BUSINESS CANNOT RELY UPON OUTSI DERS' VEHICLES. DETAILS OF VEHICLES USED BY APPELLANT DURING THE RELEVANT ASSESSMENT YEAR ARE AS FOLLOWS : COMPANYS OWN VEHICLES DIRECTORS AND RELATIVES OWN VEHICLES OUTSIDERS VEHICLES 10 31 76 5.1.4. THE ISSUES WHY DISCRIMINATION IN PAYMENT OF HIRE CHARGES FOR THE SAME ROUTE / SAME KM. OF TRAVEL P& METRIC TON BETWEEN VEHICLES OF DIRECTORS / RELATIVES VIS - A - VIA OUTSIDERS AND NOT EXCLUSIVE DEDICATION OF VEHICLE TO APPELLANT COMPANY. WHEN APPELLANT CLAIMED THAT IT GAINED BUSINESS ADVANTAGE DUE TO ITS EXCLUSIVE USAGE OF VEHICLES BELONGING TO ITS DIRECTORS AND THEFT RELATIVES IN ITS TRANSPORTATION BUSINESS (THOUGH CLAIMED BUT NOT PROVED SATISFACTORILY WITH ANY MATERIAL EVIDENCE EVEN 15 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. DURING APPELLATE P ROCEEDINGS) AND IF EXCLUSIVE DEDICATION OF VEHICLE IS THE CRITERION FOR HIGHER PAYMENT OF HIRE CHARGES TO DIRECTORS, THEN WHAT PREVENTED THE DIRECTORS AND THEIR RELATIVES NOT TO HAVE MORE VEHICLES AND DEPLOY THEM AT COMPANY DISPOSAL THAN THE NUMBER OF VEHI CLES CURRENTLY DEPLOYED BY THEM ( I. E. NOT MORE THAN TEN AS PRESCRIBED U/S 44AE OF THE ACT.) NAME OF DIRECTOR / RELATIVE OF DIRECTOR NUMBER OF VEHICLES TAKEN ON HIRE BY THE COMPANY FROM THEM FOR ATLEAST A PART OF THE YEAR HIRE CHARGES DEBITED TO PROFIT AND LOSS ACCOUNT OF THE ASSESSEE COMPANY DUE TO THE VEHICLES HIRED FROM THEM CH.MALLIKARJUNA RAO 8 RS.76,98,973/ - C.V.N.RAJESWARI 9 RS.1,09,47,487/ - Y.SUBBARAO 6 RS.77,27,357/ - Y.SUNEETA 8 RS.1,16,37,784/ - TOTAL 31 RS.3,80,11,601/ - 5.1.5. BY PAYING MORE HIRE CHARGES TO DIRECTORS AND THEIR RELATIVES, THE C OMPANYS PROFIT IS REDUCED SUBSTANTIALLY WHEN COMPARED WITH THE HIRE CHARGES PAID TO OUTSIDER VEHICLES. ON THE ONE HAND, THE DIRECTORS AND THEIR RELATIVES THOUGH RECEIVED HIGHER HIRE CHARGES FOR THE SAME DISTANCE OF FREIGHT TRANSPORTATION, OPTED FOR OFFERING INCOME U/S 44AE OF THE ACT, THUS, DEPRIVING THE REVENUE OF ITS LEGITIMATE DUES. DETAILS ARE AS FOLLOWS: SL.NO. NAME OF DIRECTOR / RELATIVE OF DIRECTOR HIRE CHARGES DEBITED TO PROFIT & LOSS ACCOUNT OF THE COMPANY DUE TO VEHICLES HIRED BY THEM BUSINESS INCOME OFFERED IN THEIR INDIVIDUAL INCOME TAX RETURNS U/S 44AE OF THE ACT ON ACCOUNT OF HIRE CHARGE RECEIPTS FOR ASST.YEAR 2012 - 13 NO. OF VEHICLES PAN 1. CH.MALLIKARJUNA RAO 8 AAZPC9500G RS.76,98,973 RS.4,15,000 2. C.V.N.RAJESWARI 9 AAZPC8624Q RS.1,09,47,487 RS.5,35,000 3. Y.SUBBA RAO 8 AAPPY0050K RS.77,27,357 RS.4,50,000 4. Y.SUNEETA 8 - RS.1,16,37,784 RS.4,80,000 5.1.6. IN MY VIEW, ASSESSING OFFICER'S ACTION OF COMPARISON OF HIRE PAYMENTS TO VEHICLES OF DIRECTORS AND RELATIVES VIS - A - VIS OUTSIDERS VEHICLE IS IN ORDER AS THE COMMON FEATURE OF CHARGE OF TRANSPORTATION IS RATE PER METRIC TON PER K M . THE APPELLANT COMPANY ALSO HAD ONLY TEN VEHICLES REGISTERED IN ITS NAME AND IT ALSO CLA IMED INCOME U/S 44AE OF THE ACT. APPELLANT COMPANY DID NOT HAVE ANY OTHER BUSINESS. ITS TOTAL TURNOVER 16 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. FOR ASST. YEAR 2012 - 13 WAS RS.6,94,04,125/ - . IT IS CLEARLY COVERED U/S. 44AB OF THE ACT. RELEVANT SUBMISSION OF APPELLANT IN THIS REGARD IS QUOTED BELOW: THE ASSESSEE FOR THE ASSESSMENT YEAR 2012 - 13 FILED ITS RETURN OF INCOME REPORTING SEPARATELY INCOME GENERATED FROM TRANSPORTATION SERVICES BY USAGE OF OWN VEHICLES AND INCOME GENERATED FROM TRANSPORTATION SERVICES BY EMPLOYING HIRED VEHICLES. THE INCOME GENERATED FROM USAGE OF OWN VEHICLES HAS BEEN REPORTED ON PRESUMPTIVE TAXATION BASIS U/S.44AE AS ASSESSEE WAS OWNING NOT MORE THAN 10 VEHICLES DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR 2012 - 13. IN SO FOR AS INCOME GENERATED FROM EMPLOYMENT OF HIRED VEHICLES, ASSESSEE REPORTED THE SAME ON 5THE BASIS OF REGULAR BOOKS OF ACCOUNTS MAINTAINED BY IT BY DRAWING A PROFIT AND LOSS ACCOUNT SEPARATELY FOR OWN VEHICLES AND HIRED VEHICLES. THE INCOME GENERATED THROUGH EMPLOYMENT OF HIRED VEHICLES INCLUD ED NOT ONLY THE HIRED VEHICLES OF ITS DIRECTORS AND RELATIVE BUT ALSO HIRED VEHICLES TAKEN ON HIRE FROM 5 PARTIES. ONE OF THE EXPENSES CLAIMED IN THE PROFIT AND LOSS ACCOUNT FOR REPORTING INCOME FROM EMPLOYMENT OF HIRED VEHICLES INCLUDED HIRE CHARGES INCUR RED BY THE COMPANY ON VEHICLES BELONGING TO THE DIRECTORS, THEIR IELATIVE AND 3'' PARTIES. THERE IS NO LEGAL OR STATUTORY REQUIREMENT TO SEGREGATE THE EXPENSES AS ABOVE AS THE BUSINESS IS SINGLE AND INDIVISIBLE AND THE SAID BUSINESS WAS DONE IN PART WITH O WN VEHICLES AND THE OTH ER PART WITH HIRED VEHICLES. THIS SITUATION IS SIMILAR TO ASSESSEE HAVING EXEMPT IN COME AND TAXABLE INCOME ON WHICH COMMON EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE. THE ASSESSEE SEGREGATED COMMON EXPENDITURE BETWEEN PRESUMPTIVE BUSINESS INCOME AND NON - PRESUMPTIVE (NORMAL) BUSINESS INCOME AND VOLUNTARILY RENOUNCED COMMON EXPENDITURE RELATING TO PRESUMPTIVE BUSINESS. GUIDANCE HAS BEEN TAKEN BY THE ASSESSEE IN THIS REGARD FROM THE CBDT CIRCULAR NO. 14 OF 2001 DATED 09.11.2001 AND G UIDANCE NOTE ISSUED BY ICAI ON TAX AUDIT UNDER SECTION 44A B OF THE INCOME TAX ACT, 1961. IN MY VIEW, THERE IS NO NEED TO SEGREGATE THE EXPENSES AND THE ICAI GUIDANCE NOTE IS NOT APPLICABLE TO FACTS OF APPELLANT'S CASE AS IT HAS ONLY ONE BUSINESS. THERE I S NO QUESTION OF APPELLANT HAVING ANY EXEMPT INCOME. HENCE, APPELLANT'S SEGREGATION OF EXPENSE IS NOT IN ACCORDANCE WITH 17 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. THE PROVISIONS OF THE ACT. THE BASIS, GENUINENESS AND SANCTITY OF THIS SEGREGATION IS BEST KNOWN TO APPELLANT ONLY. 5.1.8. THE REASONABLE OF ANY EXPENDITURE IS TO BE JUDGED HAVING REGARD TO THE FAIR MARKET VALUE OF GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS ACCRUING TO THE APPELLANT. THE BURDEN OF PROVING NON - APPLICABIL ITY OF SECTION 40A(2) RESTS ON THE APPELLANT. IN THIS REGARD, APPELLANT DID NOT PROVE WITH EVIDENCE / SUPPORTING MATERIAL THAT ITS CASE DID NOT ATTRACT PROVISIONS OF SECTION 40A(2) OF THE ACT. 5.1.9. PAYMENTS IN THE NATURE TO AVOID TAX LIABILITY ARE CLEA RLY HIT BY PROVISIONS OF SECTION 40A(2) OF THE ACT. THE SOLE GROUND OF DISALLOWING THE EXCESS PAYMENT WAS THAT IT WAS A COLOURABLE DEVICE TO REDUCE THE INCIDENCE OF TAX. [KISHAN CHAND HARISH CHAND V. ACIT (2001) 21 DTC 522 (JP - TRIB.)]. 5.1.10. IN MY VIEW, IN APPELLANT'S CASE ALL THE THREE REQUIREMENTS OF SECTION 40A(2) ARE MET, I.E. (I) LORRY HIRE CHARGES PAYMENT TO VEHICLES OF DIRECTORS AND THEIR RELATIVES IS EXCESSIVE OR UNREASONABLE WHEN COMPARED WITH THE VEHICLES OF OTHERS (ON THE BASIS OF FAIR MARKET VALUE OF RATE PER KM. PER METRIC TON) AND HAVING REGARD TO THE LEGITIMATE NEEDS OF THE BUSINESS. (II) IT IS NOT NECESSARY TO RECORD FINDING AS TO MARKET VALUE OF GOODS / SERVICES. ASSESSING OFFICER ON THE BASIS OF MATERIALS SUPPLIED BY APPELLANT RIGHTLY CONCLUDED T HAT THE PROVISIONS OF SECTION 40A(2) ARE ATTRACTED. IT IS NOT NECESSARY FOR HIM TO BRING ANY EVIDENCE ON HIS OWN. [CORONATION FLOUR MILLS VS. ACIT (GUJ) 314 ITR 1]. (III) THE CASE LAWS CITED BY THE APPELLANT ARE CLEARLY DISTINGUISHABLE FROM FACTS OF APPELLANT'S CASE. ASSESSING OFFICER HAS RECORDED HIS FINDING WITH COGENT REASONS. IN THE ABSENCE OF ANY EVIDENCE, IT IS DIFFICULT TO BELIEVE THAT THE DIRECTORS AND THEIR RELATIV ES ARE RENDERING SUFFICIENT SERVICE COMMENSURATE WITH EXCESS PAYMENT BY DEPLOYING THEIR VEHICLES VIS - A - VIS VEHICLES OF OUTSIDERS. APPELLANT ITSELF SUBMITTED EXCESS PERCENTAGE OF DIFFERENCE ON REVENUE AT 10.98% ON SAMPLE BASIS IN ITS WRITTEN SUBMISSION GIVE N ON 15.12.2015. HENCE. I FIND NO REASON TO INTERFERE WITH THE ADDITION OF RS.45,61 .392/ - MADE BY ASSESSING OFFICER AS ASSESSING OFFICER DISALLOWED 12% OF THE HIRE CHARGES OF RS.3,80,11,601/ - DEBITED TO P&L A/C DUE TO DIRECTORS AND RELATIVES. HENCE, I CO NFIRM THE ADDITION OF RS.45,61,392/ - . 18 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. 6.1. THE ARGUMENT OF THE ASSESSEE AND THE REASONS ASSIGNED BY THE ASSESSEE WITH REGARD TO THE HIRING OF THE VEHICLES FROM THE DIRECTORS FOR PAYMENT AT HIGHER RATE IS NOT BASED ON ANY DOCUMENTARY EVIDENCE. FOR A QUERY FROM THE BENCH, THE LD.AR SUBMITTED THAT THE ASSESSEE COMPANY HAS NOT FOLLOWED ANY TENDERING PROCESS. AS OBSERVED FROM THE QUOTATIONS IN THE PAPER BOOK IT HAD OBTAINED SOME QUOTATIONS FOR THE VARIOUS ROUTES FROM THE KNOWN TRANSPORT OPERATOR S WITHOUT FOLLOWING ANY TENDERING PROCESS. THE COMPANY HAS NOT INVITED ANY QUOTATIONS FOLLOWING THE DUE PROCESS WITH THE SPECIFIC TERMS AND CONDITIONS REQUIRED BY THE COMPANY . AFTER OBTAINING THE QUOTATIONS FROM SOME SUPPLIERS WITHOUT FOLLOWING ANY PROCEDU RE THE COMPANY HAS PASSED BOARD RESOLUTION HIGHLIGHTING THE DISADVANTAGES AND EXPECTATIONS FROM THE VEHICLES HIRED FROM THE DIRECTORS, BUT NO AGREEMENT WAS SIGNED BY THE COMPANY WITH DIRECTORS AS PER THE SPECIFIC TERMS AND CONDITIONS MENTIONED THEREIN. T HE BOARD OF DIRECTORS HAS PASSED THE RESOLUTION HOLDING THAT HIRING OF THE VEHICLES FROM THE DIRECTORS IS IN THE INTEREST OF THE BUSINESS AND COMMERCIAL EXPEDIENCY. HOWEVER, THE COMPANY HAS NOT DISCLOSED ITS TERMS AND CONDITIONS AND INVITED THE GLOBAL TENDE RS. THEREFORE, THE QUOTATIONS OBTAINED BY THE COMPANY AND PASSING THE BOARD RESOLUTION IN FAVOUR OF HIRING THE VEHICLES FROM THE DIRECTORS APPEA RS TO BE A SELF SERVING DOCUMENT TO SUIT THE NEEDS OF THE COMPANY. 19 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. FOR A QUERY FROM THE BENCH, THE LD.AR SUBM ITTED THAT THE COMPANY HAS NOT ENTERED INTO ANY WRITTEN AGREEMENT EITHER WITH THE DIRECTORS AND RELATIVES OR WITH THE OUTSIDERS. THEREFORE, IN THE ABSENCE OF WRITTEN AGREEMENT FROM THE OUTSIDERS AS WELL AS THE DIRECTORS AND THEIR RELATIVES, THE ARGUMENT O F THE ASSESSEE WITH REGARD TO THE METHOD OF PAYMENT OF HIRE CHARGES TO THE OUTSIDERS AND THE DIRECTORS AND EXCLUSIVITY OF VEHICLES CANNOT BE GIVEN MUCH CREDENCE . EVEN THE ASSESSEE HAS NOT ESTABLISHED THIS FACT WITH THE FINANCIAL STATEMENTS OF THE COMPANY. BITUMEN IS A COMPONENT WHICH REQUIRED TO BE TRANSPORTED IN SPECIALLY DESIGNED VEHICLES FOR THE PURPOSE. EITHER THE VEHICLES HIRED FROM DIRECTORS OR RELATIVES OR FROM OUTSIDERS REQUIRE TO BE FIT FOR TRANSPORTATION AND PAYMENT REQUIRED TO BE MADE ON RTKM B ASIS. THOUGH LD.AR ARGUED THAT THE VEHICLES OF THE DIRECTORS AND THEIR RELATIVES DO NOT CARRY OUTSIDERS GOODS IN THE RETURN TRIP IT IS EQUALLY APPLICABLE TO THE O UTSIDERS VEHICLES SINCE AFTER UN LOADING THE BITUMEN, THE VEHICLE CANNOT BE USED FOR ANY OTHER PURPOSE UNLESS IT IS P ROP ERLY CLEANED WHICH A LONG DRAWN PROCESS. IN GENERAL, THE FREIGHT RATE IS FIXED ON THE BASIS OF PER KILOMETER PER METRIC TON. IN THE CASE OF DIRECTORS VEHICLES, THE SAME IS FIXED AT 90% OF THE TRANSPORT RECEIPTS WHICH IS NOT A COMMON FEATURE IN THE TRANSPORTATION BUSINESS. THE LD.AR DID NOT BRING ANY EVIDENCE TO SHOW THAT THE PAYMENT OF 90% OF TRANSPORTATION RECEIPTS IS 20 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. COMMON FOR FIXING THE FREIGHT RATE. APART FROM THE ABOVE, I N THE CASE OF DIRECTORS, THE INCOME IS ADMITTED ON PRESUMPTIVE BASIS AS PER SECTION 44AE AND THE EXCESS PAYMENT MADE TO DIRECTORS DID NOT SUFFER TAX EITHER IN THE HANDS OF THE DIRECOR OR IN THE HANDS OF THE COMPANY . THE LD.A RS ARGUMENT OF COMPLETE DISPOSA L OF VEHICLES AT THE COMPANY AND PAYMENT OF TRANSPORTATION CHARGES AT THE END OF THE YEAR CANNOT BE ACCEPTED UNLESS THE TENDERS ARE INVITED AS PER THE SPECIFIC REQUIREMENTS AND FOLLOWING THE DUE PROCEDURE. APART FROM THE ABOVE THERE ARE NO WRITTEN AGREEME NTS ALSO FROM THE DIRECTORS SPECIFYING THE TERMS AND CONDITIONS MENTIONED IN THE BOARD OF DIRECTORS RESOLUTION. IN THE ABSENCE OF THE WRITTEN AGREEMENT, THE CONTENTION OF THE LD.AR ARE EXTRANEOUS CONSIDERATION WHICH C AN NOT RELIED UPON. THEREFORE, WE HOLD THAT THE PAYMENT MADE TO DIRECTORS IS IN EXCESS OF FAIR MARKET RATE AND ATTRACTS PROVISIONS OF SECTION 40A(2) OF I.T.ACT. I N THE INSTANT CASE, THE PAYMENT MADE TO DIRECTORS IS IN EXCESS OF 15 .14 % COMPARED T O OUTSIDERS AND THE DISALLOWANCE 12% OF HIRE CHA RGES MADE BY THE AO IS REASONABLE AND WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LD.CIT (A) AND THE SAME IS UPHELD. 7. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMISSED . 21 ITA NO . 388 /VIZ/201 6 CMR TRANSPORT CONTRACTORS CO.PVT.LTD. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 25 TH APR , 20 1 8 . SD/ - SD/ - ( . ) ( . . ) (V. DURGA RAO) ( D.S. SUNDER SINGH ) /JUDICIAL MEMBER /ACCOUNTANT MEMBER /VISAKHAPATNAM /DATED : 25 . 0 4 .2018 L.RAMA, SPS / COPY OF THE ORDER FORWARDED TO: - 1. / THE APPELLANT - M/S CMR TRANSPORT CONTRACTORS , CO.PVT. LTD. D.NO.54 - 18 - 3/4, NEAR ITI GATE , BHARAT GAS LINE, SIVAPURAM COLONY , VIJAYAWADA 2 . / THE RESPONDENT - THE ACIT, CIRCLE - 2(1), VIJAYAWADA 3 . THE PR. COMMISSIONER OF INCOME TAX , VI JAYAWADA 4. THE COMMISSIONER OF INCOME - TAX(APPEALS), VI JAYAWADA 5 . , , / DR, ITAT, VISAKHAPATNAM 6. / GUARD FILE / BY ORDER // TRUE COPY // SR. PRIVATE SECRETARY ITAT, VISAKHAPATNAM