The National Faceless Appeal Centre (NFAC) has deleted an addition of ₹42.09 lakh made by the Assessing Officer towards alleged unverifiable transportation and contractor expenses after the remand proceedings confirmed that the transactions were genuine.

The Commissioner of Income Tax (Appeals) observed that the very basis for disallowing the expenditure ceased to exist once the Assessing Officer verified the affidavits, ledger accounts and banking transactions of the transport contractors and found them to be in order.

The appeal concerned Assessment Year 2018-19 and arose from an assessment order passed under Section 143(3), read with Sections 143(3A) and 143(3B), of the Income Tax Act, 1961.

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Transportation Expenses Disallowed During Assessment

The assessee, an individual engaged in the transportation business, filed the income tax return on October 31, 2018, declaring a total income of ₹48,70,370.

The case was selected for limited scrutiny to verify the genuineness of the expenses claimed by the assessee. During the assessment proceedings, the Assessing Officer examined payments made to various truck owners and transport contractors.

The officer was not satisfied with the supporting evidence produced in respect of payments made to six parties. Consequently, transportation and contractor expenses aggregating to ₹42,09,375 were disallowed.

After making the addition, the Assessing Officer determined the assessee’s total income at ₹90,79,745 against the returned income of ₹48,70,370. A tax demand of ₹18,73,186 was raised, and penalty proceedings under Section 270A were also initiated.

Assessee Relies on Bank Payments and Books of Account

The assessee challenged the disallowance before the appellate authority, contending that the transportation expenditure was genuine and had been incurred wholly for the purposes of the business.

It was submitted that all the transactions were duly recorded in the books of account and that the payments to the transport contractors had been made through banking channels.

The assessee also sought permission to produce additional evidence under Rule 46A of the Income Tax Rules, 1962. The additional material primarily comprised affidavits from the six transport contractors, their ledger accounts and other supporting records.

Explaining the failure to produce these documents during assessment, the assessee submitted that the records could not be obtained at the relevant time because of the COVID-19 situation and the limited time available during the assessment proceedings.

AO Finds Transactions Genuine During Remand Proceedings

The appellate authority forwarded the additional evidence to the Assessing Officer for examination and sought a remand report.

During the remand proceedings, the Assessing Officer issued notices under Section 133(6) of the Income Tax Act to all six transport contractors. Each contractor responded to the notice and confirmed that they were engaged in the transportation business.

The parties further confirmed that they had received the respective amounts from the assessee as transportation charges during Financial Year 2017-18. The amounts disclosed in their affidavits and ledger accounts matched the payments disallowed in the assessment order.

The Assessing Officer also examined the ledger accounts and banking transactions on a test-check basis. Following the verification exercise, the officer reported that the transactions were genuine and that the transportation expenditure of ₹42,09,375 was acceptable as business expenditure, subject to the applicable provisions of the Income Tax Act.

Additional Evidence Admitted Under Rule 46A

The Commissioner of Income Tax (Appeals) noted that the original disallowance was principally made because sufficient evidence relating to the six transport contractors had not been produced or was considered inadequate at the assessment stage.

The appellate authority found that the affidavits, ledger accounts and supporting records were directly connected with the disputed addition and were necessary for deciding the appeal correctly.

It was also observed that the Assessing Officer had been given a full opportunity to examine the additional evidence during the remand proceedings. Consequently, admitting the evidence would not cause any prejudice to the Revenue.

Considering the circumstances cited by the assessee and the subsequent verification conducted by the Assessing Officer, the appellate authority admitted the additional evidence under Rule 46A.

Basis of Disallowance No Longer Survived

While deciding the matter on merits, the appellate authority placed significant reliance on the findings recorded in the remand report.

It noted that statutory notices had been issued to all six parties and that responses had been received from each of them. Their affidavits, ledger accounts and bank transactions had also been examined by the Assessing Officer.

Most importantly, the Assessing Officer expressly reported that the transactions were genuine and that the transportation expenditure was acceptable.

The appellate authority held that the basis on which the expenditure had originally been disallowed no longer survived after the Assessing Officer’s own verification.

It further observed that there was no material on record to establish that the payments were not made for business purposes or that the expenditure was bogus. On the contrary, the documents subsequently verified by the Assessing Officer supported the assessee’s claim that the expenditure was incurred in the course of carrying on the transportation business.

₹42.09 Lakh Addition Deleted

Accordingly, the Commissioner of Income Tax (Appeals) deleted the entire disallowance of ₹42,09,375 and directed the Assessing Officer to recompute the assessee’s total income and tax liability.

The appeal was allowed, with a direction that consequential relief be granted to the assessee in accordance with law.

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