The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the mere non-response of vendors to notices issued under Section 133(6) of the Income Tax Act cannot, by itself, justify the wholesale disallowance of business expenditure where the assessee has already produced primary documentary evidence in support of its claims.
The bench of Padmavathy S (Accountant Member) and Manu Kumar Giri (Judicial Member) remanded the matter to the Assessing Officer (AO) for fresh examination after directing the Revenue to conduct proper verification and provide the assessee with an adequate opportunity of hearing.
The ruling came in appeals filed by E2E Supply Chain Solutions Limited for Assessment Years (AYs) 2008-09 and 2013-14 against orders passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC). While the Tribunal did not grant outright relief, it restored the disputed additions to the AO for fresh adjudication, allowing both appeals for statistical purposes.
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For AY 2013-14, the company, engaged in transportation of goods, stevedoring, port handling, warehousing and allied logistics services, reported a turnover of approximately ₹43.31 crore while claiming freight, stevedoring and port handling expenses of about ₹41.74 crore.
During assessment proceedings, the AO made additions aggregating more than ₹40.66 crore, including disallowance of ₹35.51 crore towards freight and allied expenses on the allegation that several transporters or vendors were fictitious; disallowance of ₹5.12 crore under Section 40A(3) relating to cash payments; and minor additions towards statutory interest and delayed PF/ESI contributions.
The CIT(A) affirmed the principal additions, prompting the assessee to approach the Tribunal.
The company argued that the freight expenditure had been disallowed solely because certain vendors failed to respond to notices issued under Section 133(6) or because notices were returned undelivered.
It submitted that the Revenue had ignored extensive evidence including: PAN details of vendors; Addresses and bank account particulars; Invoices; Lorry receipts; Goods consignment notes; Payment confirmations; and Bank statements evidencing payments through banking channels.
The assessee further contended that no specific show-cause notice was issued before drawing adverse conclusions and that the AO never informed it during assessment that vendors had allegedly failed to respond. It also pointed out that voluminous documentary evidence had been produced before the appellate authority but was not properly considered.
After examining the record, the Tribunal observed that the Revenue had accepted the assessee’s declared turnover while simultaneously disallowing almost the entire operational expenditure.
The Bench held that such an approach cannot be sustained merely because third parties failed to respond to departmental notices.
According to the Tribunal, where the assessee furnishes complete primary evidence regarding the identity of vendors, invoices, bank payments and transportation documents, the burden shifts to the Revenue to undertake meaningful verification instead of drawing adverse inferences solely from non-response to notices.
The Tribunal observed that mere non-response to notices under Section 133(6), without conducting further independent verification, particularly when complete primary evidence has been furnished, cannot justify wholesale disallowance of business expenditure. It further noted that once turnover has been accepted, corresponding expenditure cannot ordinarily be disallowed in its entirety unless there is cogent evidence establishing that the transactions are sham or fictitious.
Although the Tribunal found deficiencies in the assessment process, it did not delete the additions outright.
Instead, it restored the issue to the AO with directions to verify the documentary evidence already submitted; conduct independent enquiries wherever necessary; undertake verification through jurisdictional Assessing Officers of vendors, if required; and provide the assessee with an effective opportunity of hearing before passing a fresh order.
The Tribunal directed the assessee to cooperate fully and furnish all necessary information during the fresh proceedings.
The Tribunal also found merit in the assessee’s challenge to the disallowance under Section 40A(3).
The assessee argued that the AO had wrongly aggregated annual cash payments made to transporters and treated them as though they had been made on a single day. According to the company, no individual payment exceeded the statutory threshold of ₹35,000 per person per day, and the addition resulted from a factual misunderstanding.
Accepting that this factual issue required verification, the Tribunal remanded the matter to the AO for limited verification of daily payment records. It directed that if no payment exceeded the prescribed per-day threshold, no disallowance under Section 40A(3) should survive. The consequential levy of interest under Section 234B was also directed to be recomputed, if necessary.
The Tribunal also examined the reassessment for AY 2008-09 involving a disallowance of ₹6.55 crore relating to payments made to Twinkle Vanijaya Private Limited.
The addition had been made primarily on the basis of an alleged statement of a third party, Mr. Abhishek Chokhani.
The assessee argued that neither the statement was supplied to it nor was the witness produced for cross-examination despite repeated requests. It also maintained that it had furnished confirmations, invoices, goods consignment notes and other documentary evidence establishing the genuineness of the expenditure.
The Tribunal accepted that the principles of natural justice required disclosure of any third-party material relied upon by the Revenue and an opportunity for cross-examination wherever such statements formed the basis of adverse findings.
The Tribunal restored this issue as well to the AO, directing that the alleged statement relied upon must be supplied to the assessee if it is proposed to be used; Effective opportunity for cross-examination must be granted; The documentary evidence produced by the assessee must be independently verified; and a fresh order should be passed after granting adequate opportunity of hearing.
The Tribunal treated both appeals as allowed for statistical purposes and requested the Assessing Officer to expedite the fresh proceedings.
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