ITAT Bangalore Nixes Ad-Hoc Disallowance on Transport Expenses: Practical Relief for Nationwide Transport Operators

The decision of the Bangalore bench of the Income Tax Appellate Tribunal in A Kishore Rao and Others Vs DCIT is a significant ruling for assessee engaged in large-scale transportation and logistics. The Tribunal has categorically held that where the Revenue has accepted the business activity and receipts as genuine, it cannot lightly resort to ad-hoc disallowance of core operating expenses merely because every petty voucher across India is not available on record.

In this case, the assessee was transporting chassis from automobile manufacturers to dealers across the country through a network of drivers, cleaners, agents and coordinators. Substantial expenses were incurred on fuel, tolls, driver bata, enroute and travelling expenses, and transportation charges routed through local agents. The Assessing Officer (AO) rejected the books under Section 145(3) and disallowed a flat 10% of such expenses on the premise that full original bills were not produced. The Commissioner of Income Tax (Appeals) (CIT(A)) sustained the rejection of books but trimmed the disallowance to 8%.

The Tribunal stepped in and deleted the entire disallowance, emphasising that suspicion cannot replace proof and the Revenue cannot expect “perfect documentation” in a business that operates on highways and remote locations nationwide.

Background of the case

Nature of business and receipts

  • The assessee, a HUF, was engaged in the business of chassis transportation from manufacturers to dealerships spread across India.
  • For Assessment Year 2016-17, the assessee reported gross transportation receipts of Rs. 22,34,78,203.87.
  • Major expense heads claimed included:
    • Commission expenses – Rs. 67,80,400
    • Enroute expenses – Rs. 5,90,66,202
    • Sundry expenses – Rs. 16,49,946
    • Travelling expenses – Rs. 2,21,07,891
    • Transportation charges – Rs. 12,79,96,307

These key cost components were largely incurred by two principal agents, M/s Unique Trans and Shri Paramjit Singh Sandhu, and later reimbursed by the assessee through banking channels.

Trigger for disallowance

During assessment, the assessee furnished:

  • Ledger extracts
  • Reimbursement bills raised by agents
  • Sample fuel bills
  • Driver sheets
  • Bank statements showing payments to agents by account payee instruments

However, the AO was dissatisfied because:

  • Complete original third-party petty vouchers for all items of expenditure (fuel, tolls, highway expenses, etc.) were not available;
  • Reimbursement claims were backed by summary statements rather than full sets of base vouchers for each route and trip.

On this basis, the AO:

  • Invoked Section 145(3) of the Income Tax Act 1961, rejecting the books of account;
  • Treated enroute expenses, travelling expenses, sundry expenses and transportation charges aggregating to Rs. 21,08,20,847 as unverifiable;
  • Disallowed 10% of this total, i.e., Rs. 2,10,82,034, under Section 37 as not proved to be wholly and exclusively for business.

The assessee’s stand was that:

  • These expenses were indispensable to transportation operations (fuel, tolls, driver bata, etc.), without which no revenue could be earned;
  • All reimbursements were account payee and routed through banks;
  • Complete petty vouchers were practically impossible to maintain for every highway transaction nationwide, especially where truck drivers and cleaners were mostly uneducated;
  • Sample supporting documents and reconciliations were produced; and
  • Past years and subsequent years had accepted this business model, with a consistent net profit (NP) profile.

Findings of the CIT(A)

On appeal, the CIT(A) broadly agreed with the AO that books could be rejected under Section 145(3), but reduced the disallowance rate from 10% to 8%.

Key observations of the CIT(A)

  1. On rejection of books under Section 145(3)

    • Even if accounts are audited, the AO is not barred from invoking Section 145(3) where correctness or completeness is not satisfactorily demonstrated.
    • The AO had recorded that substantial expenses could not be matched with primary documentary evidence or trip-wise details.
    • On that basis, the CIT(A) upheld the rejection of books.

  2. On estimation and rate of disallowance

    • Once books are rejected, income must be estimated reasonably having regard to the facts.
    • The AO’s 10% ad-hoc rate on unverifiable expenses was considered somewhat excessive.
    • Considering volume of operations and payments through banking channels, the CIT(A) restricted the disallowance to 8% of such expenses.

  3. Rejection of assessee’s reliance on R.G. Buildwell Engineers Ltd.