Declaring deemed profit u/s 44AE against business payments claimed as expenditure by related party was legal tax-planning – ITAT
In a recent judgment, ITAT Delhi has upheld the finding of CIT(A) that transactions with related party who claimed 100 % expenditure of payments made to assessee who in turn declared deemed profit u/s 44AE against such payments was a well designed method of tax-planning and not tax evasion.
ABCAUS Case Law Citation:
4832 (2025) (11) abcaus.in ITAT
In the instant case, the Revenue had challenged the order passed by the CIT(A) in deleting the addition made by the Assessing Officer as unexplained income of the assessee from truck running business.
The respondent assessee was in the business of providing transport services. For the relevant assessment year, return was filed declaring income u/s 44AE & some income declared u/s 44AD of Income Tax Act, 1961 (the Act). Out of receipts declared u/s 44AE substantial income (approx. 90%) was from one related party.
The case of the Assessing Officer (AO) was that the said related party took transport services from the respondent assessee and claimed full payment made to the assessee as business expense which saved it tax @33.33% on payment made to the assessee. Whereas, the assessee had offered payment received from the related party u/s 44AE, which was only 2.41% of the receipt from related party.
The AO opined that the assessee and the related party were one and the same party. This entire arrangement was to divert profit by misusing the provisions of 44AE. The assessee had not been able to prove that the receipts are from truck running business. Merely owning 10 trucks does not imply that the assessee is engaged in truck hiring business and earning income therefrom.
During the course of first appellate proceedings before the CIT(A), the appellant submitted various documents evidencing the expenditure incurred towards fuel, insurance, repair and maintenance etc. to prove that he actually carried out business transactions. The assessee also filed details, showing complete list of vehicles to justify its claim u/s 44AE of the Act.
The assessee contended that the Revenue cannot start with the question as to whether the transaction is a tax deferment / saving device, rather, it has to apply the “look at test” to ascertain the true legal nature, for genuine strategic tax planning is permissible. He placed reliance on the judgment of the Hon’ble Supreme Court which held that that every tax payer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury.
Further the assessee on the issue of scope of enquiry under section 44AE placed reliance on the judgment of the Allhabad High Court in which it was held that the very purpose and idea of enactment of such provision like Section 44AE of the Act is to provide hassle free proceedings. Such provisions are made just to complete the assessment without further probing provided the conditions laid down in such enactments are fulfilled. The presumptive income, which may be less or more, is taxable. Such an assessee is not required to maintain any account books.
The Hon’ble High Court held that even if, the actual income in a given case, is more than income calculated as per sub-section (2) of Section 44AE, it cannot be taxed. Thus, the query of the Assessing Officer as to how the assessee met his daily expenses, there being no withdrawal and conclusion of additional income was uncalled for.
The assessee also relied upon the judgment of the Chandigarh Bench of ITAT in the context of section 44AD in which it was held that asking the assessee to prove to the satisfaction of the Assessing Officer, the expenditure to the extent of 92% of gross receipts, would also defeat the purpose of presumptive taxation as provided under section 44AD of the Act or other such provision. Since the scheme of presumptive taxation has been formed in order to avoid the long drawn process of assessment in cases of small traders or in cases of those businesses where the incomes are almost of static quantum of all the businesses, the Assessing Officer could have made the addition under section 69C of the Act, once he had carved out the case out of the glitches of the provisions of section 44AD of the Act.
The CIT(A) observed that the AO had held that colorable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it was honorable to avoid payment of tax by resorting to dubious methods. The AO had also doubted the genuineness of the transaction and the very fact that the appellant was actually involved in the business of running trucks.
The CIT(A) also noted that in the case of the related party his case had been the subject matter of Transfer Pricing assessment. The TPO after examining of documents produced and taking into account the analysis therein had come to the conclusion that no adverse inference can be drawn, with respect to related parties u/s 92CA of the Act.
The CIT(A) opined that it was evident that the assessee was justified in claiming the benefit of Section 44AE and 44AD of the Act. This was justified in terms of number of trucks owned by the appellant (which in this case is 10) and also in view of the turnover which is basis of claiming benefit u/s 44AE and 44AD of the Act.
The CIT(A) referring to the decision of Hon’ble Supreme Court held that a tax payer can reduce his liability by commercially arranging his affairs and that the transactions with the related party were part of tax planning.
The CIT(A) opined that what the assessee had resorted to needs to be viewed from the perspective of tax planning. This was different from tax evasion. The law provides the tax payer to adopt such methods to reduce his tax burden. It is treated as legitimate and bona-fide. The Hon’ble Supreme Court has laid down that a tax-payer can reduce his liability, by so arranging his commercial affairs that charge of tax is distributed. From the facts of the case, the transaction including the arrangement of facts of the related party entity with the mother company points to a well designed method of tax-planning. The assessee was within his right to do so.
As a result, the CIT(A) deleted the addition made.
The Tribunal held that a careful perusal of the order of the CIT(A) did not show any good reason to interfere with the findings of the CIT(A) and therefore the order of the CIT(A) was sustained and the grounds raised by the Revenue were rejected.
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