2013 (11) TMI 281 - AT - Income Tax

Disallowance out of sub-contracting charges u/s 40A(3) being paid in Cash - AO made disallowance of Rs. 63,69,540/- by considering the cash payment of Rs. 50,00,000/- with narration CPCL Paramount cash payment-Head Office and the cash payment of Rs. 13,69,540/- to various persons Held that - apparent from the record that the cash payments of Rs. 50,00,000/- is not a payment made by the assessee to the parties on account of sub-contract payments but the said amount represents the remittance of various amounts made by the assessee to its branch office at Chennai for the purpose of work carried out at various sites. Therefore, no error in the order of the CIT(A) in deleting the said addition of Rs. 50,00,000/- because it was not a payment to the third party but only a remittance by the head office to the branch office. As regards the disallowance of cash payments of Rs. 13,69,540/-, no dispute that the work was being carried out at about 80 sites and details of which have been given by the assessee - Out of the total payments of Rs. 2,19,02,968/- the payment of Rs. 2,06,96,216/- was made through cheques therefore, about 95% of the payments on account of expenditure at the contract sites were made through cheques and only 5% of the payments was made in cash. Keeping in view of the number of sites and the locations of the sites as well as nature of work it cannot be ruled out that the cash payment was inevitable in such circumstances. Therefore, the disallowance of the total payment of Rs. 13,69,540/- by the AO is not justified in the facts and circumstances of the case when the majority of payments were subjected to TDS. Since, the assessee failed to furnish necessary bills/vouchers therefore, the CIT(A) has restricted the addition to 10% of the said amount of Rs. 13,69,540/- which is just and proper Decided in favor of Assessee.

Summary

Issues:
1. Disallowance of sub-contract charges
2. Disallowance of cash purchases and unexplained outstanding expenses

Analysis:

Issue 1: Disallowance of sub-contract charges
The appellant filed an appeal against the Commissioner of Income Tax(Appeals) order for the assessment year 2004-05. The appellant claimed deductions for sub-contract expenses but the Assessing Officer (AO) disallowed a sum of Rs. 63,69,540/- due to lack of evidence. The AO noted cash payments made to individuals exceeding Rs. 10,000 and a cash payment of Rs. 50,00,000/- labeled as "CPCL Paramount cash payment-Head Office." The AO completed the assessment ex-parte under section 144 of the Income Tax Act due to lack of details provided by the appellant. The Commissioner of Income Tax (Appeals) deleted the addition of Rs. 50,00,000/- as it was a remittance by the head office to the branch office. Regarding the cash payment of Rs. 13,69,540/-, the Commissioner restricted the disallowance to 10% of this amount. The Tribunal upheld the Commissioner's decision, considering the majority of payments made through cheques and the necessity of some cash payments due to the nature of work.

Issue 2: Disallowance of cash purchases and unexplained outstanding expenses
The AO disallowed Rs. 82,89,125/- for cash purchases and Rs. 54,00,168/- for outstanding expenses, adding them to the total income. The appellant argued that the outstanding expenses were already part of the total purchase amount. The AO proposed a 20% disallowance on cash purchases, reducing it to Rs. 16,57,825/-. The Commissioner further reduced the disallowance to Rs. 2,00,000/-. The Tribunal observed a lack of specific findings regarding the double addition of Rs. 54,00,168/- and remitted the issue back to the Commissioner for verification. The Tribunal found the reduced disallowance of Rs. 2,00,000/- to be just and proper in the circumstances.

In conclusion, the Tribunal partly allowed the revenue's appeal, emphasizing the need for proper verification and factual findings in determining the disallowances related to sub-contract charges and cash purchases with unexplained outstanding expenses.