2014 (7) TMI 332 - AT - Income Tax

Addition u/s 40A(3) - Payment not made in cash but paid to third parties on behalf of supplier of goods payments have been made by way of crossed-cheques - Held that - The purchases made by the assessee are not in dispute - The AO has not treated such purchases as not genuine, but he had invoked the provisions of section 40A(3) of the Act for making the addition - the parties from whom the goods were purchased requested the assessee-company to give payments to their suppliers/their borrowers for early and immediate settlement of their dues - the AO was not justified in invoking the provisions of Section 40A(3) of the Act, since the AO has not made any enquiry whether such payments were made at the instance of the parties from whom the assessee-company purchased the goods - there is nothing placed on record that instead of account payee cheques, the assessee-company has made cash payment to the parties from whom the goods were purchased thus, there is no infirmity in the order of the CIT(A) holding that the AO was not justified in invoking the section 40A(3) of the Act Decided against Revenue.

Summary

Issues:
Appeal against deletion of addition under section 40A(3) of the Income Tax Act for Assessment Year 2005-06.

Detailed Analysis:

1. Grounds of Appeal by Revenue:
The Revenue challenged the order of the Ld.CIT(A) deleting the addition made under section 40A(3) of the Act. The Revenue contended that the payments made by the assessee did not comply with the provisions of section 40A(3) as certified by auditors in the tax audit report.

2. Assessment and Background:
The assessee-company initially declared a total loss in its return of income for the relevant year. The AO re-opened the assessment and made an addition under section 40A(3) for payments made otherwise than by crossed cheques or bank drafts. The AO's decision was based on discrepancies between the audit report and actual payments made by the assessee.

3. Arguments and Findings:
The Sr. DR argued against the deletion of the addition, while the counsel for the assessee reiterated that the payments were made through third parties by account payee cheques as directed by the original suppliers. The CIT(A) found that the purchases were genuine and in compliance with the law.

4. Analysis of Section 40A(3):
Section 40A(3) prohibits deductions for expenditures exceeding a specified amount if payments are not made through account payee cheques or bank drafts. The assessee made payments to various parties through account payee cheques based on directions from the original suppliers, which were confirmed by the parties involved.

5. Judgment and Decision:
The ITAT upheld the CIT(A)'s decision to delete the addition under section 40A(3). It was found that the AO did not investigate whether the payments were made at the suppliers' request. The absence of evidence of cash payments and the confirmation from parties supported the conclusion that the provisions of section 40A(3) were not applicable in this case.

6. Conclusion:
The Revenue's appeal was dismissed, affirming the CIT(A)'s order to delete the addition under section 40A(3). The judgment highlighted the importance of complying with the provisions of the Income Tax Act regarding payment methods to claim deductions.

This detailed analysis provides a comprehensive overview of the legal judgment involving the appeal against the deletion of an addition under section 40A(3) of the Income Tax Act for a specific assessment year.