2017 (2) TMI 1405 - AT - Income Tax

Disallowance u/s. 40A(3) - cash expenditure of the assessee exceeding permissible limits - Held that - It is not disputed that assessee has produced books of accounts before AO. In fact the assessment order specifically states so. Rigours of Sec. 40A(3) is attracted only where payments in relation to expenditure exceeded A 20,000/- in a day to a person. In our opinion, methodology adopted by the ld. Assessing Officer was incorrect and ld. Assessing Officer ought have compiled the instances of cash payments if any in excess of the limits, from the cash book maintained by the assessee. Thereafter he should have called for explanation of the assessee, in each case for which there was excess cash payment. In the facts and circumstances of the case, we are of the opinion that the issue requires a fresh look by the ld. Assessing Officer. We set aside the orders of the lower authorities and remit the question for reconsideration - Appeal of the assessee allowed for statistical purpose Levy of penalty u/s.271B - failure to conduct the Audit under section 44AB of the Act and to furnish the reports - Held that - It is not sufficient that an explanation is given. Such explanation has to be proved and substantiated. Nothing has been brought on record by the assessee to substantiate its argument that its Accountant had resigned or to show that non compliance with the statutory provisions was due to difficulties beyond the control. Assessee was in the business since many years. For the preceding assessment year also assessee had filed its tax audit report belatedly. We are thus of the opinion that assessee could not bring out any reason which could be termed as reasonable. In our opinion, levy of penalty u/s.271B of the Act was justified. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act.
2. Levy of penalty under Section 271B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(3) of the Income Tax Act:

The first appeal concerns the disallowance of ?38,44,069 under Section 40A(3) of the Income Tax Act, 1961, which was confirmed by the Commissioner of Income Tax (Appeals). The assessee, engaged in the business of granite blocks, had filed a return of income disclosing ?13,20,370. During assessment, the Assessing Officer noted cash withdrawals totaling ?1,78,80,776 from the assessee's bank accounts. The officer analyzed these withdrawals and concluded that ?38,44,069 was spent in cash for purchases, thereby violating Section 40A(3), which disallows deductions for cash payments exceeding ?20,000 in a day to a person.

The assessee argued that the expenditures were bona fide and genuine, citing Supreme Court and Delhi High Court judgments to support that Rule 6DD of the Income Tax Rules, which provides exceptions to Section 40A(3), is illustrative and not exhaustive. However, the Commissioner of Income Tax (Appeals) upheld the disallowance, stating that the assessee's case did not fit within Rule 6DD's exceptions and emphasized the onus on the assessee to prove exceptional circumstances.

Upon appeal, the tribunal noted that the Assessing Officer's methodology for computing cash expenditure was incorrect. The officer should have compiled instances of cash payments exceeding the limit from the cash book and sought explanations for each. The tribunal thus set aside the lower authorities' orders and remitted the issue back to the Assessing Officer for fresh consideration in accordance with the law.

2. Levy of Penalty under Section 271B of the Income Tax Act:

The second appeal concerns the levy of penalty under Section 271B for failure to get accounts audited as required by Section 44AB. The assessee contended that the delay in audit was due to the sudden resignation of their accountant in August 2012, which left the books and accounting papers in disarray, necessitating significant effort to prepare the accounts.

The Departmental Representative argued that the assessee was habitually late in filing audit reports and that the resignation of an employee was not a valid reason for the delay. The tribunal noted that the audit report was filed along with the return of income on 31.03.2013, but not before the due date specified under Section 139(1). The tribunal emphasized that filing the audit report and the return of income are independent requirements and that the assessee failed to prove reasonable cause for the delay, such as substantiating the accountant's resignation.

Given the assessee's history of delayed filings and lack of substantiated reasons, the tribunal found the penalty under Section 271B justified and upheld the lower authorities' orders.

Conclusion:

The appeal concerning disallowance under Section 40A(3) was allowed for statistical purposes, requiring fresh consideration by the Assessing Officer. The appeal against the penalty under Section 271B was dismissed, affirming the penalty's imposition. The order was pronounced on February 28, 2017, at Chennai.