2015 (2) TMI 1315 - AT - Income Tax

Revision u/s 263 - Disallowance under section 40A(3) - no opportunity to assessee to explain before the A.O. whether the cash payments are coming within the exceptions provided under Rule 6DD - HELD THAT - CIT was not justified in directing the A.O. to apply section 40A(3) to the cash payments made by assessee straightaway. Assessee deserves an opportunity to explain before the A.O. whether the cash payments are coming within the exceptions provided under Rule 6DD. The decisions relied upon by A.R. also say section 40A(3) has to be looked into in conjunction with Rule 6DD. We, therefore, direct the A.O. to examine whether the cash payments are coming within exceptions of Rule 6DD of the Rules and only thereafter, may decide whether to apply section 40A(3) to such cash payments. The A.O. must afford reasonable opportunity of being heard to the assessee in the matter. CIT herself has admitted the fact that as far as interest to the creditors are concerned, most of the creditors were brought forward from earlier years. Even in respect of balance two creditors assessee has not only established the identity but has also furnished confirmation letters and it is also fact that the credits are through regular banking channel. Without bringing some material on record to show that these two creditors are not genuine or they do not have creditworthiness, CIT cannot hold the assessment order to be erroneous and prejudicial to the interest of Revenue. As it appears from record at the time of assessment proceedings, assessee has also produced confirmation letters from creditors. Therefore, it cannot be said that the A.O. has not examined the credits. In these circumstances, the assessment order passed cannot be held to be erroneous and prejudicial to the interests of Revenue. Similarly, in so far as cash deposits made to the S.B. Account is concerned, it is manifest from the revision order that CIT has accepted that the deposits have been reflected in the books of accounts. Moreover, assessee has also explained the source of such deposits - at assessment proceedings, A.O. has examined the books of accounts as well as the bank statement. Therefore, when the assessee has produced its books of accounts before the A.O. as well as before the Ld. CIT and has also explained the source for deposit which have not been disputed or found to be incorrect by the Ld. CIT, in our view, it was not proper on the part of CIT to set aside the assessment order on that issue as the directions given by the CIT, without any positive finding of error or prejudice to the Revenue, is only in the nature of a roving and fishing enquiry to be conducted by the A.O. which is not the intent and purpose of section 263. We direct the A.O. to only examine the issue of applicability of section 40A(3) with reference to Rule 6DD after giving due opportunity of being heard to the assessee. The order of Ld. CIT is modified to this extent. Appeal of assessee is partly allowed for statistical purposes.

Summary

Issues:
1. Applicability of section 40A(3) of the Income Tax Act on cash payments made by the assessee for the purchase of land.
2. Allowance of interest payments to creditors without proper verification.
3. Verification of cash deposits in the savings bank account.

Issue 1: Applicability of section 40A(3) on cash payments for land purchase:
The appeal was against an order passed under section 263 of the Income Tax Act for the A.Y. 2009-2010. The Commissioner found the assessment order erroneous as the Assessing Officer (A.O.) failed to disallow cash purchase of land under section 40A(3). The Commissioner directed the A.O. to apply section 40A(3) to the cash payments of Rs. 9 lakhs made by the assessee. The Tribunal held that while the A.O. did not examine the applicability of section 40A(3), the Commissioner should have allowed the assessee to explain if the cash payments fell within Rule 6DD exceptions before applying section 40A(3). The A.O. was directed to re-examine the issue with the assessee's input.

Issue 2: Verification of interest payments to creditors:
Regarding interest payments to creditors, the Commissioner directed the A.O. to verify two specific creditors' income tax returns to confirm loans reflected as credits. The Tribunal found that the assessee had provided confirmation letters and established the identity of most creditors, including the two in question. As there was no evidence of non-genuineness or lack of creditworthiness, the assessment order was not considered erroneous.

Issue 3: Verification of cash deposits in the savings bank account:
The Commissioner acknowledged the proper reflection of cash deposits in the books but directed the A.O. to verify them. The Tribunal noted that the deposits were explained by the assessee and reflected in the accounts. As the A.O. had examined the bank statements during assessment and the deposits were not disputed, setting aside the assessment order was deemed improper. The A.O. was directed to re-examine the applicability of section 40A(3) with reference to Rule 6DD, affording the assessee a fair hearing.

In conclusion, the appeal was partly allowed for statistical purposes, modifying the Commissioner's order to ensure proper examination of the issues under section 40A(3) and verification of creditors and cash deposits.