2018 (7) TMI 2039 - AT - Income Tax

Addition u/s 40A(3) - purchases in cash - commercial expediency - Cash payments were accounted in the books of accounts of the supplier. - HELD THAT - Primary object of enacting section 40A(3) of the Act was two fold viz 1) Putting a check on trading transactions with a mind to evade the liability to tax on income earned out of such transactions and 2) To inculcate the banking habits amongst the business community. Cash payments were accounted in the books of accounts of the supplier. The assessee also furnished the copy of the balance sheet wherein the PNB bank is reported in the assets side of the balance sheet. The AO during the assessment proceedings has called for the information from the supplier Mr.Vijay Kapoor who has confirmed the sales to the assessee as well as receipt of the proceeds either in cash or bank deposits. From the above it is clear that both the purchases and sales were duly accounted in the books of accounts of the assessee as well as the supplier. Therefore there were no unaccounted transactions and the entire transactions were accounted. That being so we decline to interfere in the order passed by the ld. CIT(A) and his order on this issue is hereby upheld and the grounds raised by the Revenue is dismissed.

Summary

Issues:
Violation of section 40A(3) of the Income Tax Act, 1961.

Detailed Analysis:
The appeal pertains to the Assessment Year 2011-12 and is against an order by the Ld. Commissioner of Income Tax (Appeals)-7, Kolkata, arising from an assessment order by the Assessing Officer under section 143(3) of the Income Tax Act, 1961. The Revenue raised grievances regarding the deletion of an amount under section 40A(3) due to the inapplicability of Rule 6DD(k) of the Income Tax Rules, 1962. The dispute arose from payments made to a creditor, M/s Vijay Kapoor, in cash, which the Revenue contended violated section 40A(3) of the Act. The Assessing Officer made an addition of Rs. 2,89,00,710 based on the lack of documentary evidence supporting the cash deposits made.

The assessee appealed to the ld. CIT(A), who noted that payments were made through banking channels, and the supplier confirmed the sales and receipt of proceeds. The ld CIT(A) found no tax evasion and deleted the addition. The Revenue challenged this decision before the ITAT Kolkata. The ITAT considered the genuineness of the transactions, emphasizing that payments were made through bank deposits, ensuring traceability and tax compliance. The ITAT relied on precedents to support its decision that section 40A(3) should not apply to genuine transactions. The ITAT highlighted the objective of section 40A(3) to curb tax evasion and promote banking transactions.

The ITAT observed that all transactions were duly accounted for by both parties, with no unaccounted transactions or tax avoidance. The ITAT upheld the ld. CIT(A)'s decision, dismissing the Revenue's appeal. The judgment emphasized the importance of genuine transactions and adherence to tax laws, ultimately leading to the dismissal of the Revenue's appeal.

In conclusion, the ITAT Kolkata dismissed the Revenue's appeal, upholding the ld. CIT(A)'s decision regarding the inapplicability of section 40A(3) to the genuine transactions in question. The judgment underscored the significance of proper documentation, banking channels, and tax compliance in commercial transactions to prevent tax evasion and ensure transparency.