2014 (10) TMI 1039 - AT - Income Tax

Revision u/s 263 - Narration in the cash books which reflected deposits in cash to the bank accounts of trade creditors and Non-examination of books of account with reference to the deposits into trade creditors bank accounts - as per CIT that provisions of section 40A(3) were attracted to cash deposits made directly to the accounts of suppliers - HELD THAT - There is no dispute that the issue regarding application of section 40A(3) of the Act was verified by the AO during the course of assessment proceedings. That, queries were raised in this regard and assessee had given reply on 8.3.2013 is clear from the paperbook filed by the assessee. It might be true that there are some decisions of different High Courts which could lead to a view that payments effected directly to suppliers bank account in cash would also attract section 40A(3) - it cannot be said that the view taken by AO is not a lawful one, especially when the co-ordinate Bench of the Tribunal in the case of Sandur Sales Services Pvt. Ltd. 2012 (11) TMI 1305 - ITAT BANGALORE had held in favour of the assessee in similar facts and circumstances, relying on the decision of Hon ble Apex Court in Attar Singh Gurmukh Singh 1991 (8) TMI 5 - SUPREME COURT So, effectively, the ld. CIT was trying to substitute a lawful view taken by AO with that of his own. The Hon ble Apex Court in the case of Max India Ltd 2007 (11) TMI 12 - SUPREME COURT had clearly held that when two views are possible and ITO had taken one view with which Commissioner does not agree, it could not be treated as an erroneous order prejudicial to the interest of revenue, unless view taken by ITO was unsustainable in law. The Hon ble Bombay High Court in Gabriel India Ltd. 1993 (4) TMI 55 - BOMBAY HIGH COURT has clearly held that section 263 did not visualize substitution of judgment of Commissioner with that of ITO. We are, therefore, of the opinion that this was not a fit case where powers u/s. 263 could have been invoked. The original assessment order could be stated to be erroneous insofar as it was prejudicial to the interests of revenue. Order of the CIT u/s. 263 is quashed. - Decided in favour of assessee.

Summary

Issues: Application of section 40A(3) of the Income Tax Act, 1961; Invocation of powers u/s. 263 by the Commissioner of Income-tax (CIT); Legitimacy of the view taken by the Assessing Officer (AO); Interpretation of judicial decisions and their impact on assessment proceedings.

Application of section 40A(3) of the Income Tax Act, 1961:
The Appellate Tribunal considered the issue of whether section 40A(3) applied to cash deposits made directly to the accounts of suppliers. The Commissioner of Income-tax (CIT) contended that such payments should be disallowed under section 40A(3) based on decisions of the Hon'ble Madras High Court. However, the Assessing Officer (AO) had previously examined this issue during the assessment proceedings and concluded that section 40A(3) did not apply. The Tribunal noted that the AO had considered the issue and the taxpayer had provided a detailed explanation for the payments, citing relevant judicial precedents supporting their position. Ultimately, the Tribunal held that the AO's view was a possible and lawful interpretation, especially considering a similar decision by a co-ordinate Bench of the Tribunal and the decision of the Hon'ble Apex Court. Therefore, the Tribunal found that the CIT was attempting to substitute a lawful view taken by the AO, and the original assessment order was not erroneous in this regard.

Invocation of powers u/s. 263 by the Commissioner of Income-tax (CIT):
The CIT invoked powers under section 263, deeming the original assessment order as erroneous and prejudicial to the interests of revenue due to the AO's interpretation of section 40A(3). The CIT directed the AO to recompute the income by disallowing payments to creditors under section 40A(3). However, the Tribunal disagreed with the CIT's decision, highlighting that the AO had considered the issue during assessment, and the taxpayer had provided a detailed response supported by legal precedents. The Tribunal emphasized that the CIT was attempting to replace a lawful view taken by the AO with his own interpretation, which was not permissible under the law. Therefore, the Tribunal quashed the order issued by the CIT under section 263.

Legitimacy of the view taken by the Assessing Officer (AO):
The Tribunal analyzed the legitimacy of the view taken by the AO regarding the application of section 40A(3) to cash deposits made directly to suppliers' accounts. The AO had examined the issue during the assessment proceedings and concluded that section 40A(3) did not apply based on the taxpayer's explanations and relevant legal precedents. The Tribunal noted that the AO's view was a possible interpretation, especially considering a similar decision by a co-ordinate Bench of the Tribunal and the decision of the Hon'ble Apex Court. The Tribunal emphasized that when two views are possible, and the AO's view is not unsustainable in law, it cannot be deemed as erroneous or prejudicial to the revenue's interests. Therefore, the Tribunal held that the CIT's attempt to substitute the AO's view was unwarranted.

Interpretation of judicial decisions and their impact on assessment proceedings:
The Tribunal scrutinized the impact of judicial decisions on assessment proceedings, particularly in the context of conflicting views on the application of section 40A(3) to cash deposits made to suppliers' accounts. The Tribunal considered the legal precedents cited by the taxpayer, including decisions of the Hon'ble Apex Court and a co-ordinate Bench of the Tribunal, which supported the taxpayer's position. The Tribunal emphasized that the AO had considered these aspects during the original assessment, and the taxpayer had provided a detailed response. Ultimately, the Tribunal concluded that the CIT's attempt to override the AO's view based on conflicting judicial decisions was not justified. The Tribunal underscored the importance of allowing the AO's lawful interpretation to stand when two plausible views exist, as long as the AO's view is not unsustainable in law.

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