2023 (5) TMI 1256 - AT - Income Tax

Disallowance u/s.40A(3) - amount being paid in excess of Rs.20,000/- in a day to procurement of sand - HELD THAT - Going by nature of business and practicability of the line of trade, we have to consider that though ultimate bill of sand procured subsequently given by Mr. M.Palanisamy, the fact is to be considered that sand is transported by trucks past midnight on account of prohibition to run on the day. Actually, there is prohibition to run heavy trucks i.e. from 6.00 am to 6.00 pm in metros and big cities of India. The sand loads carried by different truck drivers are delivered at different locations of projects on the same day past mid-night. Although, cost of each load delivered in one single site may not exceed Rs.20,000/-, but on the same day different drivers have delivered different loads at different locations as is noted from ledger account submitted by the assessee, different drivers have delivered different loads at different locations of assessee s construction sites and cumulatively, on a single day exceeds Rs.20,000/-. Considering that since major portion of sand will consist of lorry freight, drivers who bring delivery of sand would demand cash payment in night in order to make wage payments. Hence although, provisions of section 40A(3) applies to present case, but neither the Assessing Officer nor the CIT(A) has gone into factum of delivery of sand load of trucks, whether truck drivers are agents of assessees or agent of sand supplier. No clarity is coming out from the orders of lower authorities on this issue. Hence, another angle is that in case, entire amount of Rs.2.59 crores is added to the returned income of the assessee, profit margin of the assessee will be more than 50%, which is not at all possible in the given scenario and nature of business of the assessee. Therefore we estimate fair amount of disallowance and thus, we estimate disallowance at 25% of sand supplied by the assessee - Appeal of the Revenue is partly allowed.

Summary

Issues Involved:
1. Limitation in filing the appeal.
2. Disallowance under section 40A(3) of the Income Tax Act, 1961.
3. Applicability of Rule 6DD(k) of the Income Tax Rules, 1962.

Summary:

1. Limitation in Filing the Appeal:
The appeal filed by the Revenue was barred by a delay of 9 days. The Tribunal condoned the delay, considering the reason for the delay as reasonable, and admitted the appeal.

2. Disallowance under Section 40A(3) of the Income Tax Act, 1961:
The primary issue was the disallowance of Rs. 2,59,07,222/- made by the Assessing Officer (AO) under section 40A(3) of the Act for cash payments exceeding Rs. 20,000/- per day to Mr. M.Palanisamy for the purchase of sand. The AO contended that the payments were made in cash in excess of the prescribed limit and did not fall under any exceptions provided under Rule 6DD.

3. Applicability of Rule 6DD(k) of the Income Tax Rules, 1962:
The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, noting that the assessee's transactions fell under the exception provided in Rule 6DD(k). The CIT(A) observed that the payments were made to lorry drivers who acted as agents of the supplier, Mr. M.Palanisamy, and that each transaction involving one lorry supply was less than Rs. 20,000/-. The CIT(A) concluded that the payments were made under business exigency and practical difficulties, and thus, the disallowance under section 40A(3) was not justified.

Tribunal's Findings:
The Tribunal noted that the assessee admitted the cash payments but argued that each transaction was below Rs. 20,000/-. The Tribunal considered the nature of the business, the practical difficulties, and the prohibition on running heavy trucks during the day. It was observed that the payments were made to different drivers at different locations, and cumulatively, the payments exceeded Rs. 20,000/- in a single day.

The Tribunal found that neither the AO nor the CIT(A) had clarified whether the truck drivers were agents of the assessee or the sand supplier. It was also noted that adding the entire amount would result in an unrealistic profit margin for the assessee. Therefore, the Tribunal estimated a fair disallowance at 25% of the total cash payments and directed the AO accordingly.

Decision:
The appeal of the Revenue was partly allowed, with the Tribunal directing a 25% disallowance of the total cash payments made by the assessee.