2016 (8) TMI 551 - AT - Income Tax

Addition u/s 40A(3) - Held that - Assessing Officer cannot restrict the Business of the assessee firm on application of the Rule 6DD, further provisions of Sec. 40A(3) of the Act empowers the ld. Assessing Officer to disallow deduction claimed as expenditure were payments are not by account payee cheque/draft. The ld. Assessing Officer should analysis the payments either by Crossed Cheque or Bank Draft and ascertain whether the payments are genuine considering business expediency, genuineness and bonafide peculiar transactions of the business. The assessee firm makes cash payments in the circumstances as per the intention of the vendors/supplier who transact on cash basis and no credit facility is available in the remote villages. So, considering the apparent facts and nature of business of the assessee being laying of roads, building bridges and culverts in the remote village and purchase of sand, jelly from the local vendors and lorry brokers who are illiterate and does not have permanent place of Business and also vendors and Hawkers deliver the sand, jelly at the working sites of assessee during odd hours in remote areas and we support our opinion with the decision of Anupam Tele Services vs. ITO (2014 (2) TMI 30 - GUJARAT HIGH COURT ) and we set aside the order of the Commissioner of Income Tax (Appeals) and delete the addition made by the ld. Assessing Officer on this ground. - Decided in favour of assessee Disallowance being expenses for tea, coffee, freight charges and diesel expenditure not supported by vouchers - Held that - The fact that nature of expenditure being tea, coffee, freight charges and diesel expenditure, the assessee has claimed these expenditure incurred wholly and exclusively for the purpose of activities of the business and the findings of the ld. Assessing Officer they are not supported with vouchers and doubted the genuineness and disbelieved the transactions. The ld.CIT(A) has confirmed the findings of the ld. Assessing Officer. Considering the apparent facts and material, we are of the opinion that the consent cannot be a reasons for sustaining the addition in exceptional circumstances of the working conditions of the firm and the nature of expenditure incurred. Further their shall not be laxity on the part of the assessee firm in maintenance of vouchers for due compliance of Income Tax provisions. we found that it would be reasonable to restrict the disallowance to 50% due to external circumstances of works and we direct the ld. Assessing Officer to restrict the disallowance of said expenses to 50% only and the ground of the assessee is partly allowed. Disallowance on account of labour charges, jelly purchase, sand purchase and gravel purchase and vouchers are self made could not be verified - Held that - The fact that labour charges, jelly purchase, sand purchase and gravel purchase incurred wholly and exclusively for the purpose. Since, the vouchers are self made the ld. Assessing Officer has doubted the transactions and made disallowance. The ld.CIT(A) has confirmed the findings of the ld. Assessing Officer. Considering the facts and nature of expenditure and the laxity on the part of the assessee firm on non maintenance of record and compliance of Income Tax provisions, we found it Reasonable to restrict the disallowance at 50% due to Business activities at remote areas as discussed. We direct the ld. Assessing Officer to restrict the disallowance to 50% only and the ground of the assessee is partly allowed.

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Disallowance under Section 40A(3) of the Income Tax Act.
3. Disallowance of expenses for tea, coffee, freight charges, and diesel expenditure.
4. Disallowance of expenses on account of labor charges, jelly purchase, sand purchase, and gravel purchase due to self-made vouchers.

Detailed Analysis:

1. Delay in Filing the Appeal:
The appeal by the assessee was delayed by 148 days. The assessee's counsel filed an affidavit explaining the reasons for the delay, and the Departmental Representative had no serious objections. The Tribunal found the reasons satisfactory and condoned the delay, admitting the appeal for adjudication.

2. Disallowance under Section 40A(3) of the Income Tax Act:
The assessee, engaged in civil contract works, was disallowed a sum of ?21,87,851 by the Commissioner of Income Tax (Appeals) invoking Section 40A(3) due to cash payments exceeding ?20,000. The assessee argued that due to business exigencies, lack of banking facilities in remote areas, and dealing with illiterate vendors and hawkers who insisted on cash payments, these transactions should fall under the exceptions of Rule 6DD. The Tribunal acknowledged the business exigencies and the practical difficulties faced by the assessee in remote areas. It was noted that the provisions of Section 40A(3) must be read along with Rule 6DD, which provides exceptions to the rule. The Tribunal, referencing the decision in Anupam Tele Services vs. ITO, found the disallowance unwarranted and deleted the addition made by the Assessing Officer.

3. Disallowance of Expenses for Tea, Coffee, Freight Charges, and Diesel Expenditure:
The assessee was disallowed ?4,58,755 for expenses not supported by vouchers. The assessee explained that these expenses were incurred for labor welfare and fuel in remote working sites, where maintaining vouchers was impractical due to environmental conditions. The Tribunal acknowledged the necessity of these expenses for business operations and the negligible amount relative to the total contract receipts. It found the complete disallowance unreasonable and directed the Assessing Officer to restrict the disallowance to 50%, considering the working conditions and the nature of the expenses.

4. Disallowance of Expenses on Account of Labor Charges, Jelly Purchase, Sand Purchase, and Gravel Purchase:
The assessee was disallowed ?15,95,100 due to self-made vouchers for these expenses. The assessee argued that these expenses were essential for operations in remote areas where vendors did not issue formal receipts. The Tribunal recognized the genuineness of the expenses and the practical difficulties in obtaining formal vouchers. However, it noted the need for compliance with tax provisions and found it reasonable to restrict the disallowance to 50%, considering the business activities in remote areas.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal condoned the delay in filing the appeal and deleted the disallowance under Section 40A(3). For the disallowances related to tea, coffee, freight charges, diesel expenditure, and other expenses supported by self-made vouchers, the Tribunal directed the Assessing Officer to restrict the disallowance to 50%. The order was pronounced on June 30, 2016, at Chennai.