2016 (9) TMI 436 - AT - Income Tax

Disallowance u/s 40A(3) - cash purchase - Held that - The assessee has made payment of purchase under exceptional circumstances out of business expediency and also filed all the relevant documents and evidence in support of the same before both the lower authorities and the lower authorities have not brought any material on record by verifying the same that they are false, bogus or unreliable. Therefore, in the given circumstances, we are of the view that the assessee is covered by the exceptions in the proviso below sub-section (3A) to section 40A(3) and no disallowance u/s 40A(3) can be made in the hands of the assessee. Further with regard to the contention of the assessee that the land purchased was shown as part of its closing stock thereby no expenditure having been claimed in the profit and loss account during the year under consideration in the computation of business profits, no disallowance u/s 40A(3) can be made by the Assessing Officer. We find that before the Assessing Officer the assessee filed tax audit report and submitted that it is evident from the tax audit report that the assessee has not claimed expenditure and entire cost of land and development work is carried forward to next assessment year which fact has not been disputed either by the Assessing Officer or the learned CIT(A). Therefore, as no expenditure having been claimed by the assessee in the profit and loss account while computing its total income, no disallowance u/s 40A(3) can be made. Our above view is fortified by the decision of the Delhi Bench of the Tribunal in the case of M/s Saral Motors and General Finance Ltd. vs. ACIT (2008 (5) TMI 301 - ITAT DELHI-B ) wherein it was held that there cannot be disallowance of expenditure without any claim of allowance of expenditure having been made. Therefore, the disallowance in the instant case u/s 40A(3) cannot be made on this count also. We, therefore, set aside the orders of the lower authorities and delete the disallowance - Decided in favour of assessee Disallowance under the head bogus purchases - Held that - Assessing Officer has himself allowed deduction for purchases of ₹ 2,45,000/- made from Kailash Porwal. Thus, part of the purchases was accepted from the said party by the Assessing Officer as genuine. He has doubted the purchases of ₹ 13,34,400/- only for the reason that payments were made in cash for them. The Assessing Officer has brought no material after verification to show that the purchases were bogus and the assessee has shown the same in its profit and loss account to reduce its profit. No material has been brought on record after comparing the material consumed in the year under appeal and in earlier year to show that the purchases are inflated by the assessee. It can be a case where the assessee due to business necessity has to make payments for materials through vouchers in cash but that alone cannot be a ground for disallowing the genuine business expenditure of the assessee. In our considered view, suspicion howsoever grave cannot take place of proof and entitle the Assessing Officer to make disallowance of genuine business expenditure claimed by the assessee. Therefore, we set aside the orders of the authorities below and vacate the disallowance.

Issues Involved:
1. General nature of the appeal.
2. Assessment order barred by limitation and jurisdiction.
3. Disallowance of expenditure under Section 40A(3) of the Income Tax Act.
4. Disallowance of bogus purchases.
5. Addition under Section 68 of the Income Tax Act and disallowance of interest.
6. Confirmation of penalty under Section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. General Nature of the Appeal:
The first ground of the appeal was general in nature and required no separate adjudication.

2. Assessment Order Barred by Limitation and Jurisdiction:
The assessee contended that the assessment order was barred by limitation, passed without jurisdiction, and was illegal. However, no argument was advanced by the counsel for the assessee during the hearing, leading to the dismissal of this ground for want of prosecution.

3. Disallowance of Expenditure under Section 40A(3) of the Income Tax Act:
The assessee, a real estate developer, made cash payments totaling ?3,51,72,500 for land purchases, which the Assessing Officer disallowed under Section 40A(3) for violating the provision requiring payments above ?20,000 to be made through crossed cheques or drafts. The CIT(A) upheld this disallowance, stating that the amendment effective from 1.4.2009 mandated 100% disallowance for such violations.

The assessee argued that the cash payments were made under business expediency and exceptional circumstances, such as sellers' mistrust and legal disputes. The Tribunal found that the assessee had provided sufficient evidence to support these claims and that the lower authorities had not disproved the genuineness of the transactions. Consequently, the Tribunal ruled that the assessee's case fell within the exceptions provided in the proviso to Section 40A(3A) and deleted the disallowance.

4. Disallowance of Bogus Purchases:
The Assessing Officer disallowed ?13,34,400 out of ?15,79,400 in purchases from a particular party, suspecting them to be bogus due to cash payments and the inability to produce original purchase bills or the seller for verification. The CIT(A) upheld this disallowance.

The Tribunal noted that the Assessing Officer had accepted part of the purchases as genuine and found no material evidence to prove the remaining purchases were bogus. The Tribunal emphasized that suspicion alone could not justify disallowance without concrete proof. Therefore, the disallowance was vacated, and this ground of appeal was allowed.

5. Addition under Section 68 of the Income Tax Act and Disallowance of Interest:
The Assessing Officer added ?2,30,00,000 received as unsecured loans from three parties to the assessee's income under Section 68, citing doubts about the genuineness and creditworthiness of the lenders. The CIT(A) confirmed this addition based on the low income reported by the lenders.

The Tribunal found that the assessee had provided substantial evidence, including confirmation letters, bank statements, income tax returns, and balance sheets of the lenders, proving the genuineness of the loans. The Tribunal ruled that the Assessing Officer had not conducted adequate inquiries to disprove this evidence and that mere suspicion could not replace proof. Consequently, the addition under Section 68 and the disallowance of interest were deleted.

6. Confirmation of Penalty under Section 271(1)(c) of the Income Tax Act:
The ground regarding the confirmation of penalty under Section 271(1)(c) was deemed premature and was dismissed.

Conclusion:
The appeal was partly allowed, with the Tribunal deleting the disallowances under Sections 40A(3) and 68, as well as the related interest disallowance, while dismissing the general and premature grounds.

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