2017 (11) TMI 112 - AT - Income Tax

Disallowance under section 40A(3) - Held that - Where genuineness of transactions made in cash in excess of ₹ 20,000 was not disbelieved by authorities, same cannot be disallowed under Section 40A(3). - Decided in favour of assessee.

Issues Involved:
1. Jurisdiction and compliance with legal requirements for framing the assessment order under section 153A/143(3).
2. Disallowance under section 40A(3) of the Income Tax Act.
3. Validity and legality of the assessment order.
4. Absence of incriminating material found during the search.
5. Charging of interest under section 234B.
6. Additional grounds and modifications to the appeal.

Detailed Analysis:

1. Jurisdiction and Compliance with Legal Requirements:
The assessee argued that the assessment order under section 153A/143(3) was framed without proper jurisdiction, requisite approval, and compliance with mandatory conditions. The tribunal noted that the original assessment for AY 2006-07 was completed under section 143(3) on 16.09.2008, and no incriminating material was found during the search on 21.01.2011. Therefore, the assessment could not be reopened under section 153A without incriminating evidence. This position was supported by the Delhi High Court judgment in PCIT vs. Meeta Gutgutiya, which emphasized that additions could not be made for a particular assessment year without incriminating material.

2. Disallowance under Section 40A(3):
The assessee challenged the disallowance of ?23,62,700 under section 40A(3), arguing that the genuineness of cash payments was not doubted, and the payees were identified. The tribunal observed that the disallowance was made based on inquiries during the assessment proceedings, not on incriminating material found during the search. The tribunal cited various judgments, including Smt. Harshila Chordia vs. ITO and Gurdas Garg vs. CIT, which held that disallowance under section 40A(3) should not be made if the genuineness of the payment is not doubted and the payees are identified. Therefore, the disallowance was deemed unsustainable.

3. Validity and Legality of the Assessment Order:
The assessee contended that the assessment order was bad in law, illegal, unjustified, barred by limitation, and contrary to facts and law. The tribunal found that the assessment was concluded without any incriminating material, making the order void ab initio and beyond jurisdiction. The assessment was thus not sustainable on legal and factual grounds.

4. Absence of Incriminating Material:
The tribunal emphasized that no incriminating material was found during the search that could justify the disallowance under section 40A(3). The tribunal referred to the Delhi High Court judgment in PCIT vs. Meeta Gutgutiya, which clarified that additions could not be made without incriminating material. The seized purchase deeds were not considered incriminating by themselves.

5. Charging of Interest under Section 234B:
The assessee argued against the charging of interest under section 234B. However, the tribunal's primary focus was on the disallowance under section 40A(3) and the absence of incriminating material, leading to the deletion of the disallowance. The tribunal did not provide a detailed analysis on the interest charged under section 234B.

6. Additional Grounds and Modifications:
The assessee reserved the right to add, modify, amend, or delete any grounds of appeal. However, the tribunal's decision to delete the disallowance under section 40A(3) rendered this point moot.

Conclusion:
The tribunal allowed the appeals for both AY 2006-07 and AY 2007-08, directing the deletion of the disallowance under section 40A(3) due to the absence of incriminating material and the genuineness of the payments. The assessment orders were found to be without jurisdiction and not sustainable, leading to the appeals being allowed in favor of the assessee.

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