2018 (7) TMI 1462 - AT - Income Tax

Disallowance under section 40A(3) - Held that - Two-three contradictory situations viz. if assessee has itself made disallowance of ₹ 1.32 crores whether it is part of total payment of ₹ 2.25 crores or not, and if yes, then how the AO has made disallowance of ₹ 2.25 cores ? He should have only made disallowance of difference of ₹ 2.25 crores minus ₹ 1.32 crores. The second question arise is, whether Shree Sardar Co-op. Sugar Industries has acted as an agent on behalf of the assessee for purchase of sugarcane from farmers. Benefit of clause (e) and (k) of Rule 6DD would be given to the assessee if Shree Sardar Cooperative Sugar Industries has acted as an agent of the assessee and made direct payment to the farmers after receiving from the assessee. No such circumstances have been discussed by the ld.CIT(A) - we deem it appropriate to set aside this issue to the file of the AO for readjudication. The ld.AO shall determine whether Shree Sardar Cooperative Sugar Industries has acted as agent of the assessee for purchase of sugar cane from farmers. If yes, then benefit of Rule 6DD in terms of Hon ble High Court s decision be given to the assessee. Similarly, he will examine the issue with regard to the admission of disallowance made by the assessee. After ascertaining the facts on these two aspects, he will decide the issue in accordance with law. Penalty u/s 271(1)(c) - Held that - The quantification of the penalty is depended upon the addition made to the income of the assessee. In the present case, the assessee has filed appeal before the CIT(A) against quantum addition. Adjudication of quantum addition was pending before the ld.CIT(A) and the penalty proceedings is solely depended upon the ultimate determination of income, therefore, appeal arising out of imposition penalty cannot be decided before adjudication of quantum appeal. On account of this simple procedural irregularity, we set aside the order of the ld.CIT(A) and remit this issue to the file of the AO for fresh adjudication - decided in favour of revenue for statistical purpose.

Summary

Issues involved:
- Disallowance under section 40A(3) of the Income Tax Act
- Procedural irregularity in deciding penalty appeal before quantum appeal

Issue 1: Disallowance under section 40A(3) of the Income Tax Act:

The case involved two appeals, one related to the quantum appeal (ITA No.2215/Ahd/2016) and the other to the penalty appeal (ITA No.1021/Ahd/2015). The Revenue contended that the ld.CIT(A) erred in deleting the disallowance of &8377; 2,25,65,154/- under section 40A(3) of the Act. The assessee, a cooperative society, had made cash payments exceeding &8377; 20,000/- for the purchase of sugarcane, leading to the disallowance. The ld.CIT(A) deleted the disallowance, citing that all payments were made to a cooperative with government shareholding, ensuring genuineness. Additionally, the cooperative acted as an agent making cash payments to farmers, falling under Rule 6DD exemptions. The Tribunal noted the procedural errors in the AO's calculation and remitted the issue back for reevaluation. It directed the AO to determine if the cooperative acted as an agent for the assessee and to consider the admission of disallowance made by the assessee.

Issue 2: Procedural irregularity in deciding penalty appeal before quantum appeal:

The penalty appeal (ITA No.1021/Ahd/2015) was decided before the quantum appeal, which was procedurally incorrect. Section 271(1)(c) provides for penalty quantification based on the tax sought to be evaded due to concealment or furnishing inaccurate particulars of income. As the penalty determination is linked to the quantum addition, the penalty appeal should not have been decided before the quantum appeal. Due to this procedural flaw, the Tribunal set aside the order of the ld.CIT(A) and remitted the issue back to the AO for fresh adjudication. The AO was instructed to first address the quantum addition before deciding on the initiation of penalty against the assessee.

In conclusion, the Tribunal allowed both appeals of the Revenue for statistical purposes, highlighting the importance of adhering to procedural requirements in tax assessments and penalty determinations. The judgment emphasized the need for a thorough evaluation of facts and compliance with legal provisions in such cases.