2019 (5) TMI 531 - AT - Income Tax

Addition u/s 40A - cash payments in question exceeded the limit prescribed - AO completed assessment u/s 144 - commercial expediency - HELD THAT - As examined the cash book and ledger account and cross-checked the same with the narrations of the accountant of the assessee that each payment, on each day to each person was less than ₹ 20,000/- in cash. While doing so, he has not made any adverse comment on the claim of the assessee. A perusal of the copy of the ledger account demonstrates the payments made by cash to each of the parties on any single day has not exceeded ₹ 20,000/-. There were both purchases and sales from each of the parties and it was only the difference that was settled in cash on various dates. This copy of the ledger account and the various evidences, such as voucher copies filed were not disputed by the ld. D/R. The factual claims of the assessee supported by the copy of the ledger account etc. could not be controverted by the ld. D/R. The Assessing Officer has not conducted any third party verification. He has given factually incorrect figures in his remand report. Under these circumstances, we are of the opinion that there is no violation of Section 40A(3). As decided in M/S A DAGA ROYAL ARTS VERSUS ITO, WARD-2 (2) , JAIPUR 2018 (6) TMI 1240 - ITAT JAIPUR he consequences, which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration. The intent and the purpose for which section 40A(3) has been brought on the statute books has been clearly satisfied in the instant case. Therefore, being a case of genuine business transaction, no disallowance is called for by invoking the provisions of section 40A(3) - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act, 1961.
2. Examination of cash payments exceeding ?20,000.
3. Genuineness of transactions and business expediency.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(3) of the Income Tax Act, 1961:
The primary issue in this case was the disallowance of ?1,11,97,683 under Section 40A(3) of the Income Tax Act, 1961, by the Assessing Officer (AO) on the grounds that the assessee made cash payments exceeding ?20,000 for the supply of timber to various local merchants. The AO completed the assessment under Section 144 of the Act, determining the total income at ?1,22,27,660. The assessee contended that none of the cash payments exceeded the limit prescribed under Section 40A(3) on any single day to any single person.

2. Examination of Cash Payments Exceeding ?20,000:
The assessee produced a cash book and ledger account to demonstrate that the cash payments did not exceed ?20,000 on any single day to any single person. The First Appellate Authority (CIT(A)) examined the cash book and ledger account, cross-checking the accountant's narrations, and found no adverse comments on the assessee's claim. The AO, however, reiterated in the remand report that an amount of ?99,03,526 was paid in cash exceeding ?20,000 to a single entity on a single day. The AO's figures were found to be factually incorrect, and no third-party verification was conducted. The Tribunal concluded that there was no violation of Section 40A(3) as the payments made by cash to each party on any single day did not exceed ?20,000.

3. Genuineness of Transactions and Business Expediency:
The Tribunal emphasized that the genuineness of the payments was not in dispute. The propositions of law discussed in various case laws, such as DCIT vs. Maruti Freight Movers Ltd., Chartered Logistics Ltd vs. ACIT, and others, were considered. These cases highlighted that when the genuineness of the payment is not doubted, technical disallowance under Section 40A(3) should not be made. The Tribunal also referred to the judgments of the Hon'ble Jurisdictional High Court in Goenka Agencies vs. CIT and the Hon'ble Gujarat High Court in Anupam Tele Services vs. ITO, which supported the view that genuine business transactions should not be disallowed under Section 40A(3) if they are made under exceptional and unavoidable circumstances.

The Tribunal concluded that the assessee's factual claims were supported by the ledger account and other evidences, which were not disputed by the Departmental Representative (D/R). The Tribunal held that the disallowance under Section 40A(3) was factually and legally incorrect, and thus, the entire disallowance was deleted.

Conclusion:
The appeal of the assessee was allowed, and the disallowance made under Section 40A(3) of the Income Tax Act, 1961, was deleted based on the genuineness of the transactions, business expediency, and the incorrect factual findings of the AO.