2020 (3) TMI 52 - HC - Income Tax

Addition u/s 40A - Reliance upon Rule 6DD was rejected by AO quoting the procedure followed for purchase of fire wood through open bidding system as states that no farmer sells fire wood directly in the open market and hence the protection under Rule 6DD would not be available to the petitioner - in addition, certain credits appearing in the bank accounts of the petitioner were proposed to be disallowed under Section 68 - HELD THAT - Learned counsel states that adequate opportunity was not granted to the petitioner prior to completion of assessment. My attention is drawn to the medical records of VA Sadasivam to establish the need for emergency treatment0 and expenses incurred when the partner had met with a serious accident. The petitioner is relegated to statutory appellate remedy. The order of assessment may be challenged by way of first appeal before the Commissioner of Income Tax (Appeals) within a period of three weeks from today. If the appeal is filed within the period as aforesaid, the same shall be taken on file by the office of the Commissioner (Appeals) and disposed on merits and in accordance with law, without reference to limitation. Since the powers of the Commissioner (Appeals) are co-terminus with that of the Assessing Officer, a proper enquiry be conducted as to the veracity or otherwise of the explanations tendered by the petitioner both in response to the proposal under Section 68 of the Act as well as the applicability of Rule 6DD to the disallowance under Section 40A(3). Let an order of assessment be passed de novo within a period of three months from date of institution of appeal, after hearing the petitioner. Recovery of the disputed demand shall not be insisted upon till disposal of appeal. In the event the appeal is not instituted within the time frame as aforesaid, the order of assessment now impugned shall be revived and stand undisturbed.

Summary

Issues:
Challenge to assessment order for AY 2017-18 under Income Tax Act, 1961 - Disallowance under Section 40A(3) for cash expenditure on firewood - Disallowance under Section 68 for certain credits in bank accounts - Adequate opportunity for petitioner prior to assessment - Applicability of Rule 6DD and identity of creditors - Statutory appellate remedy and powers of Commissioner (Appeals).

Analysis:
The petitioner contested an assessment order dated 30.12.2019 for AY 2017-18 under the Income Tax Act, 1961. Two disallowances were made - the first under Section 40A(3) for cash expenditure exceeding the permitted limit, related to firewood purchases. The petitioner invoked Rule 6DD of Income Tax Rules, 1962, which exempts specified categories from 100% disallowance under Section 40A(3). However, the Assessing Officer rejected this, stating firewood purchases were not covered under Rule 6DD due to the procedure followed in open bidding systems, where farmers do not directly sell firewood in the open market.

Additionally, the assessment proposed disallowance under Section 68 for certain credits in the petitioner's bank accounts. The petitioner explained these as loans from twelve creditors for medical treatment of a partner in the firm. The explanation was disbelieved due to failure in establishing the creditors' identity, capacity to lend, and the genuineness of the transactions.

The High Court held that both issues required factual examination, making it unsuitable for interference under Article 226 of the Constitution of India. The petitioner's claim of inadequate opportunity before assessment was supported by medical records showing emergency treatment expenses for the partner following a serious accident.

The Court directed the petitioner to pursue statutory appellate remedy by filing a first appeal before the Commissioner of Income Tax (Appeals) within three weeks. The Commissioner (Appeals) was instructed to conduct a thorough enquiry into the petitioner's explanations under Section 68 and the application of Rule 6DD under Section 40A(3). An order of assessment was to be passed afresh within three months of appeal institution, after hearing the petitioner. Recovery of disputed demand was stayed until appeal disposal, with revival of the impugned assessment order if appeal was not filed within the specified timeframe.

Ultimately, the writ petition was dismissed, granting liberty to pursue appellate remedy. No costs were awarded, and connected miscellaneous petitions were closed.