2021 (10) TMI 519 - HC - Income Tax

Reopening of assessment u/s 147 - eligibility of reasons to believe - no assessment order passed under Section 143(3) - disallowance u/s 40-A(3) - HELD THAT - No assessment order came to be passed in the case of assessee under Section 143(3) - Thus, no opinion had been formed by the assessing authority with respect to the matters considered while recording the reasons to believe that income had escaped the assessment at the hands of the assessee. Those reasons dated 30.03.2005 are confined to cash expenditure contrary to the mandate of Section 40-A(3) - in absence of any opinion having been formed by the AO may not be right in asserting that reasons to believe could have been recorded only on the strength of any fresh material that may have come into existence or that may have come to the knowledge of the AO after the assessment order came to be passed. That principle would remain applicable only to cases where an opinion had been formed on the subject matter considered in the reassessment proceeding, in an assessment order passed under Section 143(3). Addition u/s 40A(3) - Only a statutory presumption exists in favour of the revenue to disallow such expenditure as may have been made in cash by making payments in excess of ₹ 20,000/- during the previous year, to any persons. The presumption is rebuttal. We find that the affidavits filed by the assessee during the assessment proceeding were not rebutted by the revenue. Those affidavits contain clear recital that the purchasers insisted for cash payment. Their identity is certainly not in doubt. There is no finding to that effect in any of the orders leading to this appeal. The sale deeds are also admitted to be registered documents and there is no other material as may be considered adverse to the claim set up by the assessee. In view of the undisputed facts of the present case we find no good ground to distinguish the law laid down by this Court in Commissioner of Income Tax Vs. Chaudhary And Co. 1995 (9) TMI 53 - ALLAHABAD HIGH COURT that has held the field for more than 26 years now. - Decided in favour of assessee.

Summary

Issues:
1. Validity of proceedings under Section 147 of the Income Tax Act without fresh material.
2. Justification of Assessing Officer's belief that income has escaped assessment.
3. Disallowance under Section 40-A(3) despite exceptional circumstances.

Analysis:
1. The High Court addressed the first two issues regarding the validity of proceedings under Section 147 of the Income Tax Act without fresh material. The court noted that no assessment order had been passed under Section 143(3) of the Act, indicating that no opinion had been formed by the assessing authority. The court emphasized that reasons to believe could be recorded without fresh material only if an opinion had been formed in a previous assessment order. Therefore, the court answered questions (i) and (ii) in favor of the revenue, stating that the Assessing Officer was justified in upholding the proceedings under Section 147.

2. The third issue involved the disallowance under Section 40-A(3) despite exceptional circumstances. The court considered the assessee's explanation that cash payments were made due to urgent requirements of sellers who lacked access to banking services. The court highlighted the genuineness of the transactions supported by registered sale deeds and affidavits from the purchasers. Referring to a previous decision, the court emphasized that Section 40-A(3) aims to prevent fictitious claims but does not outright disallow cash payments. The court stressed the need for the revenue to assess the payee based on the transactions. Consequently, the court answered question (iii) in favor of the assessee, stating that the disallowance under Section 40-A(3) was not justified in this case.

3. The court emphasized that the burden to disallow expenditure under Section 40-A(3) is rebuttable, requiring the assessee to provide adequate evidence. The court highlighted factors such as the seller's insistence on cash payments, disclosed identities, and genuineness of payments as crucial in determining the validity of such expenditures. In this case, the court found that the affidavits filed by the assessee were not rebutted by the revenue, indicating genuine transactions. Therefore, the court ruled in favor of the assessee, allowing the expenditure under Section 40-A(3) due to the exceptional circumstances and genuine nature of the transactions.

In conclusion, the High Court partially allowed the appeal, ruling in favor of the revenue on the first two issues and in favor of the assessee on the disallowance under Section 40-A(3).