2021 (12) TMI 875 - AT - Income Tax

Disallowance of cash payments in excess of prescribed limit u/s. 40A(3) - HELD THAT - In case of payments made for purchase of river sand in a village, it was an explanation of the assessee that said payments is made for purchase of product manufactured or processed without aid of power. Since, the processing of river sand is without aid of power and further such industry is in the nature of cottage industry, payment made for procurement of river sand comes under Clause (f) of Rule 6DD of IT Rules, 1962, and thus, same cannot be disallowed u/s. 40A(3). Remaining payments made which are not covered under any exception, we find all these payments are made to the traders which are supported by necessary evidence, and further such payments have been made at the instances of traders, that too in an emergency situation which compelled the assessee to make payments in cash - even though few payments is covered u/s. 40A(3) of the Act, because of peculiar nature of business of assessee, we find that those payments cannot be considered for disallowance u/s. 40A(3) of the Act. To sum up, all payments made by the assessee for purchase of materials in excess of prescribed limit provided u/s. 40A(3) of the Act cannot be disallowed. Hence, we direct the AO to delete the additions made towards disallowance of cash payments u/s. 40A(3) Additions towards unsecured loans received by the assessee u/s. 68 - assessee has failed to prove identity, genuineness of transaction and credit worthiness of the parties - HELD THAT - Assessee has filed necessary evidences to prove identity, genuineness of transactions and creditworthiness of parties - once assessee discharges its burden, then the AO cannot make additions towards unsecured loans u/s. 68 of the Act as unexplained credit, unless he proves otherwise - it is a matter of fact that such unsecured loans has been treated as cessation of liability and offered to tax u/s. 41(1) of the Act for the assessment year 2014-15. This fact has not been disputed by the AO. Therefore, once a particular sum is considered for taxation in subsequent years then, said loan cannot be once again treated as income of the assessee for the impugned assessment year - AO has completely erred in making additions towards unsecured loans received from M/s. Park Field Developers Builders Pvt. Ltd., u/s. 68 - CIT(A) without appreciating facts as simply confirmed additions made by the AO. Hence, we set aside the order passed by the Ld. CIT(A) and direct the AO to delete additions made towards unsecured loans u/s. 68 - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of cash payments under Section 40A(3) of the Income Tax Act, 1961.
2. Additions towards unsecured loans under Section 68 of the Income Tax Act, 1961.
3. Charging of interest under Sections 234A, 234B, and 234C of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Cash Payments under Section 40A(3):
The assessee, engaged in civil construction, was subject to a search and seizure operation, leading to assessments under Section 143(3) read with Section 153A. The Assessing Officer (AO) disallowed cash payments exceeding the prescribed limit under Section 40A(3), arguing that such payments did not fall under any exceptions provided by Rule 6DD of the Income Tax Rules, 1962. The assessee contended that the payments were made on Saturdays/Sundays or in areas without banking facilities, thus justifying the cash transactions. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, stating that the payments violated Rule 6DD and hence were disallowed despite their genuineness.

Upon appeal, the Tribunal noted that the AO did not doubt the genuineness of the payments. It was observed that many payments were made on weekends or in areas without banking facilities, which are exceptions under Rule 6DD. Furthermore, payments for river sand, processed without aid of power, also fell under another exception. The Tribunal concluded that these payments should not be disallowed under Section 40A(3) due to the peculiar nature of the assessee's business. Thus, the Tribunal directed the AO to delete the disallowance of cash payments.

2. Additions towards Unsecured Loans under Section 68:
The AO added ?50 lakhs as unexplained credit under Section 68, arguing that the assessee failed to prove the identity, genuineness, and creditworthiness of the creditor, M/s. Park Field Developers & Builders Pvt. Ltd. The assessee provided a confirmation letter and other evidence, including the creditor's details from the Ministry of Corporate Affairs, showing the company was active. The CIT(A) upheld the AO’s addition.

The Tribunal found that the assessee had provided sufficient evidence to prove the identity, genuineness, and creditworthiness of the creditor. Additionally, the loan was treated as cessation of liability and offered for tax under Section 41(1) in a subsequent assessment year, which the AO accepted. Therefore, the Tribunal held that the AO erred in making the addition under Section 68 for the impugned year and directed the deletion of the addition.

3. Charging of Interest under Sections 234A, 234B, and 234C:
The assessee challenged the charging of interest under Sections 234A, 234B, and 234C as part of the grounds of appeal. However, the Tribunal's order primarily focused on the disallowance of cash payments and the addition of unsecured loans. Since the disallowances and additions were directed to be deleted, the consequential interest charges under these sections would also be impacted accordingly.

Conclusion:
The Tribunal allowed the appeals filed by the assessee for all the assessment years, directing the AO to delete the disallowance of cash payments under Section 40A(3) and the addition of unsecured loans under Section 68. The order was pronounced on 08th December 2021 at Chennai.