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2022 (8) TMI 347 - AT - Income TaxRevision u/s 263 by CIT - addition u/s 40A ignored by AO - HELD THAT - As the expenses have been incurred in cash exceeding Rs. 20,000/- per day throughout the financial year, the Assessing officer is expected to verify these expenses not just applying the test of genuineness and whether the expense have been incurred for the purposes of assessee's activities as so claimed and purposes for which it is claimed to be incurred but also the necessity of payment been made in cash on a recurring basis and applicability of provisions of section 40A(3). As we find that more than 50% of these expenses have been incurred in cash exceeding Rs. 20,000/- per day, therefore, these are cash transactions spreading throughout the financial year and it is not a case of certain sporadic cash transactions which could have escaped the attention of the Assessing officer and have been noticed subsequently by the ld. CIT(E). We therefore find that it is a case where the Assessing officer has completely failed to examine the provisions of section 40A(3) and applicability thereof in the facts of the instant case. AO is expected to examine the provisions of section 40A(3) vis- -vis respective transactions and determine which all these transactions are covered by the provisions of section 40A(3) and which all transactions fall under the exception as so provided in the Rule 6DD and decide accordingly. Only where the AO has examined the transactions from the perspective of section 40A(3) read with exceptions thereto and the ld. CIT(E) arrives at a different finding, the question of change of opinion arises. Where there is no examination and no formation of opinion at first place, the question of change of opinion as so contended by the ld. AR doesn't arise. Where the provisions of section 40A(3) are applicable in the facts of the case and which the AO has failed to examine and invoke at first place and the ld. CIT(E) subsequently noticed and thereafter, records his findings as to how the said provisions are applicable in the facts of the case, it is no doubt a case of reappraisal of the facts but with a view to highlight the applicability of correct law which the AO has failed to apply which is very much within the domain and jurisdiction of the ld. CIT(E) and in the process of applying the correct law, where the AO is directed to carry out further verification of individual transactions, the same is clearly permissible and necessary guidance can be drawn from the decision of the Hon'ble Supreme Court in case of Malabar Industrial Company Ltd. 2000 (2) TMI 10 - SUPREME COURT ) - Decided against assessee.
Issues Involved:
1. Jurisdiction of CIT under Section 263 of the Income Tax Act. 2. Erroneous and prejudicial nature of the original assessment order. 3. Applicability of Section 40A(3) of the Income Tax Act to the assessee's expenses. 4. Adequacy of the Assessing Officer's (AO) enquiries and verification during the original assessment. Issue-wise Detailed Analysis: 1. Jurisdiction of CIT under Section 263 of the Income Tax Act: The primary issue is whether the Commissioner of Income Tax (Exemptions) [CIT(E)] exceeded his legislative jurisdiction under Section 263 of the Income Tax Act. The CIT(E) invoked Section 263, arguing that the original assessment order was erroneous and prejudicial to the interests of the revenue due to the AO's failure to make necessary enquiries and verifications. The CIT(E) held that the AO's order was passed without proper application of mind, thus satisfying the conditions for invoking Section 263 as established in the case of Malabar Industrial Co. Ltd. v. CIT. 2. Erroneous and Prejudicial Nature of the Original Assessment Order: The CIT(E) found that the AO's order was erroneous and prejudicial to the interests of the revenue. The AO had failed to consider the applicability of Section 40A(3) of the Income Tax Act, which mandates disallowance of expenses paid in cash exceeding Rs. 20,000 per day. The CIT(E) noted that the AO did not verify whether the expenses incurred by the assessee's society were genuine and whether they complied with the provisions of Section 40A(3). The CIT(E) concluded that the AO's failure to apply the correct law led to an under-assessment of income, thus making the order prejudicial to the interests of the revenue. 3. Applicability of Section 40A(3) of the Income Tax Act to the Assessee's Expenses: The CIT(E) held that Section 40A(3) was applicable to the assessee's expenses, which included fuel, vehicle running, and kitchen expenses, totaling Rs. 22,48,374/-, out of which Rs. 11,70,515/- was paid in cash exceeding Rs. 20,000 per day. The CIT(E) emphasized that the AO should have examined these expenses under the provisions of Section 40A(3) and its exceptions under Rule 6DD. The CIT(E) also noted that the Finance Act, 2018, extended the applicability of Section 40A(3) to charitable activities, effective from AY 2019-20, but the principle of curbing black money and ensuring genuine transactions was always inherent in the law. 4. Adequacy of the AO's Enquiries and Verification During the Original Assessment: The CIT(E) found that the AO did not conduct adequate enquiries and verification during the original assessment. The AO had disallowed certain expenses based on self-made vouchers but did not specifically examine the cash payments exceeding Rs. 20,000 per day. The CIT(E) noted that the AO's assessment was completed in undue haste without proper verification of the bills and vouchers submitted by the assessee. The CIT(E) concluded that the AO's failure to make necessary enquiries and apply the relevant provisions of the law rendered the assessment order erroneous and prejudicial to the interests of the revenue. Conclusion: The appeal filed by the assessee was dismissed, and the order of the CIT(E) was upheld. The Tribunal agreed with the CIT(E) that the AO had failed to apply the provisions of Section 40A(3) and conduct necessary verification of the expenses. The Tribunal found that the AO's order was erroneous and prejudicial to the interests of the revenue, justifying the invocation of Section 263 by the CIT(E). The AO was directed to re-examine the matter afresh in accordance with the law, providing reasonable opportunity to the assessee.
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