2022 (8) TMI 850 - AT - Income Tax

Revision u/s 263 - Disallowance u/s 40A(3) - AO initiated reassessment proceedings on the strength of cash payments - HELD THAT - It is apparent that if the payment is made to a person otherwise than through the modes prescribed in the section and the recipient is residing in any village or town, not served by any bank, then no disallowance shall be made u/s.40A(3) - The assessee furnished certificates dated 22-12-2016 from Gram Panchayat (Local Govt. authority) that the two villages namely (1) Pakahrsangvi and (2) Khandgaon were not served by any bank. All the payments under consideration have been made to the residents of these villages as have been admitted by the ld. Pr.CIT as well. Not only such certificates were produced before the AO during the course of assessment proceedings on the basis of which he got satisfied and did not make any disallowance, these were also filed before the CIT in the revision proceedings. He did not find anything amiss in them and still preferred to direct the AO to verify their veracity. Under such circumstances, we fail to comprehend as to how the assessment order can be termed as erroneous and prejudicial to the interest of revenue. The position would have been different if the AO had accepted the contention of the assessee of being covered under rule 6DD(g) without any support of the certificates. Here is a case in which the assessee furnished necessary certificates from Gram Panchayat (Local Govt. authority) indicating that the recipients under consideration were living in two villages which were not served by any bank and the AO accepted genuineness of the certificates. In that view of the matter, we do not find any infirmity in the order of the AO in not making disallowance in respect of the payments made to the residents of these two villages. The impugned order is set aside to this extent. Pr.CIT invoked his revisionary jurisdiction is non-verification of advances from the customers - In the assessment order passed u/s 147 of the Act, the AO made addition of Rs.11 lacs, being, the amount which, in his opinion, contravened the provisions of section 40A(3). Thus, it is apparent that the question of verification of advances from customer totaling to Rs.89,60,500 was not the subject matter of re-assessment concluded by means of an order on 29.12.2016. Once the issue of advances from customers is held to be not a part of re-assessment proceedings, naturally, it will pertain to the original assessment proceedings. The limitation for revision is contained in sub-section (2) of section 263 of the Act, being, a period of two years from the end of financial year in which the order sought to be revised was passed. Thus, an order u/s 263 is required to be passed within a period of two years from the end of financial year in which the order sought to be revised is passed. The impugned order u/s 263 has been passed in this case on 25.03.2019. Though the reassessment order was passed on 29.12.2016, the relevant assessment order for the purposes of advances from customers is the original assessment order, which was passed on 21.03.2014. The period of two years from the end of financial year in which the order was passed, came to end on 31.03.2016. As the impugned order has been passed in the year 2019, it is therefore, held to be barred by limitation on the issue of advances from customers. We, therefore, set aside the impugned order on this score as well. Assessee appeal is allowed.

Summary

Issues:
1. Disallowance under section 40A(3) of the Income-tax Act, 1961.
2. Non-verification of advances from customers.

Issue 1: Disallowance under section 40A(3) of the Income-tax Act, 1961:
The appeal arose from an order passed under section 263 of the Income-tax Act, 1961 concerning the assessment year 2011-12. The Assessing Officer (AO) reopened the assessment due to cash payments made by the assessee in violation of section 40A(3). The Principal Commissioner of Income Tax (Pr. CIT) observed that the AO did not disallow the full amount paid in cash, leading to invoking section 263. The Tribunal noted that the AO had accepted the genuineness of certificates from the Gram Panchayat stating that the recipients lived in villages without banking facilities. As per Rule 6DD(g), payments made in such areas are exempt from disallowance under section 40A(3). The Tribunal found no error in the AO's decision not to disallow payments made to residents of these villages, thus setting aside the Pr. CIT's order.

Issue 2: Non-verification of advances from customers:
The Pr. CIT also raised concerns about the AO not verifying advances totaling Rs. 89,60,500 from 66 customers against actual sales. However, the Tribunal pointed out that the original assessment order and subsequent reassessment focused solely on the disallowance under section 40A(3). The issue of advances from customers was not part of the reassessment proceedings but pertained to the original assessment. Moreover, the Pr. CIT's order under section 263 was passed beyond the two-year limitation period from the end of the financial year in which the original assessment was made, rendering it time-barred. Therefore, the Tribunal set aside the Pr. CIT's order on this issue as well.

In conclusion, the Tribunal allowed the appeal, emphasizing that the original assessment order was not erroneous or prejudicial to the revenue's interests regarding both the disallowance under section 40A(3) and the non-verification of advances from customers. The Pr. CIT's order under section 263 was set aside due to being beyond the limitation period.