2023 (5) TMI 623 - AT - Income Tax

Disallowance u/s 40A(3) - payments being made in cash and higher than Rs.20,000/- - suppliers did not maintain books of account - AO proposed 10% of totally payment as disallowed on account of unverified payment - HELD THAT - We find ourselves in agreement with the submission of assessee that disallowance u/s 40A(3) has not been found from the books of accounts of the assessee. Rather the plea is that the suppliers have not maintained proper books of accounts. Hence, it could not be co-related. We note that the disallowance u/s 40A(3) in this case has not been made on the basis of anything found from the assessee s books. Rather this case has been made out that the suppliers did not maintain books of account and same could not be traced. We also rely upon the ITAT order in assessee s own case for AY 2007-08 referred above. Suppliers are small type of butchers living in various locations and are illiterate as noted by the Tribunal. Instead of money receipts, assessee was using slip system, which in such areas is not uncommon. The recipients of such type of slips do not preserve such slips and this is not uncommon phenomenon. In our considered opinion, the disallowance made u/s 40A(3) is not reasonable and hence, we set-aside the orders of the authorities below and deleted the addition. Appeal of the assessee stands allowed.

Summary

Issues involved:
The issues involved in the judgment are the misdirection in sustaining an addition under section 40(A)(3) and the erroneous enhancement of the initial addition by the ld. CIT (Appeals).

Issue 1: Misdirection in Sustaining Addition under Section 40(A)(3):
The Assessing Officer disallowed 20% of the total cash credit amounting to Rs.2,18,28,275 based on responses from creditors, despite the assessee's claim that all creditors were genuine. Additionally, a payment of Rs.9,91,425 to a supplier was disallowed under section 40A(3) as cash payment, even though the assessee provided the supplier's account details. The ld. CIT (Appeals) not only confirmed this addition but also enhanced it by Rs.1,47,19,942, asserting that the payments were not co-related with supplier books, leading to a violation of section 40A(3). However, the ITAT found that the disallowance was not based on the assessee's books but rather on the suppliers' lack of proper accounts, ultimately setting aside the addition under section 40A(3).

Issue 2: Erroneous Enhancement of Initial Addition:
The Assessing Officer proposed to disallow 10% of total payments of Rs.1,63,55,491 due to unverified payments made in cash for raw material purchases, as suppliers were not traceable. The ld. CIT (Appeals) upheld and increased this addition by Rs.1,47,19,942, emphasizing the lack of correlation between the assessee's and suppliers' books. However, the ITAT disagreed with this reasoning, noting that the disallowance under section 40A(3) was unfounded as it was not based on any discrepancies in the assessee's books but on the suppliers' inadequate record-keeping practices. Consequently, the ITAT set aside the orders of the lower authorities and deleted the addition, allowing the appeal of the assessee.