2023 (9) TMI 1076 - AT - Income Tax

Addition u/s 40A(3) - assessee company made huge cash payments in excess of Rs. 20,000/- in connection with development of housing plots at Bangalore - HELD THAT - AO is trying to invoke the provisions of section 40A(3) for some site expenses and other expenses, but not on account of any payments made to Shri B.V. Sampath and family members by the assessee. Even in the remand report also, the AO had given vague answer according to which he is presuming that part of the payments might have reached Shri B.V. Sampath. This in our opinion cannot be the basis for addition u/s. 40A(3). For attracting the provisions u/s. 40A(3), there must be some cash payments recorded in the books of accounts. However, in the instant case as mentioned earlier no books of accounts were produced during the course of assessment proceedings for which the assessment was completed u/s. 144 of the I.T. Act and therefore, the AO could not have invoked the provisions of section 40A(3). So far as the statement of the Director is concerned, we find nowhere he has stated that they have paid an amount of Rs. 1.50 crore towards purchase of land. We also agree with the observation of the ld.CIT(A) that in absence of examination of the books of accounts and without finding that such cash payments were made and debited to the profit and loss account, the AO could not have made the disallowance u/s. 40A(3). DR also could not controvert the finding of the ld.CIT(A) that the AO had made the same disallowance of Rs. 1.50 crores u/s. 40A(3) in the subsequent assessment year i.e. AY 2009-10 also. Since, no evidence either oral or documentary has been brought on the record by the AO that in fact the said cash payments were made by the assessee company to Shri B.V. Sampath and family members, therefore, order of the ld.CIT(A) deleting the addition of Rs. 1.50 crores made by the AO u/s. 40A(3) upheld - Decided against revenue.

Summary

Issues Involved:
1. Validity of the reopening of assessment under section 147 of the I.T. Act.
2. Disallowance under section 40A(3) of the I.T. Act for cash payments exceeding Rs. 20,000.
3. Consideration of the remand report and additional evidence.

Summary:

Issue 1: Validity of Reopening of Assessment under Section 147
The assessee, a company engaged in the development and selling of lands, filed its return of income belatedly. The AO reopened the assessment under section 147 of the I.T. Act, citing reasons that the assessee had taxable income but had not filed its return on time, leading to income escaping assessment. Additionally, the AO received information from the DDIT (Inv.) about the assessee making cash payments exceeding Rs. 20,000, attracting the provisions of section 40A(3). Consequently, notice under section 148 was issued, but the assessee did not respond, leading the AO to complete the assessment under section 144 of the I.T. Act.

Issue 2: Disallowance under Section 40A(3)
The AO made an addition of Rs. 1.50 crores by invoking section 40A(3) based on the sworn statement of the MD of the company, which indicated cash payments. The assessee argued before the CIT(A) that all transactions were genuine and reflected in the financial statements. The CIT(A) deleted the addition, observing that the AO relied solely on a vague statement without proper evidence or inquiries. The CIT(A) noted that the payments were made by cheques and reflected in the books of account. The Tribunal upheld the CIT(A)'s decision, stating that the AO did not bring any material evidence to substantiate the disallowance and that disallowance under section 40A(3) requires cash payments to be recorded in the books, which was not the case here.

Issue 3: Consideration of Remand Report and Additional Evidence
During the remand proceedings, the assessee produced books of accounts showing payments made by cheques. The AO's remand report suggested some site expenses incurred in cash but did not support the disallowance of Rs. 1.50 crores paid to the landlords. The Tribunal agreed with the CIT(A) that the AO's presumption about cash payments was not a valid basis for disallowance. The Tribunal found no infirmity in the CIT(A)'s order, which was based on the remand report and additional evidence provided by the assessee.

Conclusion:
Both appeals filed by the revenue were dismissed, and the order of the CIT(A) deleting the addition of Rs. 1.50 crores under section 40A(3) was upheld. The Tribunal found no evidence of cash payments recorded in the books of accounts and agreed with the CIT(A) that the AO's disallowance was not sustainable on facts or law.