2022 (10) TMI 1252 - AT - Income Tax

Addition u/s 40A(3) - business expediency in making the payments in cash - Payments made on holidays / Sundays - HELD THAT - As seen that the payments have been made for purchase of building material, purchase of cement, sand, wood steel, Labour payment and purchase of electrical and hardware material. All these items are supported by relevant bills and vouchers and are related to the business of the assessee. Assessee was working at various construction sites which were located at different places, it may not be always possible to make the payments through banking channels. It was quite possible that the supervisors had to make the payment in cash to ensure uninterrupted supply of material for construction work. Therefore, to some extent there could be business expediency in making these payments in cash. Therefore, partly accepting the plea of Ld. AR and considering the peculiar facts of the case, we direct Ld. AO to delete addition of those payments which have been made on holidays / Sundays and re-compute the addition. Appeal stands partly allowed for statistical purposes.

Summary

Issues Involved:
Confirmation of addition under Sec. 40A(3) for Rs. 35.21 Lacs to the returned income of Rs. 6.95 Lacs for Assessment Year 2010-11.

Analysis:

1. Confirmation of Addition under Sec. 40A(3):
The appeal by the assessee arose from the order of the Commissioner of Income Tax (Appeals) confirming the addition under Sec. 40A(3) for Rs. 35.21 Lacs to the returned income of Rs. 6.95 Lacs. Sec. 40A(3) mandates business expenditure exceeding Rs. 20,000/- to be paid through specified banking channels only, with non-compliance leading to disallowance of expenditure. The assessee, a resident firm engaged in civil construction, contested the addition.

2. Assessee's Contentions:
The assessee, a civil contractor for 24 years operating in Chennai within a 60 KM radius, explained that due to construction activities at various sites, payments were made in cash by supervisors at those locations. The contention included payments made on Sundays/holidays when banking transactions were not feasible. The assessee argued for business expediency in making cash payments due to the nature of construction work.

3. Tribunal's Decision:
Upon examining the assessment order and considering that payments were for building materials, cement, sand, wood, steel, labor, electrical, and hardware materials, supported by bills and vouchers, the Tribunal acknowledged the business nature of the expenses. Recognizing the challenges of working at multiple construction sites, the Tribunal accepted the need for cash payments to ensure uninterrupted material supply. Consequently, the Tribunal directed the Assessing Officer to delete the addition for payments made on holidays/Sundays and recompute the addition, requiring the assessee to provide necessary details. No other grounds were raised before the Tribunal.

4. Outcome:
The Tribunal partly allowed the appeal for statistical purposes, pronouncing the order on 12th October 2022. The decision highlighted the importance of considering business exigencies and practical challenges in assessing compliance with statutory provisions, ultimately resulting in a favorable outcome for the assessee in the disputed addition under Sec. 40A(3).