1993 (10) TMI 117 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance under Section 40A(3) of the Income-tax Act, 1961.
2. Applicability of Rule 6DD(j) of the Income-tax Rules, 1962.
3. Impact of invoking Section 145 of the Income-tax Act, 1961, on the disallowance under Section 40A(3).

Detailed Analysis:

1. Disallowance under Section 40A(3) of the Income-tax Act, 1961:
The department appealed against the CIT(A)'s order deleting disallowances made under Section 40A(3) of the Income-tax Act, 1961. The disallowances included Rs. 23,07,483 for cash payments and payments by bearer cheque to sub-contractors, and Rs. 1,35,127 for purchases made in cash, where individual payments exceeded Rs. 2,500.

The assessee argued that the cash payments were due to "urgent requirements for labour payments," supported by vouchers and confirmatory letters from two sub-contractors. However, the Assessing Officer (AO) found the explanation unsatisfactory, noting the general nature of the explanation and lack of specific evidence for unavoidable circumstances. The AO also observed that most sub-contractors maintained bank accounts, questioning why payments were not made by crossed cheques.

2. Applicability of Rule 6DD(j) of the Income-tax Rules, 1962:
The assessee contended that the cash payments were due to exceptional and unavoidable circumstances, covered by Rule 6DD(j) and a CBDT circular. The CIT(A) accepted this argument, noting that cash payments were often necessary at work sites where neither party had bank accounts, and payments were sometimes made after banking hours or on holidays. The CIT(A) held that these circumstances justified the exemption under Rule 6DD(j).

However, the Tribunal found the assessee's explanations inconsistent and lacking specific evidence. The Tribunal noted that confirmatory letters were only provided by two sub-contractors and were in general terms. The Tribunal concluded that the assessee failed to establish the necessity for cash payments under Rule 6DD(j) and the CBDT circular, thus upholding the applicability of Section 40A(3).

3. Impact of invoking Section 145 of the Income-tax Act, 1961, on the disallowance under Section 40A(3):
The CIT(A) had also argued that once the AO rejected the books of accounts under Section 145 and estimated net profits, it was not proper to disallow payments again under Section 40A(3). The Tribunal disagreed, emphasizing the non obstante clause in Section 40A(1), which gives Section 40A(3) an overriding effect in the computation of income.

The Tribunal referred to the decision in New Narayan Builders v. ITO, which held that disallowance under Section 40A(3) is not applicable when income is estimated by applying a flat net profit rate. However, the Tribunal clarified that Section 40A(1) was not considered in that case. The Tribunal concluded that disallowance under Section 40A(3) is permissible even when net profit is estimated.

The Tribunal acknowledged that adjustments might be necessary to avoid double disallowance, as the net profit addition already disallowed certain expenses. The Tribunal directed that the quantum of disallowance under Section 40A(3) should be reduced by the amount of net profit addition once it is ascertained.

Conclusion:
The Tribunal allowed the department's appeal, holding that disallowance under Section 40A(3) is applicable even when net profit is estimated under Section 145. The assessee failed to establish the necessity for cash payments under Rule 6DD(j) and the CBDT circular. The Tribunal directed adjustments to avoid double disallowance, reducing the disallowance under Section 40A(3) by the amount of net profit addition.