1996 (10) TMI 128 - AT - Income Tax

Summary

Issues:
1. Enhancement in income from Rs. 10,000 to Rs. 1,43,531.
2. Disallowance of interest of Rs. 17,758.
3. Disallowance of certain cash payments exceeding Rs. 2,500 each under s. 40A(3).

Analysis:

Issue 1: Enhancement in income
The assessee, a registered firm operating a cinema house, appealed against the enhancement of income from Rs. 10,000 to Rs. 1,43,531. The Assessing Officer (AO) noted discrepancies in the closing cash balance and added Rs. 10,000 as additional profit. The Commissioner of Income Tax (CIT) found an unexplained difference of Rs. 1,43,531 in the cash book and enhanced the income by this amount. The assessee explained a dual cash book system, one at the cinema and one at the partner's residence, with the latter reflecting the true closing balance. The Tribunal examined discrepancies and explanations, finding Rs. 1,00,000 explained and sustained the addition of Rs. 43,531.

Issue 2: Disallowance of interest
The second ground of appeal concerned the disallowance of interest amounting to Rs. 17,758. The AO disallowed the interest due to a large cash balance, which the CIT upheld, citing a specific entry as non-genuine. The Tribunal disagreed, noting the entry's genuineness and the subjective nature of maintaining cash balances, deleting the disallowance.

Issue 3: Disallowance of cash payments under s. 40A(3)
Regarding the disallowance of cash payments exceeding Rs. 2,500 each under s. 40A(3), the AO disallowed Rs. 97,500 for 16 items, with the CIT confirming Rs. 70,000 for ten items. The Tribunal analyzed each payment, finding insufficient reasons for cash payments, lack of compelling circumstances for bank holiday payments, and doubts regarding payee identities. Consequently, the Tribunal sustained the entire addition of Rs. 70,000 for these cash payments.

In conclusion, the Tribunal partly allowed the appeal, addressing the issues of income enhancement, interest disallowance, and cash payment disallowance under s. 40A(3) comprehensively based on the presented facts and legal arguments.