1981 (7) TMI 123 - AT - Income Tax

Summary

Issues:
Appeal against deletion of addition under section 40A(3) of the Income-tax Act, 1961.

Analysis:
The appeal was made by the revenue against the decision of the Commissioner (Appeals) regarding the deletion of an addition of Rs. 25,000 under section 40A(3) of the Income-tax Act, 1961. The assessee had made purchases from K.B. Enterprises, and the ITO disallowed Rs. 25,000 as cash payment under section 40A(3). However, during the appeal process, it was revealed that the actual disallowance should have been Rs. 40,000. The Commissioner (Appeals) upheld the addition of Rs. 5,000 as it did not qualify for exemption under rule 6DD(j). The revenue challenged this decision in the appeal.

The main argument presented was that the disallowance under section 40A(3) pertains to the expenditure incurred in the year for which cash payment was made, regardless of when the payment was made. The departmental representative contended that the disallowance should be based on the year in which the expenditure was incurred, not the year of payment. The proviso to section 40A(3) allows for rectification of assessment orders if cash payments are discovered later. The counsel for the assessee, however, supported the decision of the Commissioner (Appeals).

Upon examination, it was clarified that section 40A(3) focuses on disallowing the expenditure incurred in the year when cash payment was made. The timing of the payment is not the determining factor for disallowance. The ITO has the authority to disallow such payments even after the assessment is completed. The Commissioner (Appeals) misunderstood the section and wrongly allowed relief to the assessee. Therefore, the decision of the Commissioner (Appeals) was set aside.

Although the Commissioner (Appeals) did not address the applicability of rule 6DD(j) to the payments made in 1975, the judgment highlighted the necessity for such a determination. The case was remanded back to the Commissioner (Appeals) to evaluate whether the payments made in 1975, totaling Rs. 35,000, qualified for deduction under section 40A(3) considering the conditions specified under rule 6DD(j).

In conclusion, the departmental appeal was treated as allowed, and the matter was referred back to the Commissioner (Appeals) for a detailed decision on the eligibility of the payments made in 1975 under section 40A(3) in compliance with rule 6DD(j).