2024 (4) TMI 316 - HC - Income Tax

Addition u/s 40A - Cash expenditure exceeding the threshold of Rs. 20, 000/- - Lump sum amount paid to the leader of each group of workers for the purpose of disbursement to the individual workers - Assessee draw a lump sum amount from bank by cheque through his employees i.e. supervisors for payment to be made to labours and supervisors used to make payment to labours and give an account to the assessee in the form of a list containing payments made to each individual labour - HELD THAT - The payment so made by the supervisors had not exceeded Rs. 20, 000/- to any individual labour. As per provision of Section 211 of the Indian Contract Act agent is bound to conduct the business of his principal according to the direction given by the principal or in the absence of such direction according to the customs which prevail in doing business of the same kind at the place where the agent conducts such business. In the present set of facts the supervisors acted as agent of the assessee in conducting the assessee s business. There is no material or evidence of record to indicate or establish that the supervisors were sub-contractors. The finding recorded by the ITAT that the supervisors were sub-contractors is perverse and contrary to law. Consequently the said finding is hereby set aside. As found that the supervisors acted as agent of the assessee to disburse the amount to individual labours which in no case exceeded Rs. 20, 000/- to any individual labour. Therefore in view of the circumstances prescribed in the second proviso to Section 40A(3) read with Rule 6DD(l) of the Income Tax Rules 1962 and the above-referred provisions of the Indian Contract Act the aforesaid payment cannot fall within the scope of Section 40A(3). Disallowance to the extent of 20% made by the ITAT and to add it in the income of the assessee cannot be sustained and is hereby set aside. Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 40A(3) of the Income Tax Act, 1961.
2. Classification of supervisors as employees or sub-contractors.

Summary:

Issue 1: Applicability of Section 40A(3) of the Income Tax Act, 1961
The core issue was whether the Tribunal was justified in applying Section 40A(3) of the Act concerning lump sum payments made to group leaders for disbursement to individual workers. The Assessing Officer disallowed 20% of Rs. 1,21,49,190/- u/s 40A(3) on the grounds that payments exceeded Rs. 20,000/- and were not made by crossed cheque or bank draft. However, the CIT(A) allowed the appeal, noting that individual payments did not exceed Rs. 20,000/- and were made through supervisors who were employees of the assessee. The ITAT reversed this, treating supervisors as sub-contractors.

Issue 2: Classification of Supervisors as Employees or Sub-contractors
The High Court found that the assessing officer did not dispute the appellant's claim that supervisors were employees. The ITAT's conclusion that supervisors were sub-contractors was deemed perverse and unsupported by evidence. The Court emphasized that supervisors acted as agents of the assessee, making payments to individual workers, none of which exceeded Rs. 20,000/-.

Legal Findings:
- Section 40A(3) and Rule 6DD(l): The Court highlighted that no disallowance under Section 40A(3) shall be made where payments exceeding Rs. 20,000/- are made to an agent for goods or services on behalf of the principal. Supervisors, acting as agents, disbursed payments to individual workers, complying with Rule 6DD(l).
- Indian Contract Act: Sections 182, 185, 186, 188, and 211 were referenced to establish the agent-principal relationship, confirming that supervisors acted under the assessee's direction.

Conclusion:
The High Court set aside the ITAT's order, ruling that the supervisors were employees acting as agents, and payments did not violate Section 40A(3). The substantial question of law was answered in favor of the assessee, and the appeal was allowed.