2008 (1) TMI 564 - HC - Income Tax

Business Expenditure - Disallowance - The assessee is a firm indulging in constructional activities. For the assessment year 1989-90 the assessee filed a return of income. The Assessing Officer disallowed an income of Rs. 37, 17, 788 holding that the expenditure incurred paid by way of cash is contrary to section 40A(3) of the Act. The assessee filed an appeal before the Commissioner of Income-tax (Appeals) which appeal came to be allowed. Against which a second appeal was filed by the Revenue which appeal has been dismissed by the Tribunal confirming the order passed by the Commissioner of Income-tax (Appeals). Against these two orders the present appeal is filed. Held that-if both the authorities on facts had held that the assessee being a principal contractor had passed on the amount to the sub-contractor such amount could not be treated as an expenditure. The cash payment of Rs. 37, 17, 798 made by the assessee did not attract the provision of section 40A(3) of the Act or an amount passed on to the sub-contractor was a question of fact and not a question of law. If both the authorities on the facts had held that the assessee being a principal contractor had passed on the amount to the sub-contractor such amount could not be treated as an expenditure. The cash payment of Rs. 37, 17, 798 made by the assessee did not attract the provision of section 40A(3) of the Act.

Summary

Issues:
Challenge to concurrent findings of Commissioner of Income-tax (Appeals) and Income-tax Appellate Tribunal regarding disallowed income under section 40A(3) of the Act.

Analysis:
1. The appeal was filed by the Revenue challenging the concurrent findings of the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal regarding the disallowed income of Rs. 37,17,788 under section 40A(3) of the Act for the assessment year 1989-90. The Assessing Officer disallowed the income, stating that the expenditure paid in cash was contrary to the Act. The Commissioner of Income-tax (Appeals) allowed the appeal, which was further confirmed by the Tribunal. The Revenue filed the present appeal against these two orders.

2. The substantial question of law raised in the appeal was whether the Tribunal was correct in holding that the cash payment made by the assessee did not attract the provisions of section 40A(3) of the Act, and thus no explanation under rule 6DD of the Rules was required to be provided by the assessee.

3. The assessee, a civil contractor, had obtained a contract from the Government and subcontracted the work to another party. The assessee claimed a commission on the total project cost for transferring the rights to the subcontractor. The assessee received payments from the Government, of which 99% was passed on to the subcontractor in cash. The Assessing Officer rejected the claim, considering the cash payment as an expenditure and disallowing the deduction.

4. Both the Tribunal and the Commissioner of Income-tax (Appeals) held that the payment to the subcontractor was not an expenditure claimed by the assessee but a payment made pursuant to an agreement. They concluded that the amount passed on to the subcontractor by the assessee cannot be treated as an expenditure. The court agreed that whether it was a business expenditure or a payment to the subcontractor was a question of fact, not law. Since both authorities found that the amount was passed on to the subcontractor, it could not be treated as an expenditure.

5. Therefore, the court dismissed the appeal, concurring with the findings of the lower authorities and ruling in favor of the assessee. The judgment upheld that the cash payment made to the subcontractor by the assessee did not attract the provisions of section 40A(3) of the Act, and no further explanation was required from the assessee under rule 6DD of the Rules.