2025 (2) TMI 1139 - AT - Income Tax

Addition u/s 40A(3) - payments made to suppliers of material in the assessee s contract business - as submitted payments have been made by bearer cheques to various individuals for supply of material and the necessary certificates from the Mukhias of the relevant Gram Panchayat had also been produced before the AO in the course of the original proceedings itself wherein it has been categorically admitted that there is no branch of any bank in the village where the suppliers were operating - HELD THAT - It is clear that even in the course of the original proceedings the certificate issued by the Mukhia of the relevant villages were available. Obviously the Mukhias are the Gram Pradhan who were elected representatives and who know the facts and the ground reality. They represented to the Government also in their respective villages. Such Mukhias have specifically confirmed that there are no banks or any branch of banks operating in the respective villages. Thus obviously the provisions of Rule 6DDJ would come into play and no disallowance can be made in respect of the payment made by bearer cheques to the various suppliers of material. Addition invoking the provisions of section 40(a)(ia) - non-deduction of TDS on payments made to Mangla Planners for map design - HELD THAT - As submitted by the ld. AR that in view of the principles laid down in the case of Hindusthan Coca Cola Beverage (P) Ltd. 2007 (8) TMI 12 - SUPREME COURT the issue could be restored to the file of the Assessing Officer for verification as to whether the recipients of the amount of Rs. 2, 95, 000/- being Rs. 1, 00, 000/- paid to Mangalam Planners and the amount of Rs. 1, 95, 000/- paid to the different persons for the design and planning of the water towers have been offered by the recipients to tax as their income. AO will also consider the fact as to whether the recipients are liable to tax or whether their incomes are below the taxable limit.

Summary

ISSUES PRESENTED and CONSIDERED:1. Whether the disallowance made under section 40A(3) of the Income Tax Act, 1961 in relation to payments made to suppliers of material in the assessee's contract business should be upheld.2. Whether the disallowance under section 40(a)(ia) of the Act for non-deduction of TDS on payments made to Mangla Planners for map design should be confirmed.ISSUE-WISE DETAILED ANALYSIS:Issue 1: Disallowance under Section 40A(3)- Relevant legal framework and precedents: Section 40A(3) of the Act pertains to disallowance of certain expenses if they are paid in cash exceeding a specified limit. Rule 6DDJ provides exceptions to this rule in cases where there is no bank account available.- Court's interpretation and reasoning: The Tribunal noted that the assessee had made payments to suppliers via bearer cheques due to the absence of a bank branch in the relevant village. The Mukhias of the Gram Panchayat confirmed this fact through certificates, invoking Rule 6DDJ to exempt the disallowance.- Key evidence and findings: Certificates from Mukhias confirming the absence of bank branches in the village, along with the details of payments made by bearer cheques, were crucial evidence.- Application of law to facts: The Tribunal applied Rule 6DDJ to exempt the disallowance under section 40A(3) considering the practical difficulties faced by the assessee in making payments through banking channels.- Treatment of competing arguments: The Revenue argued for upholding the disallowance, citing non-compliance with notices. However, the Tribunal focused on the factual circumstances and the availability of certificates from elected representatives.- Conclusions: The Tribunal deleted the disallowance made under section 40A(3) of the Act, considering the practical constraints faced by the assessee in making payments through banking channels in the absence of bank branches in the relevant village.Issue 2: Disallowance under Section 40(a)(ia)- Relevant legal framework and precedents: Section 40(a)(ia) deals with disallowance for non-deduction of TDS on certain payments. The Tribunal considered the principles laid down by the Supreme Court in Hindusthan Coca Cola Beverage (P) Ltd.- Court's interpretation and reasoning: The Tribunal directed the issue to be restored to the Assessing Officer for verification regarding whether the recipients of the payments had offered the amounts to tax as their income and if their incomes were below the taxable limit.- Key evidence and findings: The Tribunal considered the need for verification of tax compliance by the recipients of the payments made by the assessee.- Application of law to facts: The Tribunal ordered a re-examination by the Assessing Officer to determine the tax liability of the recipients of the payments in question.- Treatment of competing arguments: The assessee's argument for restoration of the issue for verification was considered against the Revenue's stance of upholding the disallowance.- Conclusions: The Tribunal partly allowed the appeal for statistical purposes, directing the Assessing Officer to verify the tax compliance of the recipients of the payments before making a final determination.SIGNIFICANT HOLDINGS:- The Tribunal deleted the disallowance under section 40A(3) based on the practical difficulties faced by the assessee in making payments through banking channels in the absence of bank branches in the relevant village.- The Tribunal directed the issue of disallowance under section 40(a)(ia) to be restored for verification of tax compliance by the recipients of the payments, following the principles laid down by the Supreme Court.Overall, the Tribunal's judgment focused on the practical constraints faced by the assessee and the need for verification of tax compliance by the recipients in determining the disallowances under the Income Tax Act.