2014 (4) TMI 312 - AT - Income Tax

Deletion on account of material purchase Held that - The expenses have been claimed in respect of material consumed despite the assessee-company a labour work contractor CIT(A) was of the view that the appellant had earned Rs.2, 47, 14, 317/- from contract work and the spent on materials was only Rs.9, 12, 549/- which is very negligible - the terms of agreement also provides for use/supply of some materials revenue could not bringing any contrary material on record to controvert the findings of the CIT(A) thus there is no infirmity in the order of the CIT(A) Decided against Revenue. Deletion u/s 40A(3) of the Act Cash payment exceeds the per day limit Held that - CIT(A) was of the view that the provisions u/s 40A(3) of the Act provides for certain exception for the application of the provisions - the project undertaken by the appellant was in a remote area and no banking facility was available - If the payment is made in a village or town which on the date of such payment is not served by any bank to any person who ordinarily resides or is carrying on any business profession or vocation in any such village or town the site where the work is being carried out is not served by any bank - Revenue has not placed anything on record suggesting that there was any branch of bank near the place where the payment has been made thus there was no infirmity in the order of the CIT(A) Decided against Revenue.

Summary

Issues:
1. Deletion of addition on account of material purchases.
2. Deletion of addition under section 40A(3) of the IT Act.

Analysis:

Issue 1: Deletion of addition on account of material purchases:
The appellant, engaged in fabrication and erection work, filed its return of income for AY 2007-08. The AO disallowed Rs. 9,12,549 for material purchases and added Rs. 1,00,341 under section 40A(3) of the Act. The CIT(A) deleted these additions. The Revenue appealed, arguing that the expenses were not for business purposes. The appellant contended that material purchases were necessary for other contract works. The ITAT found that the AO failed to justify the additions. The CIT(A)'s decision was upheld as the expenses were minimal compared to the contract earnings, and the terms of the agreement allowed for material use/supply. The Revenue's appeal on this ground was rejected.

Issue 2: Deletion of addition under section 40A(3) of the IT Act:
The second ground concerned the deletion of Rs. 1,00,341 addition under section 40A(3). The CIT(A) ruled in favor of the appellant, citing Rule 6DD(g) of the Income Tax Rules, 1962. The appellant had to make cash payments at a remote location without banking facilities. The CIT(A) noted the exception under section 40A(3) for such cases. The ITAT concurred, emphasizing that the site lacked banking services, justifying the cash payments. The Revenue's appeal on this ground was also dismissed.

General Grounds:
Grounds 3, 4, and 5, being general in nature, required no separate analysis. The ITAT pronounced the order, dismissing the Revenue's appeal.