2014 (6) TMI 631 - AT - Income Tax

Enhancement of disallowance u/s 40A(3) - scope of the term expenditure - Cash payment of Rs. 52.88 lakhs for purchase of land - payment made before registration even on Sundays Held that - The assessee has debited/charged an amount towards purchases account-land to the Profit and Loss A/c - the word expenditure has not been defined in Income-tax Act Relying upon Indian Molasses Co. Ltd. vs. CIT 1959 (5) TMI 5 - SUPREME Court - expenditure is what is paid out or away and is something which is gone irretrievably - the assessee has not claimed the payment as expenditure in the Profit and Loss A/c - It is an item of payment to sundry creditors viz., P. Srinivas & SLN Real Estate (Landlord) Account and not debited to the Profit and Loss A/c. as an expenditure the amount paid by the assessee cannot be construed as an expenditure charged to Profit and Loss A/c - When the amount paid by the assessee had not been claimed as deductible expenditure while computing the business income provisions of section 40A(3) cannot be applied. Mere entry in the books of account will not change the character of the transaction - there is no dispute that the payments are made on Sunday where there is banking holiday on that day - the payment is not required to be made when the banks are closed i.e. after banking hours - the purpose of the disallowance u/s 40A (3) is to dissuade transactions by cash - no banking facility is available where the properties were purchased by the assessee or payments were made on holidays i.e., Sundays, therefore, there was no choice for the assessee except to make the payments in cash due to exceptional or unavoidable circumstances as provided under Rule 6DD. thus, the disallowance u/s 40A(3) of the Act is not warranted Decided in favour of Assessee. Estimation of income Held that - CIT(A) deleted the addition on the basis that books of account are not rejected to estimate income of the assessee - certain expenditure towards labour and other miscellaneous expenditure are self-vouched and not verifiable - AO estimated the income at 10% of the sales and given deduction towards interest to partners - the estimation by the AO is reasonable and was accepted by the assessee during the course of assessment by signing the order-sheet - deduction cannot be deleted and is to be confirmed Decided in favour of Revenue.

Issues Involved:
1. Enhancement of disallowance under Section 40A(3) of the Income-tax Act, 1961.
2. Deletion of addition made towards disallowance on account of Section 40A(3) payments.
3. Rejection of books of account and estimation of income.
4. Verification of exceptional and unavoidable circumstances under Rule 6DD of Income-tax Rules, 1962.

Detailed Analysis:

Issue 1: Enhancement of Disallowance under Section 40A(3)
The assessee appealed against the enhancement of disallowance under Section 40A(3) from Rs. 52.88 lakhs to Rs. 386.77 lakhs. The CIT(A) observed that payments in excess of Rs. 20,000 were made otherwise than by crossed cheque or DD, amounting to Rs. 386.77 lakhs. The assessee contended that the payments were made under unavoidable circumstances as per Rule 6DD(J) and were not charged to the Profit and Loss Account as an expenditure. The assessee also argued that the income was estimated, and therefore, no addition under Section 40A(3) should be made.

Issue 2: Deletion of Addition Made Towards Disallowance on Account of Section 40A(3) Payments
The Revenue argued that the CIT(A) erred in deleting the addition, ignoring the fact that it was an agreed addition, and the assessee's AR had signed the order sheet accepting such addition. The CIT(A) deleted the addition of Rs. 22,83,144 on the grounds that the AO had not found the books of account incomplete nor identified correct number of unverifiable vouchers. The CIT(A) also noted that the AO did not confront the assessee with the material relied upon to estimate the income.

Issue 3: Rejection of Books of Account and Estimation of Income
The AO estimated the income at 10% of the sales, pointing out that certain expenditures were self-vouched and not verifiable. The CIT(A) accepted the book results but enhanced the payments under Section 40A(3). The Revenue contended that if the books of account were rejected, the question of Section 40A(3) payments would not arise. The Tribunal found the AO's estimation reasonable and noted that the AR of the assessee had accepted it during the assessment by signing the order-sheet.

Issue 4: Verification of Exceptional and Unavoidable Circumstances under Rule 6DD
The assessee claimed that payments were made under exceptional and unavoidable circumstances, as there were no banking facilities available in the village where the payments were made, and the payments were made on Sundays. The Tribunal noted that the assessee's principal office was in Ranga Reddy District, with a branch office in Nizamabad, surrounded by banks. The Tribunal found that the assessee did not provide sufficient evidence to prove the exceptional and unavoidable circumstances for cash payments. The Tribunal also noted that the assessee and the AOP had bank accounts and should have used banking channels for transactions.

The Tribunal observed that the amount paid by the assessee was not claimed as an expenditure in the Profit and Loss Account but was shown as a current liability in the Balance Sheet. Therefore, the provisions of Section 40A(3) could not be applied. The Tribunal concluded that the payments were made on Sundays, and there was no choice for the assessee except to make the payments in cash due to exceptional or unavoidable circumstances. Consequently, the Tribunal set aside the order of the CIT(A) and deleted the addition of Rs. 386.77 lakhs made under Section 40A(3).

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance under Section 40A(3) and deleted the addition of Rs. 386.77 lakhs. The Tribunal also allowed the Revenue's appeal, confirming the AO's estimation of income at 10% of the sales. Both the revenue and assessee's appeals were allowed. The order was pronounced in Open Court on 30th May, 2014.

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