2015 (10) TMI 1893 - AT - Income Tax

Disallowance u/s 40A(3) - assessee has filed the ledger extract of M/s Someshwara Fertilizers & Chemicals Ltd., and further argued that the AO and the CIT(A) were not justified in rejecting the books of assessee u/s 143(3) on the presumption that the entries in the books of assessee are not matching with the ledger extract of the said company i. E M/s Someshwara Fertilizers & Chemicals Ltd.- Held that - Under these circumstances, when there is lack of clarity the entries in the books of accounts of the assessee were not matching with the entries maintained by M/s Someshwara Fertilizers & Chemicals Ltd. we set aside the issue to the Assessing Officer to take appropriate steps such as issue of summons to M/s Someshwara Fertilizers & Chemicals for clarifying this mismatch and thereafter giving a reasonable opportunity to the assessee to decide the issue in accordance with law. - Decided in favour of assessee for statistical purposes.

Summary

Issues: Disallowance u/s 40A(3) of the IT Act, 1961

Analysis:
1. The Assessing Officer (AO) disallowed cash payments made to a party under section 40A(3) of the IT Act, 1961, as the cash payments shown in the assessee's books were less than Rs. 20,000 on each occasion, but the party's ledger obtained during a survey revealed that cash payments exceeded Rs. 20,000 on each occasion.
2. The AO issued summons to the party to produce their cash book and ledger, but there was no compliance. The AO did not accept the assessee's explanation that cash payments were made to sales representatives and entries were made in the party's books on the date of handover.
3. The AO relied on the Supreme Court decision in Attar Singh Gurmukh Singh case and Board's Circular No.717 to disallow the amount under section 40A(3) as the assessee failed to produce receipts or evidence to prove the genuineness of the payments.
4. The assessee appealed to the CIT(A), arguing that the payments were genuine, and the cash balance was available in the books. However, the CIT(A) upheld the AO's decision, stating that the assessee tried to avoid section 40A(3) by splitting payments and failing to produce receipts issued by the party.
5. The Tribunal allowed the assessee's appeal for statistical purposes, directing the Assessing Officer to clarify the mismatch between the entries in the assessee's books and the party's ledger by issuing summons to the party for further verification.

This judgment highlights the importance of complying with section 40A(3) requirements, proving the genuineness of payments, and maintaining accurate records to avoid disallowances. The decision emphasizes the need for clear documentation and evidence to support cash transactions, especially when discrepancies arise during assessments or surveys.