2016 (1) TMI 941 - HC - Income Tax

Assumption of jurisdiction under section 263 - disallow the cash purchases in terms of Section 40A(3) - Held that - Without examining the details of the expenditure involved, the assessing officer accepted the sales turnover reported by the assessee and allowed the benefit of deduction under section 40A(3). The question as to whether the assessee had made payments in excess of ₹ 20,000/- on a single day to a single person was not examined by the assessing officer. This is an error that led the Commissioner to initiate proceedings under section 263. The fact that this aspect was not gone into by the assessing officer in his scrutiny assessment order dated 31.3.2003 is borne out from para 3 of the said order. Once it is seen that such an error was committed, the next question is as to whether the same was prejudicial to the interest of the Revenue or not. The answer to this question is too obvious for any elaborate detail.If the assessee is not entitled to a deduction under section 40A(3), the income chargeable to tax will go up and the tax payable by him will naturally go up. If it is not, the benefit goes to the assessee. Therefore, it is clear that this is a case which satisfies the twin requirements under section 263(1). - Decided against assessee Applicability of the provisions of section 40A(3) - Held that - The details furnished in the show cause notice dated 18.2.2005 by the Commissioner show that the assessee had admittedly made payments of ₹ 1,00,000/- on three different dates viz., 1.10.1999, 14.10.1999 and 20.10.1999. The assessee had made payments of ₹ 2,00,000 on 31.10.1999, 2.11.1999 and 3.11.1999. All those payments are indicated in the books of accounts of the assessee to have been made to a supplier by name Standard Fireworks . Similarly payments have been made to another supplier by name Sivakasi Fireworks . Since the name of one supplier mentioned in the books of accounts of the assessee himself to whom a payment of more than ₹ 20,000/- had been made on everyone of those days, the contingencies stipulated in sub-section (3) of section 40A have arisen. - Decided against the assessee. Business compulsions and expediency in making the cash purchases - Held that - We are not for a moment to be understood to suggest that the books of accounts should have been more carefully drawn. All that we are suggesting is that atleast the names of the agencies or agents or retailers to whom payments were made on a day to day basis, on behalf of the original manufacturers should have been mentioned. In the absence of any specific detail, the vague statements made in response to the show cause notice, cannot offset the entries made in the books of accounts. Therefore, we cannot find fault with the conclusion reached either by the Commissioner or by the Tribunal in this regard. Hence, question of law is answered against the assessee. Applicability of Rule 6DD of the Income Tax Rules, 1969 - Held that - Unfortunately, the assessee neither pleaded nor proved the existence of any one of those circumstances indicated in Rule 6DD. Therefore, Rule 6DD cannot also go to the rescue of the appellant/assessee. - Decided against the assessee.

Summary

Issues Involved:
1. Validity of the Commissioner of Income Tax's revision of assessment under Section 263 of the Income Tax Act, 1961.
2. Applicability of Section 40A(3) of the Income Tax Act, 1961.
3. Consideration of business expediency in making cash purchases.
4. Application of Rule 6DD of the Income Tax Rules, 1962.

Detailed Analysis:

1. Validity of the Commissioner of Income Tax's Revision of Assessment under Section 263:
The court addressed the assumption of jurisdiction under Section 263, which allows the Commissioner to revise an assessment if it is erroneous and prejudicial to the interest of the Revenue. The Commissioner found that the assessing officer did not examine whether payments exceeding Rs. 20,000 were made in cash, which is a requirement under Section 40A(3). This oversight was deemed an error that was prejudicial to the Revenue, thus justifying the revision under Section 263. Consequently, the court ruled that the twin requirements under Section 263(1) were satisfied, and the assumption of jurisdiction was valid. Both questions related to this issue were answered against the assessee.

2. Applicability of Section 40A(3):
Section 40A(3) disallows deductions for expenditures exceeding Rs. 20,000 made in cash to a single person in a day. The assessee had made several such payments to suppliers, which were clearly recorded in the books of accounts. The court found that the conditions stipulated in Section 40A(3) were met, and therefore, the disallowance of such expenditures was justified. The third question was answered against the assessee.

3. Consideration of Business Expediency:
The court examined the proviso to Section 40A(3), which allows for exceptions based on the nature and extent of banking facilities, business expediency, and other relevant factors. The assessee argued that payments were made in cash due to business compulsions, such as dealing with agents and retailers in villages. However, the books of accounts did not reflect these claims, showing instead consolidated payments to suppliers. The court held that the vague explanations provided could not offset the clear entries in the books of accounts. Therefore, the fourth question was answered against the assessee.

4. Application of Rule 6DD:
Rule 6DD provides exceptions to the disallowance under Section 40A(3) in certain circumstances, such as transactions made in places without banking facilities or on bank holidays. The court noted that the assessee neither pleaded nor proved any of these exceptional circumstances. Therefore, Rule 6DD could not be applied to justify the cash payments. The fifth question was answered against the assessee.

Conclusion:
All five questions of law were answered against the assessee. The court upheld the validity of the Commissioner's revision under Section 263, the applicability of Section 40A(3), and rejected the claims of business expediency and exceptional circumstances under Rule 6DD. Consequently, both tax case appeals were dismissed.