2016 (8) TMI 642 - AT - Income Tax

Disallowance made under section 40A(3) - Held that - Assessing Officer has observed that the assessee failed to produce any evidence in support of his claim however the recording of the expenses in the unaccounted cash book maintained in the laptop has not been disputed by the Assessing Officer. Further the Assessing Officer has not examined the correctness of the claim by verification of the entries maintained in the laptop as well as by examining the recipient of the said amount. Since the corresponding addition has been made by the Assessing Officer in respect of on money received by the assessee then the claim of on money payments by the assessee also required to be examined by considering the fact whether the recipient has accepted this amount and offered the same as income for tax. Accordingly, in the facts and circumstances of the case when the Assessing Officer prima facie accepted the payment while making the disallowance under Section 40A(3) of the Act then for making a disallowance of the said amount under Section 37(1) of the Act a detailed and proper enquiry is required to be conducted. Accordingly, we are of the view that this issue requires a proper enquiry and consequently set aside to the record of the Assessing Officer for proper enquiry and verification and then decide the same. We make it clear that so far as the disallowance made under Section 40A(3) of the Act the same is found to be proper and therefore issue of enhancement for the balance amount made by the CIT (Appeals) is set aside to the record of the Assessing Officer. Enhancement of assessment inter alia on account of suppression of profit - Held that - Prima facie it appears that this amount of ₹ 16 lakhs was part of the opening balance of the land purchased and was not part of the expenditure claimed during the year. The CIT (Appeals) has made this addition on the basis of the reply filed by the assessee without verification of the books of accounts whether this amount was paid by the assessee in the earlier year which was already accounted for in the books of accounts or not. Further it was also not verified whether while computing the profit the assessee has suppressed this amount on account of wrong claim or this amount was not part of the expenditure during the year under consideration. Accordingly in the facts and circumstances of the case, we set aside this issue to the record of the Assessing Officer to verify the relevant record and facts as explained by the assessee and then decide this issue as per law after affording an opportunity of hearing to the assessee.

Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act.
2. Enhancement of disallowance by CIT (Appeals) on account of additional compensation.
3. Addition of ?28 lakhs.
4. Addition of ?16 lakhs.

Detailed Analysis:

1. Disallowance under Section 40A(3) of the Income Tax Act:
The key issue revolves around the disallowance made under Section 40A(3) due to cash payments exceeding the prescribed limit. The facts leading to this issue include a search operation under Section 132 of the Act, which revealed unaccounted cash transactions. The assessee admitted to receiving ?10.10 crores, out of which ?7.56 crores were in cash and not accounted for in the books. The AO disallowed 20% of ?4.5 crores (cash payment) amounting to ?90 lakhs. The CIT (Appeals) confirmed this disallowance and further enhanced it by disallowing the remaining 80% under Section 37(1) of the Act.

The assessee's arguments against this disallowance included:
- The payment was made outside the books of accounts, and thus Section 40A(3) should not apply.
- The recipient of the amount offered it for tax, thus genuine transactions should not be disallowed.
- The payment was demanded in cash by the seller, falling under exceptions provided in Rule 6DD of IT Rules.

However, the Tribunal upheld the disallowance, stating that the provisions of Section 40A(3) are attracted due to the mode of payment being in cash. The Tribunal emphasized that genuine transactions must still comply with Section 40A(3) unless they fall under specific exceptions, which were not applicable in this case. The Tribunal also noted that the payment being outside the books of accounts does not exempt it from disallowance under Section 40A(3).

2. Enhancement of Disallowance by CIT (Appeals) on Account of Additional Compensation:
The CIT (Appeals) enhanced the disallowance by including an additional compensation of ?68.80 lakhs paid in cash. The assessee argued that this payment was part of the cost of acquisition and should be allowed as an expenditure against the income from the sale of land. However, the CIT (Appeals) disallowed this amount, stating it was not wholly and exclusively for business purposes and was not recorded in the books of accounts.

The Tribunal set aside this issue to the AO for proper enquiry and verification, emphasizing that while the disallowance under Section 40A(3) was upheld, the additional compensation required further investigation to determine its legitimacy as a business expense.

3. Addition of ?28 Lakhs:
The assessee did not press this ground during the hearing, and it was dismissed as not pressed.

4. Addition of ?16 Lakhs:
The CIT (Appeals) enhanced the income by ?16 lakhs, alleging suppression of profit. The assessee contended that this amount was part of the opening stock from a previous year and was incorrectly shown as an expenditure for the current year. The Tribunal found that the CIT (Appeals) made this addition without verifying the books of accounts. Therefore, the Tribunal set aside this issue to the AO for verification of the relevant records and facts.

Conclusion:
The appeal was partly allowed. The disallowance under Section 40A(3) was upheld, while the issues regarding additional compensation and the ?16 lakhs addition were remanded to the AO for further verification. The addition of ?28 lakhs was dismissed as not pressed.

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