2016 (12) TMI 1404 - AT - Income Tax

Addition u/s 40A - Disallowing the payment for purchase of granites - vendors insisted for cash payment - Held that - We have carefully gone through the provisions of Rule 6DD of the Income-tax Rules, 1962 which categorically says that payment was made by any person to his agent, who is required to make payment in cash for goods or services on behalf of such person, the provisions of Section 40A(3) of the Act is not applicable. In this case, the assessee claims that M/s Rajham Impex and M/s Shri Bakia Trading Agency acted as agents for procuring granites on behalf of the assessee from quarry owners. Since the vendors insisted for cash payment, the assessee has to necessarily make cash payment to M/s Rajham Impex and M/s Shri Bakia Trading Agency so as to enable them to make payment in cash to the quarry owners. These facts were not in dispute. Therefore, in view of Rule 6DD(k) of Income-tax Rules, 1962, there cannot be any disallowance under Section 40A(3) of the Act. In view of the above discussion, this Tribunal is unable to uphold the orders of the lower authorities, accordingly the same are set aside. The addition made by the Assessing Officer is deleted.- Decided in favour of assessee Penalty levied under Section 271B - delay in filing audit report - Held that - The object of filing audit report is only to assist the Assessing Officer to determine the correct taxable income. Since the assessee has filed return of income along with the audit report, the purpose of statutory requirement is complied with. The delay in filing the audit report did not hamper the assessment proceeding in any way. Therefore, this Tribunal is of the considered opinion that there is no justification in levying penalty under Section 271B of the Act. Therefore, this Tribunal is unable to uphold the orders of the lower authorities, accordingly, the same are set aside and the penalty levied under Section 271B of the Act is deleted. - Decided in favour of assessee

Summary

Issues Involved
1. Legitimacy of granite purchases from M/s Rajham Impex and M/s Shri Bakia Trading Agency.
2. Application of Section 40A(3) of the Income-tax Act, 1961 regarding cash payments.
3. Levy of penalty under Section 271B of the Income-tax Act, 1961 for delayed audit report submission.

Detailed Analysis

Legitimacy of Granite Purchases
The assessee, engaged in the export of granites, claimed purchases from M/s Rajham Impex and M/s Shri Bakia Trading Agency. The Assessing Officer (AO) doubted these purchases based on inquiries that suggested these entities were non-existent. The AO disallowed the claims, asserting that the outstanding credit duration and single bill issuance were suspicious.

The assessee provided sales tax registrations, transportation bills, and bank statements to prove the existence and genuineness of transactions with these entities. Despite this, the AO relied on inspection reports from counterparts in Madurai and Trichy, which indicated the non-existence of the entities.

The Tribunal noted that the sales tax registration details and banking transactions substantiated the existence of the entities. The Tribunal emphasized that the AO's conclusion based on the inspection report was flawed, as the entities might have ceased operations by the time of the inspection. The Tribunal ruled that the material evidence provided by the assessee was sufficient to establish the existence and genuineness of the transactions.

Application of Section 40A(3)
The AO disallowed the payments under Section 40A(3) of the Act, which restricts cash payments exceeding a specified limit. The Tribunal found this contradictory, as the AO's acceptance of cash payments implied the existence of the entities. The assessee argued that the payments were made in cash because the vendors insisted on it, and these payments were made through self-cheques.

The Tribunal referred to Rule 6DD of the Income-tax Rules, 1962, which exempts certain cash payments from the restrictions of Section 40A(3) if made to agents who then pay on behalf of the payer. The Tribunal accepted the assessee's claim that the entities acted as agents procuring granites from quarry owners, necessitating cash payments. Thus, the Tribunal ruled that the disallowance under Section 40A(3) was unjustified and deleted the addition.

Levy of Penalty under Section 271B
The AO levied a penalty under Section 271B for the delayed submission of the audit report. The assessee explained that due to the illness and subsequent deaths of his parents, and ensuing family disputes, he could not finalize the accounts on time. The audit report was eventually filed along with the return of income.

The Tribunal found the assessee's explanation reasonable and noted that the audit report was filed before the completion of the assessment. The delay did not impede the assessment process. The Tribunal concluded that there was no justification for the penalty and set aside the orders of the lower authorities, thereby deleting the penalty.

Conclusion
The Tribunal allowed both appeals of the assessee, ruling in favor of the legitimacy of the granite purchases, the inapplicability of Section 40A(3) disallowance, and the deletion of the penalty under Section 271B.