2017 (6) TMI 918 - AT - Income Tax

Disallowance u/s 40A(3) - payment of expenditure in cash - CIT-A relied on sub rule (j) of 6DD for deleting disallowance - claim of the assessee that it was on account of business expediency that such payments were made - Held that - We find that the said rule apply for payments made on a day on which banks are closed. Nevertheless there is much strength in the contention of the ld. Authorised Representative that exceptional situations mentioned in Rule 6DD are not exhaustive. Hon ble Delhi High Court in the case of Basu Distributor vs. ITO 2006 (12) TMI 104 - DELHI High Court has held that there could be exceptional and unavoidable circumstances that may not find a place in Rule 6DD which would still be a reasonable ground for not applying the rigours of Sec. 40A(3) of the Act. Ld. Commissioner of Income Tax (Appeals) had given a clear finding that assessee could demonstrate business expediency which justified the payments being made in cash. We cannot find any lacuna in this finding of the ld. Commissioner of Income Tax (Appeals). For deposits made in Karur Vysa Bank Ltd, a clear finding has been given by the CIT(A) that it was proceeds of the deposits made by the assessee in the year 2005-06. Ld. Commissioner of Income Tax (Appeals) has also noted that assessee had accounted accrued interest of B77,188/-. Revenue has also not raised ground citing violation of Rule 6DD. We are therefore of the opinion that ld. Commissioner of Income Tax (Appeals) was justified in deleting both the additions. - Decided in favour of assessee.

Issues Involved:
1. Deletion of addition made under Section 40A(3) for cash payments.
2. Deletion of disallowance under Section 14A for expenditure related to exempt dividend income.
3. Treatment of credits in the current account as unexplained income under Section 68.
4. Procedural error in starting the computation from the assessed income instead of the returned income.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 40A(3) for Cash Payments:
The Revenue contended that the CIT(A) erred in deleting the addition made by the Assessing Officer (AO) under Section 40A(3) due to cash payments for land purchases. The AO disallowed cash payments totaling ?22,11,500 (?21,75,000 in the original assessment and ?36,500 in the fresh assessment). The CIT(A) deleted these additions, citing business expediency and referring to Rule 6DD(j), which exempts payments made on bank holidays. However, the Tribunal noted that Rule 6DD(j) was not applicable since the payments were not made on bank holidays. Despite this, the Tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's ruling in Basu Distributor vs. ITO, which allows for exceptional and unavoidable circumstances not explicitly covered by Rule 6DD. The Tribunal found no error in the CIT(A)'s conclusion that the payments were made out of business expediency.

2. Deletion of Disallowance under Section 14A for Expenditure Related to Exempt Dividend Income:
The Revenue argued that the CIT(A) wrongly deleted the disallowance of expenses related to earning exempt dividend income. The AO had disallowed a portion of the expenses attributable to the exempt income. The CIT(A) deleted this disallowance, accepting the assessee's claim that the investments generating the dividend income did not involve any expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the Revenue did not provide sufficient evidence to counter the assessee's claim.

3. Treatment of Credits in the Current Account as Unexplained Income under Section 68:
The AO treated credits of ?10,77,188 in the assessee's current account as unexplained income under Section 68. The CIT(A) deleted this addition, finding that the credits were proceeds from fixed deposits made by the assessee in an earlier year. The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee had satisfactorily explained the source of the credits.

4. Procedural Error in Starting Computation from Assessed Income:
The Tribunal noted a procedural error by the AO in starting the computation from the assessed income of ?1,81,40,652 instead of the returned income of ?87,05,011. The CIT(A) correctly identified this error and stated that the AO should have begun the computation from the returned income, as the original assessment had been set aside under Section 263. The Tribunal agreed with this finding and emphasized that the AO should have confined the fresh assessment to the additions made during the reassessment process.

Conclusion:
The Tribunal dismissed the Revenue's appeals for both assessment years 2008-09 and 2009-10 and allowed the cross objections of the assessee. The Tribunal upheld the CIT(A)'s decisions to delete the additions under Section 40A(3) and Section 68 and to correct the procedural error in the computation of income. The Tribunal also agreed with the CIT(A)'s handling of the disallowance under Section 14A. The result was a comprehensive affirmation of the CIT(A)'s findings and a rejection of the Revenue's contentions.

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