2017 (7) TMI 662 - AT - Income Tax

Addition u/s 40A (3) - Held that - It is evident that the factum of the genuineness of payments and identity of the payees has not been doubted by the lower authorities and that the principle of Commercial expediency of the payment has been ignored. Thus we hold that order of the ld CIT(A) is not based on finding of facts or correct application of law. We, accordingly hold that CIT(A) was not justified in upholding the addition of ₹ 80,024/- made by the Ld AO U/s 40A(3) of the Act. Addition on adhoc basis without rejecting the books of account and pointing out any specific instance of unverifiable or unvouched expense - Held that - The accounts maintained by the assessee have been audited in accordance with the provisions contained in the Act. The books of account have been accepted as true and correct for the purposes of computation of income from business. We, therefore, do 12 not find any justification in sustaining such an ad hoc or lump-sum disallowance by the ld CIT (A) without any basis. Therefore, we are of the considered view, that no such adhoc disallowance, can be justified. Accordingly, the adhoc disallowance confirmed by the by the CIT (A) at ₹ 2,00,000/- out of various expenses is deleted

Issues Involved:

1. Addition of ?80,024/- under Section 40A(3) of the Income Tax Act.
2. Disallowance of ?2,00,000/- out of total disallowance of ?4,09,304/- on an ad hoc basis without rejecting the books of account.

Issue-wise Detailed Analysis:

1. Addition of ?80,024/- under Section 40A(3) of the Income Tax Act:

The assessee challenged the addition of ?80,024/- made by the Assessing Officer (AO) under Section 40A(3) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] without appreciating the facts of the case. The AO noted payments exceeding ?20,000/- made in cash for "Staff Welfare" and "Vehicle Running and Maintenance Expense" and disallowed them under Section 40A(3). The CIT(A) confirmed the disallowance, stating that the case did not fall under any exemptions allowed under Rule 6DD.

The assessee argued that the payments were made in cash due to compelling circumstances, such as the payees not having bank accounts or refusing to accept cheques. The assessee contended that the purpose of Section 40A(3) was to check black money, not to disallow genuine expenses, and cited the proviso to Section 40A(3A), which applies to Section 40A(3) as well.

The Tribunal observed that the payments were genuine and made under compelling circumstances. The documentary evidence, such as confirmations and affidavits from the payees, supported the assessee's claim. The Tribunal noted that the intent of the legislature was to check tax evasion, not to punish genuine transactions. Citing the Supreme Court's judgment in Attar Singh Gurmukh Singh vs. Income Tax Officer, the Tribunal held that genuine and bona fide transactions are not excluded from the scope of Section 40A(3).

The Tribunal concluded that the assessee's case was covered by the proviso to Section 40A(3A) and the decision of the ITAT, Agra Bench, in the case of Tejveer Singh vs. ITO. Therefore, the CIT(A) was not justified in upholding the addition of ?80,024/- made by the AO under Section 40A(3). The addition was deleted, and the first ground of appeal was allowed.

2. Disallowance of ?2,00,000/- out of total disallowance of ?4,09,304/- on an ad hoc basis without rejecting the books of account:

The assessee challenged the ad hoc disallowance of ?2,00,000/- out of the total disallowance of ?4,09,304/- made by the AO without rejecting the books of account or pointing out any specific instance of unverifiable or unvouched expense. The AO disallowed 15% of certain expenses, such as conveyance, postage, telephone, stationery, and vehicle running expenses, due to incomplete vouchers.

The CIT(A) upheld the disallowance at ?2,00,000/-, considering it fair and reasonable. The assessee argued that its accounts were audited, and the auditors did not point out any defects. The AO did not reject the books of account or allege any expenses for non-business purposes or of capital nature. The assessee also contended that the AO did not raise any specific query on 18/03/2013, as alleged.

The Tribunal found that the disallowance was made on an ad hoc basis without pointing out any specific discrepancy. The books of account were not rejected, and no specific bill or voucher was found unverifiable. The Tribunal cited the ITAT, Ahmedabad Bench, in Monark Foods Pvt Ltd vs. ACIT, which held that ad hoc disallowances without pointing out specific defects are not justified. The Tribunal also referred to its own decision in Vigyor Overseas vs. ITO, where it held that ad hoc disallowances without any basis are not justified.

The Tribunal concluded that the accounts maintained by the assessee were audited and accepted as true and correct. Therefore, there was no justification for sustaining the ad hoc disallowance of ?2,00,000/-. The disallowance was deleted, and the second ground of appeal was allowed.

Conclusion:

The Tribunal allowed the appeal, deleting the addition of ?80,024/- under Section 40A(3) and the ad hoc disallowance of ?2,00,000/-. The third and fourth grounds of appeal were general in nature and did not require specific adjudication.

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