2017 (9) TMI 570 - AT - Income Tax

Disallowance u/s.40A(3) - whether the payment was genuine or whether it was out of the income from undisclosed sources - CIT-A allowed claim - violating Rule 46A, as fresh evidence was introduced and no remand report was called for - AO was not afforded an opportunity on the additional evidence filed by the Assessee - Held that - We are of the view that Sec.250(4) and Rule 46A of the Rules operate on totally different fields. While Sec.250(4) of the Act deals with power of the CIT(A) to make enquiries on his own before deciding an appeal, Rule 46A of the Rules lays down the manner in which or the restrictions subject to which the CIT(A) can exercise his power. We are of the view that while exercising such power u/s.250(4) of the Act, the CIT(A) would be subject to the restriction laid down in Rule 46A of the Act. In other words Sec.250(4) of the Act does not override the duty cast on the part of the CIT(A) to afford opportunity to the AO to have his say on the additional evidence produced by an Assessee before the CIT(A). We are therefore of the view that the issue should be remanded to the CIT(A) for the limited purpose to enable the CIT(A) to afford opportunity to the AO for verifying the veracity of the Certificate filed by the Assessee as additional evidence before the CIT(A). The question whether the CBDT Circular No.8 of 2006 will apply to the facts of the case should also be left open for comments by the AO in his remand report. The said CBDT Circular talks of payment by purchaser of meat from a producer of livestock and meat. If applied to the facts of the present case, it might apply to the Military/Defence establishments making payment in cash to the Assessee. As to whether it will apply to payments made by a producer of meat or livestock for purchase of livestock and chicken is also an issue which needs to be decided. The scope of remand by the Tribunal includes all aspects of the disallowance u/s.40A(3) of the Act and since the AO was not afforded an opportunity on the additional evidence filed by the Assessee, this aspect also should be left open and cannot be construed as enlarging the scope of the proceedings before CIT(A) than what was contemplated by the Tribunal while remanding the issue vide its order dated 9.3.2011. The CIT(A) after taking into consideration the remand report of the AO and after affording opportunity of being heard to the Assessee is directed to decide the issue in accordance with law. The appeals of the revenue are thus treated as allowed for statistical purpose.

Summary

Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act, 1961.
2. Admissibility of additional evidence under Rule 46A of the Income Tax Rules, 1962.
3. Application of CBDT Circular No. 8/2006.

Detailed Analysis:

1. Disallowance under Section 40A(3) of the Income Tax Act, 1961:
The primary issue in the appeals by the Revenue and the grounds raised in the cross objections pertains to the disallowance under Section 40A(3) of the Income Tax Act, 1961. This section mandates that any expenditure exceeding ?20,000 must be made through a crossed cheque or bank draft, failing which 20% of such expenditure shall not be allowed as a deduction. The provision aims to counter tax evasion by ensuring that payments are traceable and genuine. The Assessee, a partnership firm engaged in supplying dressed meat to Defense/Military Authorities, made cash payments exceeding ?20,000 to local farmers for purchasing live goats and chicken. The Assessing Officer (AO) disallowed 20% of these expenses, invoking Section 40A(3).

2. Admissibility of additional evidence under Rule 46A of the Income Tax Rules, 1962:
The CIT(A) initially upheld the AO's disallowance, as the Assessee failed to provide a veterinary doctor's certificate confirming that the Assessee was a producer of meat. However, upon further appeal, the ITAT remanded the case to the CIT(A) for fresh consideration, allowing the Assessee to submit new evidence, including a certificate from a Military Veterinary Doctor. The CIT(A), upon remand, deleted the addition made by the AO, relying on this new evidence. The Revenue contended that the CIT(A) violated Rule 46A by not providing the AO an opportunity to examine the additional evidence. The Tribunal agreed with the Revenue, emphasizing that Rule 46A requires the AO to be given a reasonable opportunity to examine any additional evidence submitted by the Assessee. The Tribunal concluded that the CIT(A) should have called for a remand report from the AO to verify the veracity of the certificate provided by the Assessee.

3. Application of CBDT Circular No. 8/2006:
The Assessee argued that the payments were covered under Rule 6DD(f)(ii) of the Income Tax Rules, which exempts certain payments from the restrictions of Section 40A(3). Specifically, the Assessee claimed that the payments were made for the purchase of meat, a product of animal husbandry, and thus should not be disallowed. The Assessee relied on CBDT Circular No. 8/2006, which clarifies that persons buying animals from farmers, slaughtering them, and selling the raw meat carcasses are considered producers of livestock and meat. The CIT(A) accepted this argument and deleted the disallowance. However, the Tribunal noted that the applicability of this circular to the Assessee's case needed further examination. The Tribunal directed the CIT(A) to allow the AO to comment on whether the circular applied to the Assessee's transactions and to decide the issue accordingly after considering the AO's remand report.

Conclusion:
The Tribunal remanded the matter to the CIT(A) for the limited purpose of allowing the AO to verify the additional evidence submitted by the Assessee and to comment on the applicability of CBDT Circular No. 8/2006. The CIT(A) was directed to decide the issue afresh after considering the AO's remand report and providing an opportunity for the Assessee to be heard. The appeals by the Revenue were treated as allowed for statistical purposes, while the cross objections by the Assessee were dismissed.