2018 (10) TMI 1437 - AT - Income Tax

Addition u/s 40A(3) - cash payments made through the agents of suppliers - purchase of building materials for the purpose of construction - Held that - The primary object of enacting section 40A(3) were two folds, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequence, which were to fall on account of non-observation of Section 40A(3) must have nexus to the failure of such object. Therefore, the genuineness of the transactions being free from vice of assessment any device of evasion of tax is relevant consideration. The assessee being a contractor frequently purchased building materials from various suppliers through their agents. The agents have flexibility to the assessee to make payments in installments. However, for giving such facility they required payments to be made in cash only. The assessee was compelled to make cash payments in excess of ₹ 20,000/-. In the instant case, the assessee had also established the circumstances under which the payment in the manner prescribed in section 40A(3) of the Act was not practicable or would have caused genuine problems and hence the business expediency is proved beyond doubt. This has not been controverted by the ld DR before us. Thus we direct the ld AO to delete the disallowance made u/s 40A(3). - Decided in favour of assessee. Disallowance u/s 40(a)(ia)- non deduction of tds on account of carriage inwards - retrospectivity of amendment - Held that - In view of the amendment to second proviso to section 40(a)(ia) read with section 201(1) of the Act, if the payees have included the subject mentioned receipts in their returns and paid taxes thereon, if any, then the disallowance u/s 40(a)(ia) of the Act would not operate in the hands of the payer. This second proviso though introduced by the Finance Act 2012 w. e. f. 1. 4. 2013 had been held to be retrospective in operation in the case of Principal CIT vs Tirupati Construction 2016 (8) TMI 1310 - CALCUTTA HIGH COURT . Hence in the interest of justice and fairplay, we deem it fit and appropriate, to remand this issue to the file of the ld AO for denovo adjudication of the issue in the light of second proviso to section 40(a)(ia) - Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Disallowance under section 40A(3) of the Income Tax Act, 1961.
2. Disallowance under section 40(a)(ia) of the Income Tax Act, 1961.

Issue 1: Disallowance under section 40A(3) of the Income Tax Act, 1961:
The appeal involved a dispute regarding the disallowance made under section 40A(3) of the Act amounting to ?9,08,882. The Assessing Officer disallowed this amount as the payments for building materials were made in cash in violation of the provisions of section 40A(3). The Appellate Tribunal noted that the genuineness of the expenditure was not in dispute, and the payments were made for business purposes through the agents of suppliers. The Tribunal analyzed the purpose of section 40A(3) to prevent tax evasion and promote banking habits. Referring to legal precedents, the Tribunal concluded that in the peculiar circumstances of the case, where cash payments were necessitated due to business expediency, the disallowance was not justified. Therefore, the Tribunal directed the Assessing Officer to delete the disallowance made under section 40A(3) of the Act.

Issue 2: Disallowance under section 40(a)(ia) of the Income Tax Act, 1961:
The second issue pertained to the disallowance made under section 40(a)(ia) of the Act amounting to ?3,84,922 on account of carriage inwards. The Assessing Officer disallowed this amount as tax deduction at source was not done for payments exceeding ?50,000 to certain parties. The Tribunal noted that the payees had included the receipts in their returns and paid taxes, as confirmed by the Assessing Officer. Considering the retrospective operation of the second proviso to section 40(a)(ia) introduced by the Finance Act 2012, the Tribunal remanded the issue to the Assessing Officer for fresh adjudication. The Tribunal allowed the assessee to provide additional evidence in support of its claim. Consequently, the Tribunal allowed the revised grounds raised by the assessee for statistical purposes.

In conclusion, the Appellate Tribunal, in the cited judgment, addressed two key issues related to disallowances under sections 40A(3) and 40(a)(ia) of the Income Tax Act, 1961. The Tribunal ruled in favor of the assessee on both issues, directing the Assessing Officer to delete the disallowances under section 40A(3) and remanding the issue under section 40(a)(ia) for fresh adjudication. The judgment emphasized the importance of business expediency and compliance with tax provisions in determining the allowability of expenses and tax deductions.