2019 (1) TMI 932 - AT - Income Tax

Disallowance of payments made to sub-contractors both on genuineness and u/s 40A(3) - assessee is engaged in the business of civil construction and excavation and evacuation of dry fly ash from the plant - Held that - From perusal of the cash book of the three sub-contractors and the assessee and found that the assessee had not made cash payments exceeding ₹ 20,000/- on a single day . Hence there is no violation of provisions of section 40A(3) of the Act. Admittedly, the ledger accounts of sub-contractors were obtained by the ld AO directly from the sub-contractors u/s 133(6) of the Act, wherein these facts were found. These details were obtained admittedly by the ld AO behind the back of the assessee and nothing adverse was found thereon. Moreover, we find that the AR rightly drew our attention to the relevant page of the paper book containing work orders wherein the sub-contractors had mandated payments to be made to them in cash every day to meet their day to day expenses for daily labour and lorry hire for smooth execution of the work. Hence business expediency of making cash payments on a regular basis is also proved by the assessee in the instant case. CIT-A had rightly deleted the disallowance of expenditure on account of genuineness and also u/s 40A(3) of the Act, which in our considered opinion, does not call for any interference - decided against revenue

Summary

Issues Involved:
1. Deletion of disallowance of payments made to sub-contractors on the grounds of genuineness.
2. Disallowance under Section 40A(3) of the Income Tax Act, 1961.

Issue-wise Analysis:

1. Deletion of Disallowance of Payments Made to Sub-contractors on the Grounds of Genuineness:

The core issue was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the disallowance of payments made to sub-contractors based on their genuineness. The assessee, engaged in civil construction and excavation, subcontracted work to various parties, including M/s Elecon Engineering Co., M/s Novel Engineering, and M/s M Construction, paying a total of ?4,49,72,243/- to 16 sub-contractors.

The Assessing Officer (AO) issued notices under Section 133(6) of the Income Tax Act to verify these transactions. The sub-contractors confirmed the work and payments received in cash, with due tax deducted at source. Despite these confirmations, the AO disallowed payments to three sub-contractors totaling ?1,34,67,807/-.

The CIT(A) found that the AO had not made any further inquiries or confronted the assessee or sub-contractors after receiving the confirmations. The CIT(A) noted that the transactions were genuine, supported by work orders, books of accounts, and tax deductions. The sub-contractors had been engaged by the assessee in previous and subsequent years without issues. The CIT(A) concluded that the AO's disallowance was based on assumptions and not on substantive evidence.

The Tribunal upheld the CIT(A)'s decision, noting that the AO had not disproved the genuineness of the transactions. The Tribunal emphasized that the sub-contractors' confirmations and the absence of defects in the books of accounts supported the genuineness of the transactions. The Tribunal dismissed the revenue's appeal on this ground.

2. Disallowance under Section 40A(3) of the Income Tax Act, 1961:

The AO also invoked Section 40A(3) to disallow payments made in cash exceeding ?20,000/- in a day. The assessee contended that no individual payment exceeded ?20,000/-, and this was supported by the cash book and ledger accounts.

The CIT(A) reviewed the cash book and ledger accounts and found no payments exceeding ?20,000/- on any single day. The CIT(A) noted that the AO had obtained information from sub-contractors under Section 133(6), which confirmed the compliance with Section 40A(3). The CIT(A) concluded that the AO wrongly invoked Section 40A(3) and deleted the disallowance.

The Tribunal agreed with the CIT(A), noting that the payments were made within the prescribed limit and were necessary for business expediency, such as daily labor and lorry hire. The Tribunal found no violation of Section 40A(3) and upheld the deletion of the disallowance.

Conclusion:

The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decision to delete the disallowance of payments to sub-contractors on the grounds of genuineness and non-violation of Section 40A(3). The Tribunal emphasized the importance of substantive evidence and business expediency in such cases.