2019 (9) TMI 1228 - AT - Income Tax

Addition u/s 40A(3) on account of payment in cash - genuineness of the transactions - HELD THAT - Since the genuinity of the payments made to the party is not doubted by the revenue, the provisions of section 40A(3) could not be made applicable to the facts of the instant case - assessee had taken enough precautions from his side to ensure that the payee also don't escape from the ambit of taxation on these receipts by paying cash. This fact is also not disputed by the revenue - consequence, which were to befall on account of non-observation of section 40A(3) must have nexus to the failure of such object. Assessee made bank draft of ₹ 5,00,000/- to pay to M/s Mahima Alekha Coal Traders, but he refused to take bank draft therefore in order to run the business the assessee did not have any option but to make payment in cash. Had the assessee not been paid cash to M/s Mahima Alekha Coal Traders, his business would have been stopped or restricted to that extent. The purpose of section 40A (3) is not to restrict the assessee s genuine business activity. As genuineness of the transactions and identity of the payee is established. Assessee has proved the pressing circumstances. The assessee acted with bona fide intention, as he made demand draft of the bank to make the payment to payee but later on it was cancelled on the request of the payee therefore, intention of the assessee was to make payment through banking channel only. This is exceptional circumstances where the assessee made payment in cash. It is observed that the assessee had taken enough precautions from his side.Hence, in the facts and circumstances as discussed above, the payment should not be disallowed as held in the case of Girdharilal Soni vs. CIT 1989 (3) TMI 84 - CALCUTTA HIGH COURT - Decided in favour of assessee. Ad hoc additions - addition of purchases from 13 parties, carriage and wages and Transport charges - Non rejection of books of accounts - HELD THAT - Here in this case,assessee submitted books of accounts and details during the assessment proceedings, however, the AO has passed order u/s 144/147 of the Act. The AO thus without rejecting the books of account of the assessee has gone for estimation on suspicion and conjectures that the assessee may be inflating its various expenses. While scrutinizing the expenditure if the expenses claimed are not having any nexus to the business of the assessee or if there is deficiency in the vouchers or there is no bills supporting the incurrence of an expenditure, at the most expenses to the extent that are not supported by the vouchers can be held to be non-genuine and can be disallowed by the AO; and item-wise the AO could have disallowed the expenditure rather than going for ad hoc disallowance of percentage basis of the expenses claimed by the assessee which action of the AO is arbitrary in nature and cannot be sustained. Therefore, the various ad hoc additions is to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition of ?5,00,000 under Section 40A(3) of the Income Tax Act.
2. Estimated addition of ?2,58,086 out of purchases from 13 parties.
3. Estimated additions of ?46,972 and ?62,284 on carriage and wages.
4. Estimated addition of ?3,56,114 on transportation charges.

Issue-wise Detailed Analysis:

1. Addition of ?5,00,000 under Section 40A(3) of the Income Tax Act:

The primary issue revolves around the addition of ?5,00,000 made by the Assessing Officer (AO) under Section 40A(3) of the Income Tax Act due to the assessee's cash payment to M/s Mahima Alekha Coal Traders. The AO observed that the payment was made in contravention of the provisions of Section 40A(3), which mandates that payments above a certain threshold should be made through crossed cheque or bank draft to curb tax evasion and inculcate banking habits. The assessee argued that the payment was made in cash due to business expediency and the insistence of the payee. The AO, however, disallowed the payment, adding it back to the total income.

The Tribunal noted that the assessee initially attempted to make the payment through a bank draft, which was refused by the payee, necessitating the cash payment to continue the business operations. The Tribunal emphasized that the genuineness of the transaction and the identity of the payee were not in doubt. It referenced the intention behind Section 40A(3), which is to prevent tax evasion and ensure genuine transactions. Given the bona fide nature of the transaction and the business exigency, the Tribunal concluded that the provisions of Section 40A(3) should not apply and deleted the addition of ?5,00,000.

2. Estimated Addition of ?2,58,086 out of Purchases from 13 Parties:

The AO made an estimated addition of ?2,58,086 on purchases from 13 parties without rejecting the assessee's books of accounts. The Tribunal observed that the AO did not find any specific mistakes in the books and did not examine the expenditure item-wise. The Tribunal emphasized that without rejecting the books of accounts under Section 145(3), the AO should not have made an ad hoc disallowance. The Tribunal held that the AO's action was arbitrary and directed the deletion of the estimated addition.

3. Estimated Additions of ?46,972 and ?62,284 on Carriage and Wages:

Similar to the previous issue, the AO made estimated additions of ?46,972 and ?62,284 on carriage and wages without rejecting the books of accounts. The Tribunal reiterated that the AO should have scrutinized the expenditure item-wise and disallowed only those expenses that were not supported by vouchers or did not have a nexus to the business. The Tribunal found the AO's approach of making ad hoc disallowances without proper examination to be arbitrary and directed the deletion of these additions.

4. Estimated Addition of ?3,56,114 on Transportation Charges:

The AO made an estimated addition of ?3,56,114 on transportation charges, again without rejecting the books of accounts. The Tribunal reiterated its stance that the AO should have examined the expenses item-wise and disallowed only non-genuine expenses. The Tribunal found the AO's ad hoc disallowance to be arbitrary and directed the deletion of this addition as well.

Conclusion:

The Tribunal allowed the appeal of the assessee, deleting all the additions made by the AO. The Tribunal emphasized the importance of examining expenses item-wise and the need for the AO to reject the books of accounts before making any ad hoc disallowances. The Tribunal's decision underscores the principle that genuine business transactions should not be disallowed under Section 40A(3) if they are made under bona fide business exigencies.