2020 (1) TMI 968 - AT - Income Tax

Disallowance u/s 37(1) - payments have been incurred by way of cash and hence genuineness of these expenses cannot be proved - AO made disallowance u/s 40A(3) of the Act protectively - HELD THAT - In the instant case, the AO has, presumably, taken the view that these expenses have not been laid out or expended wholly and exclusively for the purpose of business. Accordingly, he has invoked the provisions of sec. 37 of the Act. There should not be any doubt that, merely because certain expenditure has been incurred by way of cash, the same cannot be considered as not related to the business activities of the assessee. Assessee has incurred 90% of expenses by way of cheque, meaning thereby, in case of business necessity only the assessee has been incurring expenses by way of cash. There is no doubt that the expenses incurred by way of cash may not be amenable for cross verification. But the vouchers scanned by Ld CIT(A) would show that the recipients have signed the vouchers. Since the vouchers form part of regular books of accounts maintained by the assessee, the same cannot be considered as additional evidences. Hence we are of the view that the Ld CIT(A) was not justified in treating them as additional evidences. In any case, he has examined the same and has also scanned three vouchers in his order, meaning thereby, he has admitted them, even though the same does not constitute additional evidence. From the assessment order, we notice that the assessing officer has not found fault with any of the vouchers, nor did he attempt to examine the recipients of cash paid towards expenses in order to verify the veracity of expenses. Hence we are of the view that the AO has disallowed the expenses on surmises only. There is merit in the submission of Ld D.R that the expenses incurred by way of cash is not amenable for cross verification. The Ld CIT(A) has also pointed out certain deficiencies in the manner of maintenance of vouchers. Accordingly, we are of the view that this issue may be put to rest by disallowing 5% of expenses incurred by way of cash exceeding ₹ 20,000/-, i.e., 5% of ₹ 1,11,32,697/- in order to take care of deficiencies, if any, in incurring expenses by way of cash maintenance of vouchers. We order accordingly. Accordingly, the order passed by Ld CIT(A) on this issue stands modified. Disallowance relating to Royalty payments made to the Government u/s 40A(3) - HELD THAT - From the explanations and evidences furnished by the assessee, we notice that the provisions of sec.40A(3) are not attracted, since all the payments except two have been made by way of demand drafts only and not by way of cash. The two payments have also been stated as payment made to the Government in the treasury, which is covered by clause (b) of Rule 6DD. Since these are payments have been made to the Government, the genuineness of these expenses cannot be doubted with. There is one more reason for accepting the genuineness of expenses, i.e., The aggregate amount of royalty expenses claimed by the assessee is ₹ 2.58 crores, out of which the AO is doubting genuineness to the extent of ₹ 11.86 lakhs, that too only for the reason that they have been incurred by way of cash. However, we have seen that the assessee has either purchased demand drafts or remitted the amount into treasury. Hence we are of the view that the genuineness of these expenses cannot be doubted with. Accordingly, we set aside the order passed by Ld CIT(A) on this addition and direct the AO to delete the disallowance

Summary

Issues: Disallowance under sec. 37(1) and sec. 40A(3) of the Income Tax Act.

Analysis:

1. The appeal pertains to the asst. year 2012-13 and concerns the disallowance by the Assessing Officer (AO) under sec. 37(1) and sec. 40A(3) of the Act. The assessee, engaged in quarrying and processing of granite, faced disallowance of expenses incurred by cash, including royalty and quarry expenses totaling &8377; 3,02,74,912.

2. The AO disallowed the expenses as not genuine and invoked sec. 40A(3) protectively. The assessee contended that the cash payments were for specific purposes, covered by exceptions under Rule 6DD of the Income-tax Rules. The AO's disallowance was based on lack of credible material evidence for the payments.

3. Before the CIT(A), the assessee argued that a portion of the disallowed amount represented advance payments not claimed as expenditure. The CIT(A) allowed this portion but upheld the remaining disallowances due to insufficient evidence in the vouchers.

4. The Tribunal analyzed the disallowances separately. Regarding royalty payments, it found that most payments were made through demand drafts or directly to the Government, thus not attracting sec. 40A(3). The genuineness of these expenses was upheld, and the disallowance of &8377; 11.86 lakhs was deleted.

5. For quarry expenses, the Tribunal noted that 90% were compliant with sec. 40A(3) due to the absence of banking facilities at the quarry site. The Tribunal found the AO's disallowance unjustified and modified the CIT(A)'s decision by disallowing 5% of expenses exceeding &8377; 20,000 paid in cash to address deficiencies in voucher maintenance.

6. Ultimately, the Tribunal partly allowed the assessee's appeal, setting aside the disallowances related to royalty and quarry expenses based on the specific circumstances and compliance with the relevant provisions.

7. The Tribunal's detailed analysis considered the exceptions under Rule 6DD, the nature of expenses, and the lack of cross verification for cash payments, leading to the modification of the CIT(A)'s order and the partial allowance of the appeal.