2020 (11) TMI 607 - AT - Income Tax

Rectification u/s 154 - Addition invoking the provisions of section 40A(3) - HELD THAT - In the instant case, the A.O. has not doubted the genuineness of the transaction. Therefore, taking proceedings u/s 154 of the I.T.Act only goes to show that it is only a mere change of opinion, which is outside the mandate of the said section. The Hon ble Supreme Court in the case of ITO v. Volkart Brothers 1971 (8) TMI 3 - SUPREME COURT held that a mistake apparent on the record must be an obvious and patent mistake and not something which could be established by a long-drawn process of reasoning on points on which there might conceivably be two opinions. Since the assessee in the given facts, had proved that there is commercial / business expediency in making cash purchases, the mistake cannot be stated to be obvious and apparent from record in view of the judgment in the case of M/s.M.K.Agrotech Pvt. Ltd. 2019 (1) TMI 37 - KARNATAKA HIGH COURT and the order of Jaipur ITAT in the case of M/s.A.Daga Royal Arts 2018 (6) TMI 1240 - ITAT JAIPUR .For the aforesaid reasoning and the judicial pronouncements, I hold that the disallowance u/s 40A(3) in a 154 proceedings is uncalled for and I quash the same. - Decided in favour of assessee.

Summary

Issues:
- Rectification order u/s 154 of the I.T.Act based on cash transactions under section 40A(3)
- Validity of the CIT(A)'s order confirming the rectification
- Application of Rule 6DD(j) of the I.T.Rules for cash payments
- Disallowance u/s 40A(3) and business expediency

Analysis:

1. The appeal was against the CIT(A)'s order upholding the Assessing Officer's rectification under section 154 of the I.T.Act regarding cash transactions under section 40A(3). The appellant contended that the rectification was based on a mere change in opinion and not valid under section 154. The appellant also argued that the cash payments were made due to commercial expediency beyond their control.

2. The CIT(A) upheld the rectification order, stating that the provisions of section 40A(3) were applicable as the case did not fall under any exceptions in Rule 6DD of the I.T.Rules. The CIT(A) held that the disallowance under section 40A(3) was correct and not debatable. The CIT(A) dismissed the grounds of appeal raised by the appellant.

3. The Tribunal considered the submissions and evidence presented. The appellant, a partnership firm, explained that due to being new in the field and lack of creditworthiness, they had to make cash payments for raw materials out of business expediency. The Tribunal noted that the genuineness of the transaction was not disputed by the authorities or the Standing Counsel.

4. The Tribunal referred to Rule 6DD(j) of the I.T.Rules, which allows cash payments under exceptional circumstances for business expediency. Despite the omission of the residuary rule, judicial precedents were cited to support the allowance of cash payments when proved to be for business expediency. The Tribunal emphasized that the mistake apparent under section 154 must be obvious and not subject to differing opinions.

5. Relying on the judgments of the jurisdictional High Court and a Co-ordinate Bench, the Tribunal ruled in favor of the appellant. It held that the disallowance under section 40A(3) in a rectification proceeding was unwarranted in this case due to established business expediency. The Tribunal quashed the disallowance and allowed the appeal filed by the assessee.

In conclusion, the Tribunal's detailed analysis considered the application of Rule 6DD(j), the genuineness of the transactions, and the principle of business expediency in allowing cash payments. The judgment highlighted the importance of proving commercial necessity to avoid disallowance under section 40A(3) and emphasized that rectification orders must be based on clear and obvious mistakes, not differing interpretations.