2020 (12) TMI 462 - AT - Income Tax

Addition u/s. 40A(3) - payments were made in cash in contravention of provisions of section 40A(3) - HELD THAT - DR has initially raised an objection for sending the matter back to the Assessing Officer again for verification on the ground that sufficient opportunity was already offered to the assessee in this regard, he has finally submitted the matter can be sent back to the AO for proper verification if the assessee undertakes to produce the cash book and other evidence to support and substantiate his explanation in the matter. Since the ld. counsel for the assessee has undertaken to produce the cash book and other evidence to support and substantiate the case of assessee on this issue, consider it fair and proper and in the interest of justice to set aside the impugned order of ld. CIT(A) on this issue and remit the matter to the file of Assessing Officer for deciding the same afresh after verifying the explanation of the assessee from the relevant record including especially the cash book and other evidences which the assessee is directed to produce. Ground No. 1 of the assessee's appeal is accordingly treated as allowed for statistical purposes. Disallowance of 15% of the wages - Addition sustained by the ld. CIT(A) to the extent of 7% - HELD THAT - As rightly noted by CIT(A) in this regard, there was a mistake in the working made by the Assessing Officer in as much as the substantial increase in work-in-progress during the year under consideration was not taken into consideration by the Assessing Officer while working the percentage of wages at 31.36%. Since the wages as correctly worked out by the ld. CIT(A) at 22.73% was fair and reasonable, disallowance of 7% of the wages sustained by the ld. CIT(A) for the unverifiable element involved in the wages is slightly on the higher side and it would be fair and reasonable to restrict the same to 5%. Accordingly, modify the impugned order of ld. CIT(A) on this issue and direct the Assessing Officer to re-compute the disallowance out of wages to the extent of 5%. Ground No. 2 is thus, partly allowed.

Summary

Issues: Disallowance under section 40A(3) of the Income-tax Act, 1961 and Disallowance of wages

Issue 1: Disallowance under section 40A(3) of the Income-tax Act, 1961

Detailed Analysis:
1. The appellant, engaged in construction business, filed an appeal against the disallowance of &8377; 8,17,165 under section 40A(3) of the Act.
2. The Assessing Officer noted cash payments exceeding &8377; 20,000, totaling &8377; 40,85,825, and invoked section 40A(3) due to lack of supporting evidence.
3. The appellant's submissions included details of cash withdrawals, payments to government, capital account drawings, and payments through account payee cheques.
4. Additional evidence of payments via account payee cheques was submitted, but the Assessing Officer highlighted the absence of a cash book for verification.
5. The ld. CIT(A) upheld the disallowance citing unverifiable explanations due to the missing cash book.
6. The Tribunal decided to remit the matter to the Assessing Officer for fresh consideration, allowing the appellant to produce the cash book for verification.

Issue 2: Disallowance of wages

Detailed Analysis:
1. The Assessing Officer disallowed 15% of claimed wages due to lack of complete documentary evidence and high percentage of wages to receipts ratio.
2. The ld. CIT(A) found the Assessing Officer's calculation erroneous as it didn't consider the increase in work-in-progress, reducing the disallowance to 7%.
3. The Tribunal observed the lack of full documentary support for the wages claim but noted the error in the percentage calculation by the Assessing Officer.
4. The Tribunal considered the correct percentage of wages at 22.73% and reduced the disallowance to 5% for fairness and reasonableness.
5. The appeal was partly allowed, modifying the disallowance of wages to 5%.

In conclusion, the Tribunal partially allowed the appeal, remitting the disallowance under section 40A(3) for fresh consideration with the provision for producing the cash book. Additionally, the disallowance of wages was reduced to 5% from the initial 15%, considering the correct percentage of wages to receipts ratio.