2022 (2) TMI 422 - AT - Income Tax

Rectification of mistake u/s 154 - disallowing u/s.40A(3) of the assessee s claim for deduction of bonus as stated to have been paid in cash, i.e., in excess of the prescribed limit of ₹ 20,000/- - HELD THAT - Though Section 40A(3) contemplates disallowance of certain expenditure which is incurred by an assessee in cash beyond the prescribed limit, however, Rule 6DD of the Income Tax Rules, 1962 carves out a set of exceptions wherein the payments despite having been made in cash beyond the aforesaid prescribed limit are not to be disallowed. In the backdrop of our aforesaid observations, we are of a strong conviction, that no disallowance u/s.40A(3) of the Act, even in a case where the payments had been made by the assessee in cash beyond the prescribed limit could validly be made by invoking the provisions of Section 154 of the Act. In our considered view, as the AO had grossly erred in invoking the provisions of Section 154 of the Act for the purpose of disallowing the aforementioned amount u/s. 40A(3) of the Act, therefore, the order therein passed by him cannot be sustained and is accordingly liable to be vacated. We, thus, not being able to persuade ourselves to subscribe to the view taken by the lower authorities set aside the order passed by the CIT(A) and quash the order passed by the AO u/s.154 of the Act. Grounds of Appeal Nos.1 to 4 are allowed in terms of our aforesaid observations.

Summary

Issues involved:
1. Disallowance of bonus paid to employees under Section 40A(3) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Disallowance of bonus paid to employees under Section 40A(3) of the Income Tax Act, 1961

Background:
The appeal was filed against the order passed by the Commissioner of Income Tax (Appeals)-II, Jalandhar, which arose from the order by the Assessing Officer under Section 154 of the Income Tax Act, 1961 for the Assessment Year 2013-14. The controversy revolved around the disallowance of the assessee's claim for deduction of bonus paid to employees under Section 40A(3) of the Act.

AO's Decision and CIT(A)'s Upholding:
The Assessing Officer disallowed a bonus payment exceeding the prescribed limit of ?20,000 in cash, invoking Section 40A(3) of the Act. The CIT(A) upheld the AO's decision, leading to the assessee's appeal.

Arguments and Decision:
The Authorized Representative for the assessee argued that the disallowance under Section 40A(3) was not a rectifiable mistake under Section 154 of the Act, as it was a debatable issue. The Tribunal agreed, citing the Supreme Court's ruling that only mistakes apparent from the record can be rectified under Section 154. Additionally, Rule 6DD of the Income Tax Rules provides exceptions to cash payment limits under Section 40A(3).

Tribunal's Ruling:
The Tribunal found that the AO erred in disallowing the bonus payment under Section 40A(3) through a Section 154 order. As such, the Tribunal set aside the CIT(A)'s decision and quashed the AO's order under Section 154. The appeal was allowed, and the disallowance was vacated.

Conclusion:
The Tribunal allowed the appeal, emphasizing that disallowance under Section 40A(3) through a Section 154 order was not sustainable. The decision highlighted the importance of rectifying only mistakes apparent from the record under the Income Tax Act, ultimately ruling in favor of the assessee.

This detailed analysis covers the issues involved in the legal judgment, providing a comprehensive overview of the arguments presented, decisions made, and the final ruling by the Tribunal.