2022 (4) TMI 800 - AT - Income Tax

Addition u/s 40A(3) - expenditure paid at various project sites in cash mode - unexplained expenditure - Addition based on assessee's alleged search statement making the corresponding disclosures - HELD THAT - There is no rebuttal to the CIT(A)'s clinching findings that the assessee's books are neither reliable nor do they indicate the specific violation of the impugned statutory provision that the impugned cash payments had exceeded the specified limit; payee-wise, as the case may be. We thus invoke stricter interpretation of the impugned disallowance provision in Section 40A(3) that it is attracted only when an assessee incurs any expenditure in respect of which a payment of aggregate of payments in a day . We also quote hon'ble apex court's recent landmark decision in Commissioner of Customs Vs. Dilip Kumar 2018 (7) TMI 1826 - SUPREME COURT that provisions in the Act have to be strictly construed only. We accordingly uphold the CIT(A)'s findings deleting Section 40A(3) disallowance. Undisclosed income addition based on the assessee's search statement - AO had only made Section 40A(3) disallowance only than un-disclosed income addition based on the assessee's authorised person's search statement. That being the case, we are afraid that the Revenue's hands are indeed tied at this stage as it would not be allowed to make any addition once the AO has invoked Section 40A(3) only. Case law CIT Vs. Shapoorji Pallonji Mistry 1962 (2) TMI 12 - SUPREME COURT as well as CIT Vs. Union Tyres 1999 (9) TMI 81 - DELHI HIGH COURT hold that such an addition would not be allowed to be made even by way of enhancement in first appellate proceedings despite the fact that the CIT(A) is vested with his jurisdiction co-terminus with the AO. Their lordships make it clear that Section 251(1) enhancement jurisdiction does not extend to a new source of income. We therefore accept assessee's arguments and reject Revenue's stand regarding the alleged undisclosed income addition which was never added in both assessment orders since the Assessing Officer had merely invoked Section 40A(3) disallowance. We therefore accept the assessee's pleadings to this limited extent.

Summary

Issues Involved:
1. Correctness of additions based on alleged search declaration.
2. Delay in Revenue’s cross-objections.
3. Disallowance under Section 40A(3) of the Income Tax Act, 1961.
4. Undisclosed income addition based on search statement.

Detailed Analysis:

1. Correctness of Additions Based on Alleged Search Declaration:
The assessee challenged the correctness of additions amounting to ?10 crores and ?14 crores for the assessment years 2011-12 and 2012-13, respectively, based on an alleged search declaration. The assessee did not press for the pleadings challenging the inducement element in the search statement. The Assessing Officer (AO) observed that the assessee made significant cash withdrawals from various bank accounts and failed to provide explanations for these withdrawals. As a result, the company declared undisclosed income to cover up these deficiencies. The AO treated the undisclosed amount of ?10 crores as declared under Section 132(4) during the search proceedings as the undisclosed income of the appellant company for the year under reference.

2. Delay in Revenue’s Cross-Objections:
The Revenue filed cross-objections involving a delay of 1855 days, attributing the delay to reasons beyond its control, including the COVID-19 pandemic. The Tribunal accepted the Revenue's reasons for the delay, citing case laws that support delays backed by cogent reasons to make way for substantial justice.

3. Disallowance under Section 40A(3) of the Income Tax Act, 1961:
The Revenue's cross-objections argued that the CIT(A) erred in deleting the Section 40A(3) disallowance of ?10 crores for AY 2011-12 and ?4 crores for AY 2012-13. The AO had disallowed these amounts based on cash payments exceeding ?20,000, which were not supported by proper vouchers. The assessee argued that the payments were made in remote areas without banking facilities and were covered under Rule 6DD of the IT Rules. The CIT(A) found that the books of accounts were deemed unreliable, and the disallowance could not be made without specifying the amounts paid in cash. The Tribunal upheld the CIT(A)'s findings, noting that Section 40A(3) is an overriding provision and must be strictly construed. The Tribunal also noted that the AO did not make any undisclosed income addition despite discussing the issue at length.

4. Undisclosed Income Addition Based on Search Statement:
The Revenue argued that the assessee's search statement admitted undisclosed income, and such an addition should be confirmed. However, the Tribunal found that the AO had only invoked Section 40A(3) for disallowing the assessee's expenditure claims and did not make any undisclosed income addition. The Tribunal held that the Revenue could not make any addition at this stage since the AO had only invoked Section 40A(3). The Tribunal cited case laws that prohibit the enhancement of income from a new source during appellate proceedings. Therefore, the Tribunal accepted the assessee's arguments and rejected the Revenue's stand regarding the alleged undisclosed income addition.

Conclusion:
The assessee's appeals were allowed, and the Revenue's cross-objections were dismissed. The Tribunal upheld the CIT(A)'s findings deleting the Section 40A(3) disallowance and rejected the Revenue's stand on the alleged undisclosed income addition. The Tribunal emphasized the need for strict interpretation of Section 40A(3) and the prohibition of income enhancement from a new source during appellate proceedings. The order was pronounced in the open court on 29th March 2022.