2022 (9) TMI 1021 - AT - Income Tax

Disallowance u/s 40A(3) - payments otherwise than by way of account payee cheques/bank drafts in relation to the expenses incurred - where seller of agricultural land insisted on payment in cash? - HELD THAT - No disallowances under section 40A(3) can be made where seller of agricultural land insisted on payment in cash. Thus, applying the legal principles enunciated in the judicial precedents cited before us, we hold that the disallowance made under section 40A(3) of the Act is unsustainable. Accordingly, we delete it. - Decided in favour of assessee. Disallowance of provision of bad debts - HELD THAT - The facts emanating on record indicate that the assessee had actually written off the amount in dispute in its books of account. As evident, the bad debt written off pertains to the debtor to whom maintenance services were provided and maintenance charge on account of such services were accounted in the books of account in past assessment years and were offered to tax. The apprehension of the AO appears to be unfounded. In any case of the matter, after amendment of section 36(1)(vii) w.e.f. 01.04.1989, the condition precedent for allowance of deduction is actual writing off of the bad debts in the books of account. This is the ratio laid down in case of TRF Ltd. 2010 (2) TMI 211 - SUPREME COURT - That being the position in law, we do not find any deficiency in the decision of the learned Commissioner (Appeals). Accordingly, ground raised is dismissed. Expenditure under the head property maintenance and under the head Miscellaneous Expenses - HELD THAT - Disallowance on purely ad-hoc basis without any valid reasoning. As could be seen from the facts on record, the assessee is engaged in three business segments viz. electricity supply, estate management services and real estate division. The maintenance division is known as Sunrise Management Estate Services. As observed that the assessee has adopted this practice of raising bills in the name of Sunrise Management and Estate Services from past years and continuing with the same. As rightly observed by Commissioner (Appeals), all the details relating to the expenses were furnished before the AO and further, the payments were made through banking channel. In fact, the assessee has deducted tax at source wherever applicable. It is also a fact on record that in the preceding assessment years, such expenditure incurred by the assessee have been accepted by the AO - AO has not pointed out any specific deficiency in the documentary evidences furnished by the assessee. Thus, ad-hoc disallowance made by the AO without any valid reason cannot be sustained. Accordingly, we uphold the decision of Commissioner (Appeals) by dismissing the ground.

Summary

Issues Involved:
1. Disallowance of Rs. 1,06,50,000/- under Section 40A(3) of the Income Tax Act, 1961.
2. Deletion of disallowance of Rs. 55,42,561/- representing provision of bad debts.
3. Deletion of disallowance of Rs. 1,09,84,190/- under the head 'property maintenance' and 'miscellaneous expenses'.

Detailed Analysis:

1. Disallowance of Rs. 1,06,50,000/- under Section 40A(3) of the Income Tax Act, 1961:
The assessee, a corporate entity, contested the disallowance of Rs. 1,06,50,000/- made by the Assessing Officer (AO) under Section 40A(3) for making payments otherwise than by account payee cheques/bank drafts. The AO observed that the payments violated Section 40A(3) read with Rule 6DD and disallowed the amount. The assessee argued that the payment was made to a senior citizen for purchasing agricultural land, who insisted on cash payment. The assessee claimed that this fell under the exception provided in clause (j) of Rule 6DD. The Tribunal noted that the transaction was genuine and made due to business expediency. It was highlighted that the primary objective of Section 40A(3) is to curb tax evasion, not to obstruct genuine transactions. The Tribunal referred to various judicial precedents, including the Supreme Court's decision in Attar Singh Gurmukh Singh Vs. ITO, which emphasized that genuine and bona fide transactions should not be disallowed under Section 40A(3). The Tribunal concluded that the disallowance under Section 40A(3) was unsustainable and deleted it.

2. Deletion of disallowance of Rs. 55,42,561/- representing provision of bad debts:
The Revenue challenged the deletion of disallowance of Rs. 55,42,561/- made by the AO on the grounds that the assessee failed to prove that the corresponding income was recognized in the previous year. The Tribunal noted that the assessee had actually written off the amount in its books of account and that the bad debt pertained to maintenance services provided, which were accounted for in past years and offered to tax. The Tribunal referred to the Supreme Court's decision in TRF Ltd. Vs. CIT, which established that the condition precedent for allowance of deduction is the actual writing off of the bad debts in the books of account. The Tribunal upheld the decision of the Commissioner (Appeals) and dismissed the Revenue's ground.

3. Deletion of disallowance of Rs. 1,09,84,190/- under the head 'property maintenance' and 'miscellaneous expenses':
The AO disallowed 25% of the total expenditure claimed under 'property maintenance' and 'miscellaneous expenses' on an ad-hoc basis, amounting to Rs. 1,09,84,190/-. The Tribunal observed that the AO made the disallowance without any valid reasoning and that the assessee had furnished all details relating to the expenses, which were paid through banking channels with tax deducted at source where applicable. The Tribunal noted that similar expenditures were accepted by the AO in preceding assessment years and that the AO did not point out any specific deficiency in the documentary evidence provided by the assessee. The Tribunal upheld the decision of the Commissioner (Appeals) and dismissed the Revenue's ground.

Conclusion:
The assessee's appeal was allowed, and the Revenue's appeal was dismissed. The Tribunal deleted the disallowance of Rs. 1,06,50,000/- under Section 40A(3), upheld the deletion of disallowance of Rs. 55,42,561/- representing provision of bad debts, and upheld the deletion of disallowance of Rs. 1,09,84,190/- under the head 'property maintenance' and 'miscellaneous expenses'.