2022 (9) TMI 1079 - AT - Income Tax

Revision u/s 263 - Disallowance u/s 40A(3) - Payments in cash exceeding the permisiable limit - HELD THAT - AO observed that the payments have been made exceeding Rs. 20000/- in cash on single day, and no explanation has been offered by the assessee, which led AO to invoke provisions of Section 40A(3) and cash payments towards labour payments, stood added to the income of the assessee passed by AO u/s 143(3) read with Section 263 - CIT(A) has given erroneous finding that the books of accounts were produced by the assessee before the AO. Infact no vouchers, invoices, cash book, books of accounts were produced, and merely ledger accounts were produced and that too were changed by assessee in assessment proceedings conducted in consequences to revisionary order passed by ld. Pr. CIT u/s 263. The assessee is claiming deduction towards material purchases and labour payments from its income chargeable to tax, and thus the onus is on the assessee to bring on record cogent material to substantiate the same as well that compliances of statutory provisions such as Section 40A(3) were made, before being allowed deduction by Revenue. No infirmity in the order of the Assessing Officer , the ld. CIT(A) has misdirected itself by applying net profit rate , despite the assessee having admitted to have cash payment in violation of Section 40A(3) and the case also does not fall under exceptions as are provided in Rule 6DD of the 1962 Rules. The appellate order passed by ld. CIT(A) cannot be sustained and is reversed and the assessment order passed by the AO is confirmed so far as additions disallowance u/s. 40A(3) with respect to material consumed and labour payments are concerned. This disposes of ground number 2 and 3 raised by Revenue in its memo of appeal filed with tribunal , which stood allowed. Ground concerning disallowance of depreciation is not adjudicated by ld. CIT(A) - rectification of mistake - HELD THAT - The assessee filed its first appeal with CIT(A), and in case if the ground no. 6 raised by assessee concerning disallowance of depreciation is not adjudicated by CIT(A), the assessee stood prejudiced and it is not shown that the assessee has come in an appeal before tribunal to seek redressal of its grievance, nor it could be shown that C.O. is filed by the assessee being aggrieved by the decision of CIT(A) in not adjudicating ground number 6 concerning disallowance of depreciation - But, however, it is observed that while reproducing grounds of appeal number 6 raised by the assessee bfore ld. CIT(A) , it was erroneously typed as Rs. 33,75,200/- instead of Rs. 3,37,520/-in the appellate order passed by ld. CIT(A), which is a mistake apparent from record , which we direct to correct the same at page number 2 of the appellate order passed by ld. CIT(A). To the extent of correcting aforesaid mistake apparent from record, we modify the order of ld. CIT(A) concerning this ground number 4 raised by Revenue before tribunal. This ground is partly allowed in favour of Revenue.

Summary

Issues Involved:
1. Legality of the CIT(A)'s order.
2. Deletion of disallowances under Section 40A(3) related to material consumed and labor payments.
3. Applicability of Section 145(3) in overriding Section 40A(3).
4. Non-adjudication of the ground related to disallowance of depreciation.

Issue-wise Detailed Analysis:

1. Legality of the CIT(A)'s Order:
The Revenue contended that the CIT(A)'s order was perverse and bad in law. The Tribunal noted that the CIT(A) rejected the books of account under Section 145(3) and estimated the net profits at 6% of the gross receipts. The Tribunal found that the CIT(A) erred in applying Rule 6DD of the Income-tax Rules, 1962, without any basis or justification, and failed to appreciate that the assessee's case did not fall under the exceptions provided in Rule 6DD.

2. Deletion of Disallowances under Section 40A(3):
The Revenue argued that the CIT(A) erred in deleting disallowances under Section 40A(3) related to material consumed and labor payments. The Tribunal noted that the assessee made cash payments exceeding Rs. 20,000 in a day towards material purchases and labor charges, which violated Section 40A(3). The assessee failed to produce books of accounts, cash book, vouchers, and invoices, and instead produced manipulated ledger accounts. The Tribunal found that the CIT(A) erroneously granted relief by applying Rule 6DD, despite the assessee not demonstrating that its case fell under the exceptions in Rule 6DD. The Tribunal reversed the CIT(A)'s order and confirmed the AO's additions under Section 40A(3).

3. Applicability of Section 145(3) in Overriding Section 40A(3):
The Tribunal observed that Section 40A(1) contains a non obstante clause, which means it overrides other provisions related to the computation of income under the head "Profits and Gains of Business or Profession." The Tribunal found that the CIT(A) misdirected itself by applying a net profit rate and ignoring the clear mandate of Section 40A(3). The Tribunal held that the AO rightly made additions under Section 40A(3) and the CIT(A) erred in applying Section 145(3) to frame a best judgment assessment.

4. Non-adjudication of Ground Related to Disallowance of Depreciation:
The Revenue contended that the CIT(A) did not adjudicate the ground related to the disallowance of depreciation of Rs. 3,37,520, which was erroneously mentioned as Rs. 33,75,200 in the CIT(A)'s order. The Tribunal noted that this was a mistake apparent from the record and directed the correction of the figure in the CIT(A)'s order. The Tribunal partly allowed this ground in favor of the Revenue.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, confirming the AO's additions under Section 40A(3) related to material consumed and labor payments, and directed the correction of the erroneous figure related to the disallowance of depreciation in the CIT(A)'s order. The Tribunal dismissed the general grounds raised by the Revenue.