2023 (9) TMI 249 - AT - Income Tax

Disallowance u/s 40A(3) - transactions and payments made in cash - as per assessee payment was made in exceptional and unavoidable circumstances or the payment by cheque or bank draft was not practicable - assessee submitted that, when the genuineness of the payment is not in doubt and a case of business expediency made out, section 40A(3) cannot be invoked - D.R. submitted that assessee had made these cash payments in advance to Sub-contractors HELD THAT - The important thing to be noted is that the payment must be by the assessee to his agent, who, in turn, pays to some third person on behalf of assessee for goods and services and the sub-contractors made daily payments to workers on a daily or weekly basis through cash. On account of business exigency, the subcontractors insisted upon cash payment and accordingly, the assessee paid through bearer cheques. Hence, business exigency of making cash payment on regular basis is also pleaded by the assessee in the instant case. To support this, assessee filed affidavits from sub-contractors of assessee firm and they insisted for cash payments to make payment to workers and confirmed the above payments. In such circumstances, it cannot be said that sub-contractors are not agents of the assessee for providing labours. Hence, on this count, the expenditure claimed on account of payment made to sub-contractors cannot be considered u/s 40A(3) of the Act as held in the case of Balaji Engineering Construction Works cited 2008 (1) TMI 564 - KARNATAKA HIGH COURT as the Tribunal being subordinate to jurisdictional High Court what matters for the Tribunal is to follow the binding precedent and delete the disallowance in case of cash payments exceeding the stipulated limit coupled with the fact that cash payments are made due to business expediency and being genuine transaction and the parties are identifiable, provisions of section 40A(3) cannot be applied. Accordingly, we are inclined to delete the addition made on this count. One more payment to the labourers who are migrating labours earning wages and not permanently employed by the assessee, who have no bank accounts and these are payments made in exceptional circumstances as provided under Rule 6DD and these payments cannot fall under the purview of section 40A(3) of the Act and more so, the payments are genuine and parties are identifiable and the expenditure incurred is wholly and exclusively for the purpose of business on account of business exigency. Accordingly, provisions of section 40A(3) of the Act cannot be applied and this addition is also deleted. Thus, the ground relating to additions made u/s 40A(3) of the Act is deleted. This ground of the appeal of the assessee is allowed. Validity of framing assessment u/s 153C - In this case, there was survey u/s 133A of the Act and information of cash payments collected during the search and these documents were not unearthed during search u/s 132 of the Act. There is no question of initiating proceedings u/s 153C of the Act. Hence, the ground No.6 of the assessee s appeal is dismissed accordingly. Evidences unearthed were loose sheets and digital evidences, pen-drive, which has got no evidentiary value and legally inadmissible under Section 34 of the Indian Evidence Act - In our opinion, this ground of the assessee is totally misconceived. The documents mentioned herein are the evidences as per provisions of section 2(12A) which reads as books or books of account includes ledgers, daybooks, cash books, account-books and other books, whether kept in the written form or in electronic form or in digital form or as printouts of data stored in such electronic form or in digital form or in a floppy, disc, tape or any other form of electro-magnetic data storage device - Accordingly, this ground of assessee is also dismissed.

Summary

Issues Involved:

1. Validity of disallowance under Section 40A(3) of the Income Tax Act, 1961.
2. Validity of framing assessment under Section 148 of the Income Tax Act.
3. Admissibility of evidence as per Section 34 of the Indian Evidence Act.

Summary:

Disallowance under Section 40A(3):

The assessee, a partnership firm engaged in construction and sale of flats, challenged the disallowance of Rs. 47,33,332/- made by the Assessing Officer under Section 40A(3) of the Income Tax Act, 1961. The assessee argued that payments were made in cash due to business exigency and were genuine transactions. The payments were made to sub-contractors and laborers who insisted on cash payments due to the nature of their work and lack of banking facilities. The assessee relied on Rule 6DD of the Income Tax Rules, 1962, which provides exceptions to disallowances under Section 40A(3). The Tribunal noted that the payments were genuine and made due to business exigency, and thus, disallowance under Section 40A(3) was not warranted. The Tribunal deleted the addition made on this count, citing precedents such as CIT Vs. Balaji Engineering & Construction Works (323 ITR 351) (Karn.).

Framing Assessment under Section 148:

The assessee also contested the validity of framing assessment under Section 148 of the Act. The Tribunal found that the survey under Section 133A and the information collected during the search justified the reopening of the assessment under Section 147. The Tribunal dismissed the ground relating to the validity of framing assessment under Section 148.

Admissibility of Evidence:

The assessee argued that the evidences unearthed, such as loose sheets and digital evidence, were not admissible under Section 34 of the Indian Evidence Act. The Tribunal clarified that such documents are considered as evidence under Section 2(12A) of the Income Tax Act, which includes books of account in written, electronic, or digital form. Therefore, this ground was also dismissed.

Conclusion:

The Tribunal partly allowed the appeals, deleting the disallowance under Section 40A(3) but upholding the validity of the assessment under Section 148 and the admissibility of the evidence.