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TMI Blog2010 (4) TMI 1222X X X X Extracts X X X X X X X X Extracts X X X X ..... he addition of ₹ 10,35,858/- made under section 40A (3) of the I.T. Act. 5. On the facts and in the circumstances of the case, Ld. CIT (A) has erred in invoking the provisions of Rule 6DD of the I.T. Rules, despite the fact that assessee has issued cheque Nos.1730344 1730349 dated 26.4.2005 and 8.5.2005 (imprest account) respectively drawn on Bank of Bhutan, Bhutan from Account No.7981 to the sub-contractors. 2. Brief facts are that during the course of assessment, it was found by the AO that the assessee had debited a sum of ₹ 7,00,000/- on account of communication services, to Radio Link Agency Pvt. Ltd. (RLA)(PAN NO.AAACR4051M). The assessee submitted that communication charges were paid to RLA. Assessee explained that it was for a good communication system between office Bhutan and Delhi Head Office required for project technicalities. 3. On examination of the balance sheet / profit loss account of RLA, it was gathered by the AO that during the year as well in the preceding year, the company has shown gross receipt of ₹ 7.00 lacs only, which was stated to have been received from the assessee and no other consultancy / business receipt was reflecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar whereas disallowed in the year under reference. The A.O. called information/details u/s 133(6) from RLA which were submitted by the party. No further documents/detail in this regard were asked by A.O. RLA confirmed having charged ₹ 7 lacs which was also reflected in its books of accounts and P L account. The communication system being for business necessity, i.e. to establish good and effective communication system was allowable u/s 37(1) being business expenditure. 7. Apropos second ground, brief facts are that during the assessment proceedings the AO observed that the assessee has debited a sum of ₹ 29495705/- on account of labour charges paid to labour contractors and workers mess expenses of ₹ 349598/-. The assessee was required to explain the reasons why the labour bills were debited after the completion of the work and was required to furnish details and documents to support. 8. On receipt of the information / details, AO noticed that all the cheques barring one or two were issued on self and are debited on account of cash withdrawal. All the cheques were encashed by Sh. Amit Khurana, accountant of the assessee. The address given on the backside of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the contractors with address and PAN were submitted to the Ld. Assessing Officer. These labour contractors appeared before the assessing officer in earlier assessment year hence their identity stands established. Assessee was never informed by the Ld. Assessing Officer that letters/notice sent to them were returned back. 13. The labour contractors are working with the assessee since long time and have good relationship with the assessee. The two labour contractors had opened the bank account in the same bank in which the assessee had the bank account only for the convenience of fast transfer of money in the account. On some occasions, the cheques were given to the accountant of the assessee-Mr. Amit Khurana for withdrawal/deposit of cheques while he was going to bank for his work. The mere withdrawal of the money from bank by one person for some other person cannot not mean that the money belongs to other person. Hence the assumption of AO that withdrawal of money by the accountant of the assessee was proof of inflated expenditure is purely based on surmises. 14. All the labour contractors have reflected the contract receipts as income in their tax returns, copies were f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30, Chankya Palace, Part-I, Uttam Nagar, New Delhi-59 AANPY4415E 26,00,000/- 2 M/s Surya Enterprises (Prop. Mr. Nand Lal Bhardwaj) Bhabha Nagar, Distt. Kinnaur, Himachal Pradesh AFZPB9902L 20,50,000/- 3 M/s Dev India Construction Co. (Prop. Late Dev Raj Dhiman), A-769, Shastri Nagar, New Delhi AGRPD2416L 10,29,2901- All the three above sub-contractors had their permanent business establishment in India. They sent their labour from India to Bhutan on the condition to pay in cash to meet out their routine needs. The sub-contractors were not having bank account at work site as opening of the bank account required approval of Reserve Bank of India and it was not feasible for them to open a bank account in Bhutan being a sub-contractor to an Indian subcontractor. These payments were made in consideration of business expediency hence allowable u/s 37(1) of the Income Tax Act. 21. Section 40 A (3) states :- Provided further that no disallowance under this sub-section shall be made where any payment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubted or called in question. The amounts could not be disallowed. It was pointed out that the assessee had reflected these in the cash book submitted to the Income Tax Officer. He had also provided letters from the concerned parties confirming the transactions. Those parties were also identifiable and their letters of confirmation were also on record. (v) Attar Singh Gurmukh Singh vs. Income Tax Officer, 191 ITR 0667 (SC) Similar additions were made in assessment year 2004-05 which were deleted by ITAT in ITA No.112/Del/2008 upholding the order of CIT (A) by following observations : 7. We have heard both the parties and gone through the material available on record. Under section 40A(3), where the assessee incurs any exp in respect of which payment is made in a sum exceeding ₹ 20,000/- otherwise than by an account payee cheque drawn on a bank or account payee bank draft, 20% of such exp shall not be disallowed as deduction. Rule 6DD provides certain exceptions under which the payment of sum exceeding ₹ 20,000 shall not be disallowed. Rule 6DD(h) provides that where the payment is made in a village or town which on the date of such payment is not served by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had confirmed the receipt of the payment and duly reflected in the return filed to the department. Similar payment has been allowed in earlier year. In view of the above, we do not find any infirmity in the order of the CIT (A) on this issue and the same is upheld on this ground. 26. Labour contractors are known and identifiable were paid as per terms in the preceding year, which was allowed by the department. The labour charges are paid based on quantity of work done and therefore the AO's observation regarding the timing of doing the project was not relevant besides assessee contends that they were paid late to see the quality. The labour contractors had filed their income tax returns independently showing the labour charges received and paid due taxes thereon which is not disputed. These expenses are paid wholly and exclusively for business purpose and hence allowable u/s 37(1) of the Act. Labour contractors were working with the assessee for long and have a good working relations. No adverse inference can be drawn from the fact that contractors sometimes give their cheques to the accountant of the assessee for withdrawal. AO's finding is based on assumption, which a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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