Reopening based on Audit objection valid if cash payments above Rs. 20000 escaped scrutiny

ITO Vs Mayuri Constructions (ITAT Hyderabad)

The brief facts of the case are that the assessee is a firm engaged in the business as civil contractor filed its return of income for the AY 2008-09 on 14/10/2008 declaring total income of Rs. 65,254/-. Initially, the return was processed U/s. 143(1) of the Act and thereafter the assessment was completed U/s. 143(3) of the Act wherein the assessee’s income was assessed at Rs. 2,85,250/-. Subsequently, it was revealed by the Revenue’s Audit party that the assessee had made cash payments exceeding Rs. 20,000/- aggregating to Rs. 21,94,715/-towards expenditure which attracts the provisions of section 40A(3) of the Act and thereby the same has to be disallowed. Therefore, the Ld. AO on agreement with the finding of the Revenue’s Audit reopened the assessment U/s. 147 of the Act which was beyond the period of four years from the end of the relevant assessment year however within the limitation period specified under the Act. During the course of re-assessment proceedings, the Ld. AO once again examined the books of accounts of the assessee and found the observation of the Audit Party to be correct. The Ld. Counsel of the assessee Shri K. Khaja Hussain, Chartered Accountant had appeared on behalf of the assessee however, he could not controvert to the findings of the Ld. AO. Therefore, the Ld. AO disallowed the expenditure incurred amounting to Rs. 21,94,715/-against which cash payment were made exceeding Rs. 20,000/- and added to the income of the assessee.

On appeal, the Ld. CIT (A) citing the decision of the case CIT vs. P.J. Chemicals Limited reported in 210 ITR 830 held that the initiation of proceedings U/s. 147 of the Act is not valid in the case of the assessee because it was initiated based on audit objection. Further, the Ld. CIT (A) deleted the disallowance made by the Ld. AO U/s. 40A(3) of the Act.

Aggrieved by the order of the Ld. CIT (A), the Revenue is now on appeal before us.

ITAT find the decisions relied by the Ld.CIT(A) Viz., CIT vs. P.J. Chemicals Limited reported in 210 ITR 830 is not on the issue. Moreover on merits, ITAT find the order of the Ld. CIT (A) to be de void of merit because he has not given a categorical finding as to why the provisions of section 40A(3) of the Act would not be attracted in the case of the assessee even though assessee had made cash payments exceeding Rs. 20,000/- aggregating to Rs. 21,94,715/-. In fact he has simply brushed aside the issue by stating that all those payments were made during bank holidays which falls under exceptions mentioned in Rule 6DD of the IT Rules, 1962 without giving a clear cut finding on that regard. Further since the Ld. CIT (A) has not obtained a remand report from the AO on the issue, his observations cannot be accepted. From the above discussions, I hereby hold that the reopening of the assessment by the Ld. AO based on the Audit Objection is valid and I further hold that the order of the Ld. CIT (A) is devoid of merits and accordingly I hereby reinstate the order of the Ld. AO.

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

This appeal is filed by the Revenue against the order of the Ld. CIT (A), Kurnool in appeal No.53/CIT(A)/KNL/2014-15, dated 15/6/2018 passed U/s. 143(3) r.w.s 250(6) of the Act for the AY: 2008-09.

2. The Revenue has raised four grounds in its appeal and they are extracted herein below for reference:-

“1. The order of the Ld. CIT (A) is erroneous both on facts an din law.

2. Whether the Ld. CIT (A) erred in not following the binding decisions of supreme Court that, if a particular issue is brought to the notice of the AO by the Audit party and the AO on his / her application of mind finds that the ground is valid, reopening of assessment cannot be quashed merely because such ground was brought to the notice AO by the audit party as held in the case of CIT vs. PVS Beedies (P) Ltd (1999) 237 ITR 13/103 Taxman 294 (SC). Above decision has been reiterated by the Hon’ble SC in the case of M/s. Larsen & Turbo Ltd vs. State of Jharkhand and other in Civil Appeal No. 5390 of 2007 (SC).

3. The Ld. CIT (A) erred in holding that all the payments of more than Rs. 20,000/- made in cash by the assessee-firm cannot be disallowed U/s. 40A(3) of the Act, as per exemptions mentioned in Rule 6DD(j) i.e., payment made when banks were closed due to holidays. Since the assessee could not satisfy the AO by proving the genuineness of the transaction and the identity of the payee as per the CBDT Circular No. 220/1997. The assessee-firm provided only the ledger extracts from its books of account, but did not provide any evidence that could satisfy the AO about the genuineness of the transaction and identity of the payee as required under the said circular.

4. Any other additional ground that may be urged at the time of appeal”

3. The brief facts of the case are that the assessee is a firm engaged in the business as civil contractor filed its return of income for the AY 2008-09 on 14/10/2008 declaring total income of Rs. 65,254/-. Initially, the return was processed U/s. 143(1) of the Act and thereafter the assessment was completed U/s. 143(3) of the Act wherein the assessee’s income was assessed at Rs. 2,85,250/-. Subsequently, it was revealed by the Revenue’s Audit party that the assessee had made cash payments exceeding Rs. 20,000/- aggregating to Rs. 21,94,715/-towards expenditure which attracts the provisions of section 40A(3) of the Act and thereby the same has to be disallowed. Therefore, the Ld. AO on agreement with the finding of the Revenue’s Audit reopened the assessment U/s. 147 of the Act which was beyond the period of four years from the end of the relevant assessment year however within the limitation period specified under the Act. During the course of re-assessment proceedings, the Ld. AO once again examined the books of accounts of the assessee and found the observation of the Audit Party to be correct. The Ld. Counsel of the assessee Shri K. Khaja Hussain, Chartered Accountant had appeared on behalf of the assessee however, he could not controvert to the findings of the Ld. AO. Therefore, the Ld. AO disallowed the expenditure incurred amounting to Rs. 21,94,715/-against which cash payment were made exceeding Rs. 20,000/- and added to the income of the assessee.

4. On appeal, the Ld. CIT (A) citing the decision of the case CIT vs. P.J. Chemicals Limited reported in 210 ITR 830 held that the initiation of proceedings U/s. 147 of the Act is not valid in the case of the assessee because it was initiated based on audit objection. Further, the Ld. CIT (A) deleted the disallowance made by the Ld. AO U/s. 40A(3) of the Act by observing as follows:-

“4.2. I also find that the AO called for the books of account, vouchers and the other details at the time of completion of the regular assessment and verified the same. However, the AO did not make any disallowance U/s. 40A(3) of the Act. Obviously, he was of the view that the exceptions mentioned in Rule 6DD are applicable to the facts of the case. No fresh information has come to the light of the AO during the course of reassessment. Further, it is brought to the notice of the Assessing Officer that the payments of more than Rs. 20,000/- were all made as the banks were closed due to holiday and the exceptions mentioned in Rule 6DD are applicable to such payments.

5. In view of the facts of the case initiation of proceedings U/s. 147 is not valid and the appeal is treated as allowed.”

4.1. Aggrieved by the order of the Ld. CIT (A), the Revenue is now on appeal before us.

5. The Ld. DR vehemently argued before us stating that the order of the Ld. CIT (A) is erroneous, and his finding are not substantiated with any evidence. The Ld. DR also relied in the case CIT vs. P.V.S. Beedies Pvt Limited (1999) reported in 237 ITR 13. It was therefore pleaded that the order of the ld. AO may be reinstated. The Ld. AR on the order hand relied on the order of the Ld. CIT (A).

6. I have heard the rival submissions and carefully perused the materials on record. As pointed out by the Ld. DR, I find that the Ld. AO is right in his rem to reopen the assessment based on the Revenue’s audit report. The gist of the relevant order of the Hon’ble Apex Court is reproduced herein below for reference.

“2. We have considered the matter. It appears that the reopening was done because in the original assessment donations made to a body known as P.V.S. Memorial Charitable Trust was held by the Income Tax Officer to be eligible for deduction under Section 80G. But subsequently it was pointed out by the internal audit party that the recognition which had been granted to the P.V.S. Memorial Charitable Trust had expired on 22-9-1972. That means it had expired before 1-4-1973. Therefore, in the relevant years of account this Trust was not a recognised charitable trust. In that view of the matter the donation to P.V.S. Memorial Charitable Trust did not qualify for deduction under Section 80G as a donation made to a recognised charity.

3. We are of the view that both the Tribunal and the High Court were in error in holding that the information given by internal audit party could not be treated as information within the meaning of Section 147(b) of the Income Tax Act. The audit party has merely pointed out a fact which has been overlooked by the Income Tax Officer in the assessment. The fact that the recognition granted to this charitable trust had expired on 22-9-1992 was not noticed by the Income Tax Officer. This is not a case of information on a question of law. The dispute as to whether reopening is permissible after audit party expresses an opinion on a question of law is now being considered by a larger Bench of this Court. There can be no dispute that the audit party is entitled to point out a factual error or omission in the assessment. Reopening of the case on the basis of a factual error pointed out by the audit party is permissible under law. In view of that we hold that reopening of the case under Section 147(b) in the facts of this case was on the basis of factual information given by the internal audit party and was valid in law. The judgment under appeal is set aside to this extent.

7. Further, I find the decisions relied by the Ld. CIT(A) Viz., CIT vs. P.J. Chemicals Limited reported in 210 ITR 830 is not on the issue. Moreover on merits, I find the order of the Ld. CIT (A) to be de void of merit because he has not given a categorical finding as to why the provisions of section 40A(3) of the Act would not be attracted in the case of the assessee even though assessee had made cash payments exceeding Rs. 20,000/- aggregating to Rs. 21,94,715/-. In fact he has simply brushed aside the issue by stating that all those payments were made during bank holidays which falls under exceptions mentioned in Rule 6DD of the IT Rules, 1962 without giving a clear cut finding on that regard. Further since the Ld. CIT (A) has not obtained a remand report from the AO on the issue, his observations cannot be accepted. From the above discussions, I hereby hold that the reopening of the assessment by the Ld. AO based on the Audit Objection is valid and I further hold that the order of the Ld. CIT (A) is devoid of merits and accordingly I hereby reinstate the order of the Ld. AO.

8. In the result, appeal of the Revenue is allowed.

9. Before parting, it is worthwhile to mention that this order is pronounced after 90 days of hearing the appeal, which is though against the usual norms, I find it appropriate, taking into consideration of the extra-ordinary situation in the light of the lock-down due to Covid-19 pandemic. While doing so, I have relied in the decision of Mumbai Bench of the Tribunal in the case of DCIT vs. JSW Ltd. In ITA No.6264/M/2018 and 6103/M/2018 for AY 2013-14 order dated 14th May 2020.

Pronounced in the open Court on 16th June, 2021.