Bought note purchase vis-à-vis applicability of section 40A(3)

V.K. Textile Processors Vs ITO (ITAT Chennai)

Held that as per the identical issue of disallowance of bought note purchases in cash u/s. 40A(3) of the Act for the assessment year 2017-18 and after considering relevant facts, we set aside the issue to the file of the Assessing Officer for further verification.

Facts- The only issue that came up for our consideration is disallowance of cash payments made u/s.40A(3) of the Act. The brief facts with regard to impugned dispute are that survey u/s.133A was conducted in the case of the assessee on 06.02.2018. During the course of survey, based on material evidences collected from tally software, the assessee admitted an amount of Rs.4,24,76,975/- towards bought note purchase in violation of provisions of section 40A(3) of the Income Tax Act, 1961, and further a sum of Rs.28,18,693/- towards disallowance u/s.40(a)(ia) of the Act, towards payment made to job work charges without deduction of tax at source.

The case has been taken up for scrutiny and during the course of assessment proceedings, it was submitted before the AO that the provisions of section 40A(3) has no application, because the assessee has filed revised return and treated bought note purchase & sales as commission agent and offered net commission income for taxation and thus, when the expenditure is not claimed as deduction, question of application of provisions of section 40A(3) does not arise. AO, however, was not convinced with the explanation furnished by the assessee and according to AO, when the assessee filed original return u/s.139(1) of the Act, bought note purchase was shown as purchases in the statement of account filed along with return of income. Further, during the course of survey, tally data base shows bought note purchases in cash.

Therefore, the Assessing Officer opined that bought note purchases in cash excess of prescribed limit of Rs.20,000/-and above cannot be allowed as deduction and thus, made disallowance of purchases in cash in excess of prescribed limit u/s.40A(3) of the Act.

Conclusion- We have considered an identical issue of disallowance of bought note purchases in cash u/s. 40A(3) of the Act for the assessment year 2017-18 and after considering relevant facts, we set aside the issue to the file of the Assessing Officer for further verification. Since, facts for the impugned assessment year are pari materia with the facts considered for the assessment year 2017-18, we deem it appropriate to set aside the issue to the file of the Assessing Officer for this year also. Therefore, for similar reasons, we set aside this issue to the file of the Assessing Officer and direct the AO to reconsider the issue de novo in accordance with law, after considering various averments made by the assessee.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

These two appeals filed by the assessee and one appeal filed by the Revenue and also cross objection filed by the assessee are directed against separate, but identical orders passed by the learned Commissioner of Income Tax(Appeals), Coimbatore-3, dated 08.05.2019 and 28.07.2020 relevant to assessment years 2016-17 and 2017-18 respectively. Since, facts are identical and issues are common, for the sake of convenience, these appeals & cross objection are heard together and are being disposed off, by this consolidated order.

ITA No. 791/Chny/2020 (A.Y.2017-18):-

2. The assessee has raised following grounds of appeal:-

“The order of the learned CIT (A) is bad and erroneous in law and against the principles of natural justice.

2) The learned CIT (A) erred in not considering the grounds of appeal with respect to the disallowance of sec.40A(3) in proper perspective.

3) (a) The learned CIT (A) erred in not considering the vital fact that the disallowance u/s.40A(3) can be made ONLY when the appellant incurs expenditure in violation of sec.40A(3) and claims so in the computation of income under “Profits and Gains of Business or Professions”, which is not the case in the present case of the appellant.

(b) The learned CIT (A) erred in disallowing the expense to the tune of Rs. 15,00,000/-, being payment to Sakthivel without considering the written submissions made by the appellant.

And for other reasons that may be adduced at the time of hearing, the appellant prays that this appeal be admitted, considered and justice be rendered.”

3. The only issue that came up for our consideration from ground no.3 (a) & 3(b) of the assessee appeal is disallowance of cash payments made u/s.40A(3) of the Act. The brief facts with regard to impugned dispute are that survey u/s.133A of the Income Tax Act, 1961, was conducted in the case of the assessee on 06.02.2018. During the course of survey, based on material evidences collected from tally software, the assessee admitted an amount of Rs.4,24,76,975/- towards bought note purchase in violation of provisions of section 40A(3) of the Income Tax Act, 1961, and further a sum of Rs.28,18,693/- towards disallowance u/s.40(a)(ia) of the Act, towards payment made to job work charges without deduction of tax at source. The case has been taken up for scrutiny and during the course of assessment proceedings, it was submitted before the Assessing Officer that the provisions of section 40A(3) has no application, because the assessee has filed revised return and treated bought note purchase & sales as commission agent and offered net commission income for taxation and thus, when the expenditure is not claimed as deduction, question of application of provisions of section 40A(3) does not arise. The Assessing Officer, however, was not convinced with the explanation furnished by the assessee and according to the Assessing Officer, when the assessee filed original return u/s.139(1) of the Act, bought note purchase was shown as purchases in the statement of account filed along with return of income. Further, during the course of survey, tally data base shows bought note purchases in cash. Therefore, the Assessing Officer opined that bought note purchases in cash excess of prescribed limit of Rs.20,000/-and above cannot be allowed as deduction and thus, made disallowance of purchases in cash in excess of prescribed limit u/s.40A(3) of the Act.

4. Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee has challenged applicability of provisions section 40A(3) of the Act, in light of revised return filed subsequent to survey proceedings, otherwise, did not dispute cash payment made in excess of prescribed limit. The learned CIT(A), after considering relevant facts and also taken note of provisions of section 40A(3) of the Act, has rejected arguments of the assessee and sustained additions made by the Assessing Officer towards disallowance of expenses on the ground that subsequent filing of revised return on the basis of amended tax audit report is an afterthought to overcome rigors of provisions of section 40A(3) of the Income Tax Act, 1961, and thus, rejected arguments of the assessee and sustained additions made towards disallowance of bought note purchases in cash u/s.40A(3) of the Income Tax Act, 1961. The learned CIT(A) also upheld additions made towards cash payment to Mr. R. Sakthivel, on the ground that purchases from said party does not come under Rule 6DD and thus, sustained additions made by the Assessing Officer. Aggrieved by the learned CIT(A) order, the assessee is in appeal before us.

5. The learned A.R for the assessee submitted that the learned CIT(A) erred in not appreciating fact that provisions of section 40A(3) of the Act, will be applicable only in case, where deduction claimed towards any expenditure incurred in cash. In this case, although, the assessee has shown purchases in the original return of income filed for relevant assessment year, but subsequently, return of income has been revised where the assessee has shown net income from purchase and sale of bought note purchases, and thus, when deduction is not claimed towards purchases, provisions of section 40A(3) cannot be applied.

6. The learned DR, on the other hand, supporting order of the learned CIT(A) submitted that the assessee never disputed cash payment in excess of prescribed limit and further, evidences collected during the course of survey clearly indicate bought note purchases in excess of limit. Therefore, subsequent, filing of revised return excluding bought note purchases is only an afterthought to overcome provisions of section 40A(3) of the Act. The Assessing Officer, after considering relevant facts has rightly disallowed cash payment u/s.40A(3) of the Income Tax Act, 1961, and thus, there is no merit in the arguments of the assessee on applicability of provisions of section 40A(3) of the Act, and hence, orders of the lower authorities should be upheld.

7. We have heard both the parties, perused material available on record and gone through orders of the authorities below. There is no dispute with regard to bought note purchases by payment in cash in excess of prescribed limit. In fact, the assessee had never denied cash payment in excess of Rs.20,000/- for making bought note purchases. It was argument of the assessee that when the Assessing Officer has acted upon revised return filed by the assessee, then the Assessing Officer should have considered applicability of provisions of section 40A(3) of the Act, with reference to revised return filed by the assessee along with amended tax audit report. According to the assessee, although, in original return of income filed for relevant assessment year, it had shown purchases, but when revised return was filed only net income from bought note purchases and sales has been shown. Therefore, when deduction was not claimed towards expenditure incurred in cash, application of provisions of section 40A(3) of the Income Tax Act, 1961, is incorrect.

8. We have given our thoughtful consideration to the reasons given by the Assessing Officer to disallow cash purchases in excess of prescribed limit in light of various arguments advanced by the assessee and we ourselves do not subscribe to the reasons given by the learned AR for the assessee in light of revised return filed for relevant assessment year for simple reason that revised return has been filed subsequent to date of survey, which clearly show cause intent of the assessee to exclude bought note purchases from purchase account, to escape from provisions of section 40A(3) of the Income Tax Act, 1961. Therefore, arguments of the assessee on applicability of provisions of section 40A(3) of the Income Tax Act, 1961, are rejected.

9. As regards, alternative arguments of the assessee that the assessee was acting only as commission agent and net commission income has been offered to tax, we find that if the assessee acted only as commission agent without showing purchases & sales as his own purchase & sales, then the Assessing Officer should have examined claim of the assessee with reference to GST returns filed for relevant period to ascertain fact that whether the assessee has included bought note purchases in cash in the GST return filed for relevant assessment year or not. The Assessing Officer, without considering arguments of the assessee, simply made additions on the basis of survey findings. Therefore, we are of the considered view that this issue needs to go back to the file of the Assessing Officer for further verification in light of arguments of the assessee that it has acted only as commission agent in respect of bought note purchases. Thus, we set aside the issue to the file of the Assessing Officer and direct the AO to reconsider the issue in light of various averments made by the assessee de novo in accordance with law.

10. In the result, appeal filed by the assessee for the assessment year 2017-18 is treated as allowed for statistical purposes.

ITA No.2115 & 2231/Chny/2019 (A.Y 2016-17):

11. The first issue that came up for our consideration from assessee as well as Revenue appeal is disallowance of bought note purchases in cash u/s.40A(3) of the Income Tax Act, 1961. The Assessing Officer has disallowed cash purchase u/s. 40A(3) of the Act, on the ground that the assessee has paid cash against purchases in excess of prescribed limit and basis for disallowance is evidence collected during the course of survey. The learned CIT(A) has deleted additions made by the Assessing Officer towards disallowance u/s. 40A(3) of the Act, on the ground that the A.O has not proved with necessary evidences towards cash payment in excess of prescribed limit in individual case, on the basis of observation of the Assessing Officer, where the Assessing Officer has made specific observation about benefit of doubt with regard to certain purchases. However, the learned CIT(A) had estimated 8% profit on total sales made by the assessee and deleted additions made towards cash payment u/s. 40A(3) of the Act .

12. We have considered an identical issue of disallowance of bought note purchases in cash u/s. 40A(3) of the Act for the assessment year 2017-18 and after considering relevant facts, we set aside the issue to the file of the Assessing Officer for further verification. Since, facts for the impugned assessment year are pani matenia with the facts considered for the assessment year 2017-18, we deem it appropriate to set aside the issue to the file of the Assessing Officer for this year also. Therefore, for similar reasons, we set aside this issue to the file of the Assessing Officer and direct the AO to reconsider the issue de novo in accordance with law, after considering various averments made by the assessee.

13. The next issue that came up for our consideration from ground no.4 of assessee appeal as well as ground no. 8 & 9 of Revenue appeal is disallowance of depreciation on Effluent Treatment Plant. The Assessing Officer has disallowed 100% depreciation claimed on Effluent Treatment Plant on the ground that the assessee could not file any evidences to prove existence of asset. The learned CIT(A) has deleted additions made towards disallowance of depreciation on the ground of benefit of doubt by considering certain additional evidences without affording opportunity of hearing to the Assessing Officer.

14. During the course of hearing, the learned A.R for the assessee has requested to set aside the issue to file of the Assessing Officer for further verification, for which the learned DR present for the Revenue has fairly agreed. Therefore, considering grounds of appeal filed by the Revenue, for violation of Rule 46A of Income Tax Rules, 1962, and also arguments of the learned counsel for the assessee and the Revenue, we set aside the issue to the file of the Assessing Officer with a direction to reconsider the issue de novo in accordance with law, after considering necessary evidences filed by the assessee.

15. In the result, appeal filed by the assessee and the Revenue for the assessment year 2016-17 are treated as allowed for statistical purposes.

Cross Objection No.87/Chny/2019:

16. The assessee has filed cross objection in support of order of the learned CIT(A) in estimation of 8% profit on sales as against total disallowance of cash purchases u/s.40A(3) of the Act, and also deletion of depreciation on Effluent Treatment Plant.

17. We find that appeal filed by the assessee as well as the Revenue for the assessment year 2016-17 has been set aside to the file of the Assessing Officer for further verification and to consider issues de novo in accordance with law. In our considered view, cross objection filed by the assessee in support of order of the learned CIT(A) becomes infructuous and thus, cross objection filed by the assessee is dismissed as not maintainable.

18. In the result, cross objection filed by the assessee is dismissed in terms of our observation made hereinabove.

19. To sum up, appeals filed by the assessee as well as Revenue are allowed for statistical purposes and cross objection filed by the assessee is dismissed.

Order pronounced in the open court on 2^nd June, 2022