Case Law Details
Mana Ram Ganpat Ram & Co. Vs ITO (ITAT Delhi)
Reading of Section 40A(3) of the Act makes it clear that any payment in excess of 20,000/- should be made by crossed cheque or crossed bank draft. On failure to do so, the said payment would be disallowed.
Admittedly, the assessee has made the payment in cash. However, it would be relevant to note that before us, Learned AR has pointed to the fact that entire business activity of the contract undertaken by assessee was on behalf of Govt. agencies, at remote locate and desert of Rajasthan namely; Bikaner and Jaisalmer. The impugned payments has been done for the aforesaid contract work at remote desert location of Rajasthan. Further, the contention of the assessee that Grit has been purchased by assessee from petty persons who are illiterate and who make their living by breaking stones by hand tools and they do not possess PAN Cards has not been proved to be false or untrue.
Further, the Gross Profit ratio and the Net Profit ratio after taking into account the impugned expenditure shown by the assessee during the year under consideration as compared to that of immediate preceding year shows that there is substantial increase in those margins. It is not the case of the Revenue that the expenses are not genuine or are bogus and have been booked for the purpose of inflating expenditure and thereby reducing the profits.
We further find that Hon’ble Apex Court in the case of Attar Singh Gurmukh Singh vs. ITO [1991] 191 ITR 667 (SC) has held that provision of Section 40A(3) of the Act are not intended to restrict the business activities and insistence of payment by crossed cheque or crossed bank draft is insisted so as to enable the assessing authority to ascertain whether the payment is genuine or whether it is out of the income from disclosed sources.
It has further held that the terms of Section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of the Section and it is open to the assessee to furnish to the satisfaction of AO the circumstances under which the payment in the manner prescribed u/s 40A(3) was not practicable or would have caused genuine difficulty to the payee.
Considering the totality of the facts in the present case and seen in the light of the aforesaid decision of Hon’ble Apex Court, we of the view that the disallowance u/s 40A(3) of the Act is not justified in present case. We therefore direct the deletion of addition made by AO and upheld by CIT(A).
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal filed by assessee is directed against the order dated 28.06.2019 of the Commissioner of Income Tax (Appeals)-38, New Delhi relating to Assessment Year 2015-16.
2. Brief facts of the case as culled out from the material on record are as under :-
3. Assessee is a partnership firm stated to be engaged in the business of Contract works. Assessee electronically filed its return of income for A.Y. 2015-16 on 10.09.2015 declaring net taxable income of Rs.10,56,220/-. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) of the Act vide order dated 28.12.2017 and the total income was determined at Rs.1,50,30,000/-. Aggrieved by the order of AO, assessee carried the matter before CIT(A). CIT(A) vide order dated 28.06.2019 in Appeal No.CIT(A), Delhi-38/10206/2018-19 granted partial relief to the assessee. Aggrieved by the order of CIT(A), assessee is now in appeal and has raised the following grounds:
“1. CIT(A) has wrongly confirmed the additions of Rs.42,93,127/- u/s 40A(3) of the Act although as per records submitted to AO and during the course of hearing of appeal, all payments are less than Rs.20,000/- and as such addition needs deletion.”
4. During the course of assessment proceedings, on perusing the details of Grit purchases and carriage, AO noticed that assessee on the aforesaid account had made payment of cash aggregating to Rs.45,63,767/-. The assessee was asked to show cause as to why the entire amount of Rs.45,63,767/- not be disallowed and added to the income u/s 40A(3) of the Act, in view of the fact that payments have been made in cash. AO noted that though assessee was asked to produce the books of accounts, bills and vouchers to substantiate the claim but assessee did not file any details and did not produce the books of accounts. AO therefore concluded that assessee had nothing to say on the issue. He accordingly made addition of Rs.45,63,767/- u/s 40A(3) of the Act being cash payment about 20,000/-.
5. Aggrieved by the order of AO, assessee carried the matter before CIT(A). CIT(A) after considering the submissions of the assessee, remand report from AO and assessee’s submission to the remand report granted partial relief to the extent of Rs.2,70,640/-being the payment to M/s. Bhagyalashmi Udyog, Phalodi that was made by cheque. He upheld the disallowance of balance Rs.42,93,147/- by upholding the order of AO. Aggrieved by the order of CIT(A), assessee is now before us.
6. Before us, Learned AR reiterated the submissions made before AO and CIT(A) and further submitted that assessee is a small contractor undertaking contract work for Govt. agencies at far off locations in the desert of Rajasthan namely; Bikaner and Jaisalmer. In support of his aforesaid contention that the income is arising only out of contract work at remote locations, he pointed to the copy of the audited Profit and Loss account placed at page 6 of the paper book and the computation of income at page 3 of the paper book. From the aforesaid details, he pointed to the fact that the total contract receipts of the assessee for the year under consideration are Rs. 1,61,52,153 and which has been received from Govt. agencies namely Executive Engineer Border, Bikaner, Office of Chief Executive Engineer, Jaisalmer and Superintending Engineer, Jaisalmer. With respect to the nature of payment, Learned AR submitted that most of the payments were made to petty persons for supply of grit who make their living by breaking stones from hand tools, they are illiterate and do not possess PAN Cards. He therefore submitted that if the nature of work undertaken by assessee, the location where the work is undertaken and the parties to whom the assessee has made the payment, is taken into consideration the disallowance u/s 40A(3) is not called for. He further pointed to Page 19 of the paper book, which is a part of the tax audit report and from there he pointed to the Gross Profit and Net Profit ratio for the year under consideration and that in immediate preceding year. He pointed that the Gross Profit, Net Profit of the ratio for the year under consideration and that in immediate preceding year was 21.12% and 15.82%, respectively as compared to the Gross Profit and Net Profit in the immediate preceding assessment year being 15.30% and 8.79%. He submitted that the increase in profit ratios would indicate that the impugned expenditure is not bogus. He, thereafter, pointing to the proviso to Section 40A of the Act submitted that the disallowance u/s 40A has to be seen considering the nature of business, the extent of banking facilities available and the business expediency and other relevant factors. He submitted that if the facts of the case are seen in the light of the proviso to Section 40A, no disallowance is called for. He therefore submitted that the disallowance made by AO and upheld by CIT(A) be deleted.
7. Learned DR on the other supported the order of lower authorities.
8. We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the disallowance u/s 40A(3) of the Act.
9. Reading of Section 40A(3) of the Act makes it clear that any payment in excess of 20,000/- should be made by crossed cheque or crossed bank draft. On failure to do so, the said payment would be disallowed. Admittedly, the assessee has made the payment in cash. However, it would be relevant to note that before us, Learned AR has pointed to the fact that entire business activity of the contract undertaken by assessee was on behalf of Govt. agencies, at remote locate and desert of Rajasthan namely; Bikaner and Jaisalmer. The impugned payments has been done for the aforesaid contract work at remote desert location of Rajasthan. Further, the contention of the assessee that Grit has been purchased by assessee from petty persons who are illiterate and who make their living by breaking stones by hand tools and they do not possess PAN Cards has not been proved to be false or untrue. Further, the Gross Profit ratio and the Net Profit ratio after taking into account the impugned expenditure shown by the assessee during the year under consideration as compared to that of immediate preceding year shows that there is substantial increase in those margins. It is not the case of the Revenue that the expenses are not genuine or are bogus and have been booked for the purpose of inflating expenditure and thereby reducing the profits. We further find that Hon’ble Apex Court in the case of Attar Singh Gurmukh Singh vs. ITO [1991] 191 ITR 667 (SC) has held that provision of Section 40A(3) of the Act are not intended to restrict the business activities and insistence of payment by crossed cheque or crossed bank draft is insisted so as to enable the assessing authority to ascertain whether the payment is genuine or whether it is out of the income from disclosed sources. It has further held that the terms of Section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of the Section and it is open to the assessee to furnish to the satisfaction of AO the circumstances under which the payment in the manner prescribed u/s 40A(3) was not practicable or would have caused genuine difficulty to the payee. Considering the totality of the facts in the present case and seen in the light of the aforesaid decision of Hon’ble Apex Court, we of the view that the disallowance u/s 40A(3) of the Act is not justified in present case. We therefore direct the deletion of addition made by AO and upheld by CIT(A). Thus, the ground of assessee is allowed.
10. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 13.09.2022
