Case Law Details
Devcare Solutions Vs ITO (ITAT Chennai)
ITAT Chennai Upholds Cash Payment Disallowance Exceeding Rs. 10,000 Threshold, Technical Fees Disallowed for Lack of Proof
The Income Tax Appellate Tribunal (ITAT), Chennai Bench, has upheld disallowances made by the tax authorities against Devcare Solutions for the assessment year 2021-22. The disallowances related primarily to payments for technical services where genuineness could not be proved and significant cash expenditures exceeding the statutory threshold. The Tribunal dismissed the assessee’s appeal, confirming the orders of the lower tax authorities.
Devcare Solutions had challenged an order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Center (NFAC), Delhi, which had sustained additions made by the Assessing Officer (AO). The appeal before the ITAT involved multiple grounds, but the key issues centered on two major disallowances.
The first major issue, covered under grounds of appeal numbers 2 to 5, concerned the disallowance of Rs. 83,86,539 claimed as technical services fees paid to various persons. During the assessment proceedings, the AO had noted that the assessee claimed to have paid technical fees to approximately ten individuals. The AO had attempted to verify these payments by issuing notices under Section 133(6) of the Income Tax Act, 1961, to the recipient parties. However, these parties either did not file their returns of income or failed to respond to the notices.
When confronted with these findings, the assessee’s response to the show cause notice was limited. The company merely submitted copies of Form 16A, indicating Tax Deducted at Source (TDS) on these payments, along with a general statement claiming that these individuals had performed design, development, testing, and other related works. Crucially, the AO’s scrutiny of the assessee’s bank statements did not reveal any corresponding payments made to these parties. The assessee also failed to provide essential supporting documentation, such as copies of agreements entered into with these technical service providers or details regarding their professional qualifications.
Before the CIT(A), the assessee reiterated the same arguments and presented the identical set of documents. The CIT(A) reviewed the matter and fully concurred with the findings of the AO, upholding the disallowance for lack of substantiated evidence regarding the genuineness of the expenses and the identity of the payees.
During the hearing before the ITAT, the counsel for Devcare Solutions again presented the same arguments and relied on the same documents that had been found insufficient by the lower authorities. The Departmental Representative (DR) strongly defended the orders of the AO and the CIT(A), arguing that in the absence of any concrete, demonstrable evidence from the assessee, the genuineness of the impugned technical service expenses could not be presumed.
The ITAT, after considering the submissions and reviewing the available records, observed that it was an undisputed fact that the assessee had failed to provide any credible evidence. This included the qualifications of the purported service providers, copies of agreements with them, or proof of payments made through banking channels. The Tribunal reinforced the fundamental legal principle that the burden of proof lies with the assessee to substantiate the claims made in their income tax return. The ITAT noted that while TDS deduction could be one factor supporting a claim, it cannot be the sole basis for accepting the genuineness of an expenditure. The assessee was required to demonstrate the commercial expediency of the expenses, including the identity of the persons paid and the actual rendering of services. Finding that the assessee had not discharged this burden, the ITAT concluded there was no reason to interfere with the CIT(A)’s order on this issue and upheld the disallowance of Rs. 83,86,539.
The second significant issue, raised through grounds of appeal numbers 6 to 8, related to the disallowance of Rs. 66,61,467 made by the AO by invoking the provisions of Section 40A(3) of the Income Tax Act. During the assessment, the AO had noticed substantial cash withdrawals from the assessee’s bank account, amounting to Rs. 80,14,000. Upon being asked to explain these withdrawals, the assessee provided a copy of its cash book. Scrutiny of the cash book revealed various expenses exceeding the threshold limit prescribed under Section 40A(3), which was Rs. 10,000 per day per person at the relevant time. The aggregate amount of these cash payments exceeding the limit totaled Rs. 66,61,467.
The AO proceeded to disallow this amount under Section 40A(3) due to the lack of an effective rebuttal from the assessee regarding the necessity of these cash payments. Before the CIT(A), Devcare Solutions argued that the AO had misunderstood the facts and that there were genuine and compelling circumstances justifying the cash payments above the threshold limit. The specific justifications provided included:
1. Payment of rent amounting to Rs. 3,60,000 in cash at the request of the landlords, who were coincidentally also partners in the firm.
2. Payment of stipend totaling Rs. 21,84,147 in cash to students hired for US projects, claiming they did not possess bank accounts.
3. Payment of salary or outsourcing charges aggregating Rs. 40,16,237 in cash to temporary or contractual staff, similarly claiming they did not have bank accounts.
The ITAT considered these arguments in the context of Section 40A(3) and Rule 6DD of the Income Tax Rules, 1962. The Tribunal noted that Section 40A(3) was introduced with the specific objective of discouraging cash transactions beyond a certain limit to promote financial discipline and ensure a verifiable audit trail of expenses. Rule 6DD provides certain exceptions where cash payments exceeding the limit may be allowed, primarily in situations where banking facilities are not adequately available or for payments to low-end laborers who may not have bank accounts.
Evaluating the assessee’s justifications, the ITAT found them unconvincing. The Tribunal stated that a landlord’s request for cash payment is not a justified ground for making payments above the statutory threshold. Regarding the claim that students and temporary/contractual staff lacked bank accounts, the Tribunal found this argument untenable, particularly given that these individuals were described as “white collar workforce” likely situated in a major city like Chennai. The ITAT explicitly stated that the argument regarding the non-availability of adequate banking facilities in Chennai cannot be accepted. The Tribunal reasoned that payments to such individuals could have easily been made through banking channels like cheques or electronic transfers.
Consequently, the ITAT found sufficient force in the CIT(A)’s findings that the assessee lacked justified grounds for making significant cash payments exceeding the limit prescribed by Section 40A(3). The Tribunal saw no reason to interfere with this part of the CIT(A)’s order and confirmed the disallowance of Rs. 66,61,467 under Section 40A(3).
The final issue raised by the assessee in ground of appeal number 9 alleged a violation of the principles of natural justice, claiming that information gathered “at its back” was used against it. However, the ITAT noted that the assessee failed to provide any specific details or arguments to substantiate this claim during the hearing. Upon reviewing the orders of the lower authorities, the Tribunal found nothing to suggest that any information gathered without the assessee’s knowledge or opportunity for rebuttal was utilized in making the additions. Therefore, the ITAT deemed this ground of appeal to be infructuous and dismissed it.
In conclusion, the ITAT Chennai dismissed the entire appeal filed by Devcare Solutions, thereby upholding the disallowances of technical services fees for lack of proof and the disallowance of cash payments exceeding the threshold limit under Section 40A(3). While the Tribunal did not cite specific judicial case precedents by name, its decision was based on the fundamental legal principle that the burden of proof lies with the assessee to substantiate expenditure claims and the statutory provisions and rules governing cash payments (Section 40A(3) and Rule 6DD) and their limited exceptions. The ruling reinforces the tax authorities’ stance on requiring proper documentation for expenses and adherence to rules designed to promote transparent financial transactions.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal is filed by the assessee against the order bearing DIN & Order No.ITBA / NFAC / S / 250 / 2024-25 / 1068689335(1) dated 13.09.2024 of the Learned Commissioner of Income Tax [herein after “CIT(A), National Faceless Appeal Center[NFAC], Delhi, for the assessment years 2021-22. Through the aforesaid appeal the assessee has challenged order u/s 250 dated 13.09.2024 passed by NFAC, Delhi.
2.0 The assessee has contested the impugned order of Ld.First Appellate Authority by raising altogether 10 grounds. The ground of appeal nos 1 & 10 have been found to be general in nature and hence dismissed.
3.0 The first issue arising from the ground of appeal nos.2 to 5 are regarding addition made by the Ld.AO of Rs. 83,86,539/- in respect of technical services fees paid by the assessee to various persons. Before us the Ld.AR reiterated the arguments taken before the lower authorities placing reliance upon same set of documents. The Ld. AO in para 4 of his order had noted that the assessee had paid technical fees to about 10 persons. The Ld. AO had issued notices u/s 133(6) to parties to whom technical services fees were paid by the assessee and such parties had not filed their returns of income. There was no response to the Ld.AO’s notices. In response to the show cause assesee had merely submitted copy of form 16A showing TDS made qua the parties with a bald statement that these persons had done design, development, testing etc works. Perusal of assesess bank statement did not indicate any payments having been made to these parties. The assessee also failed to provide copy of any agreements or qualification details of persons to whom technical fees were paid. Before the Ld. First Appellate Authority, the assessee repeated the same arguments and relied upon the same set of documents. The Ld. CIT(A) proceeded to wholly concur with the findings of the Ld.AO as per observations made in para 5.4 of his order. Before us also the Ld.Counsel reiterated the same set of arguments relying on the same documents.
4.0 The Ld.DR vehemently argued in favour of the order of lower authorities. It was stated that in the absence of any cogent demonstrative evidence forthcoming from the assessee, a presumption qua genuineness of impugned expenses cannot be drawn.
5.0 We have heard rival submissions in the light of material available on records. It is an undisputed fact of the case that the assessee has not provided any evidence in the form of qualifications of the parties, agreements entered with them, details of amounts paid to them through banking channels etc thus far. It is trite law that it is the assessee which is required to lead evidence in its case in support of claims made. The assessee was therefore required to provide all the above evidence for examination of the lower authorities. Mere tax deduction by the assessee can be a factor to justify the claim, but cannot be the sole factor. The assessee was required to explain the commercial expediency of the impugned expenses including the genuineness of the transactions, identify of persons etc. Accordingly, we are of the opinion that there is no case of any interference to be made in the order of Ld.First Appellate Authority. The same is therefore confirmed and grounds of appeal nos. 2 to 5 raised by the assessee are dismissed.
6.0 The next issues raised by the assessee through grounds of appeal nos. 6 to 8 are regarding addition of Rs.66,61,467/- made by the Ld. AO by invoking provisions of section 40A(3) of the act. The Ld. Counsel drew our attention to para 6 of the Ld. AO’s order. During the course of assessment proceedings the Ld.AO noted that the assessee had withdrawn huge amount of cash amounting to Rs. 80,14,000/- from its account with HDFC bank. In response to show cause notice of the Ld.AO, the assessee provided copy of its cash book. The Ld. AO noted from the perusal thereof that cash expenses of amounts aggregating to Rs.66,61,467/- was in respect of cases where expenditure exceeded the threshold limit u/s 40A(3) of Rs.10,000/-. As evident from para 7 of the order, in the absence of any effective rebuttal from the assessee, the Ld. AO made the impugned addition. Before the Ld.CIT(A) the assessee had argued that the Ld.AO has misunderstood the fact of the case. The assessee had argued before the Ld.CIT(A) that it had genuine and compelling circumstances for making cash payments in excess of threshold limit u/s 40A(3) of Rs.10,000/-. Thus, rent amount of Rs.3,60,000/- was paid in cash as per the request of the land lords who were also incidentally partners of the firm. Stipend of Rs. 21,84,147/- was paid to some students hired for US projects since they did not have any bank account. Similarly, salary / outsourcing charges of Rs.40,16,237/- were paid to temporary / contractual staff since they did not have any bank account.
7.0 The Ld.DR relied upon the order of lower authorities.
8.0 We have heard the rival submissions in the light of material available on records. Section 40A(3) of the act has been brought on the statute with the objective of curbing cash transactions so that a bona-fide identifiable trail of expenses is available on records. Rule 6DD of the Income Tax rules presumes situations where it may not be possible to comply with the said threshold limit of Rs.10,000/- and hence certain exceptions have been made to allow for cash expenses in exceptional circumstances, chiefly being non-availability of adequate banking facilities, low end laborers etc. We find sufficient force in the findings of the Ld.CIT(A) that the assessee does not have any justified grounds in support of its claim. The argument of land lord insisting for cash payments cannot be a justified ground. Similarly, stipend payments and salary etc to white collar workforce located in metropolis of Chennai could have been easily given by cheque as argument of non-availability of adequate banking facilities in Chennai cannot be accepted. Accordingly, we do not feel any need to interfere with the order of the Ld.CIT(A) as this stage. The addition made by the Ld.AO of Rs.66,61,461/- is therefore confirmed and all the grounds of appeal raised by the assessee are dismissed.
9.0 The next issue raised by the assessee through its appeal no.9 is regarding violation of principles of natural justice to the extent of using information against it, which was gathered at its back. Upon consideration of the matter, we have noted that no specific detail or arguments were brought to our knowledge in support of the impugned ground. There is nothing in the order of lower authorities which alludes towards utilization of any information gathered at its back. Consequently, the ground of appeal no.9 has been found to be infructuous and is therefore dismissed.
10.0 In the result the appeal of the assessee is dismissed.
Order pronounced on 30th , April-2025 at Chennai.
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