Saiyed Zaharul Alam Vs ITO (ITAT Kolkata)
Core issue: Whether an ad hoc disallowance of business expenditure can be made without rejecting audited books of account or identifying specific defects in the supporting evidence, and whether cash payments for purchases of raw hides and skins attract disallowance under Section 40A(3) without examining the applicability of the exceptions under Rule 6DD.
Fact: The assessee, an individual engaged in the purchase and sale of raw hides and skins of cows, buffaloes, goats and sheep, filed his return for AY 2013-14 declaring total income of Rs. 9,75,610. Following reassessment proceedings, the original assessment was set aside by the CIT(A) on 7 October 2024 for de novo assessment. In the fresh assessment completed on 6 March 2026, the Assessing Officer disallowed Rs. 10,76,000, representing 20% of claimed expenditure of Rs. 53,83,795, and separately disallowed Rs. 17,66,159 under Section 40A(3) for cash expenditure. An addition of Rs. 3,98,668 on account of alleged suppression of sales was also made. The CIT(A), by order dated 14 May 2026, upheld the impugned disallowances. The assessee challenged the expenditure disallowance and the cash-payment disallowance before the Tribunal.
AO / CIT(A) finding: The Assessing Officer considered the different versions of the cash book and the discrepancies in expense nomenclature to indicate that the accounts were unreliable. He consequently disallowed 20% of the expenditure claimed. In relation to Section 40A(3), the Assessing Officer noted that certain payments exceeded Rs. 20,000 and concluded that the provision applied without adequately examining the assessee’s explanation that payments had been made to different persons, that some suppliers were illiterate and did not maintain bank accounts, and that certain payments were covered by business exigency or Rule 6DD exceptions. The CIT(A) upheld both disallowances.
ITAT finding: Regarding the ad hoc expenditure disallowance, the Tribunal observed that the assessee had explained that the apparent discrepancies arose because the accountant had incorrectly recorded certain expenses under different heads in the cash book, ledger and profit and loss account. The assessee furnished ledger extracts, supporting documents and a revised cash book correcting the discrepancies. The Assessing Officer had not found any expenditure to be bogus or unsupported by vouchers, identified any defect in the explanation or revised details, or rejected the audited books of account. The Tribunal held that a percentage disallowance based merely on conjecture was unjustified and directed deletion of Rs. 10,76,759.
Regarding Section 40A(3), the Tribunal noted that the assessee had contended that no payment exceeding Rs. 20,000 had been made to a single person in a day, that certain payments were made to different persons, and that some payments were necessitated by the circumstances of suppliers who did not maintain bank accounts or urgently required funds. The assessee also relied on Rule 6DD(e), concerning purchases of animal-husbandry produce, including hides and skins. Since the Assessing Officer had not adequately verified these explanations, the Tribunal set aside the disallowance of Rs. 17,66,159 and remanded the matter for fresh verification of the recipients, business expediency and applicability of the Rule 6DD exceptions. The assessee was directed to furnish the necessary supporting details, and the Assessing Officer was permitted to make further inquiries.
Cases relied: Principal Commissioner of Income Tax (Central)-1 v. M/s Forum Sales Pvt. Ltd., (2024) 160 taxmann.com 93 (Delhi High Court), concerning ad hoc disallowance of expenditure without rejecting the books of account. The assessee also relied on Rule 6DD(e) of the Income-tax Rules, 1962, concerning cash payments for purchases of animal-husbandry produce, including hides and skins.
Outcome: The appeal was partly allowed. The ad hoc business expenditure disallowance of Rs. 10,76,759 was deleted, while the cash-payment disallowance of Rs. 17,66,159 under Section 40A(3) was remanded to the Assessing Officer for verification and fresh computation in accordance with law. The remand does not constitute a final decision in the assessee’s favour on the Section 40A(3) issue.
Cases Discussed
- PCIT Vs Forum Sales (P) Ltd., [2024] 160 taxmann.com 93 (Delhi High Court), ITA Nos. 862/2019 and 863/2019, decided on 01/03/2024 — Cited by the assessee against estimated expense disallowance without rejection of the books of account.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This is an appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-NFAC, Delhi (hereinafter referred to as the “Ld. CIT(A)”] passed u/s 250 of the Act dated 14.05.2026 for the AY 2013-14 in Appeal No. NFAC/2012-13/10588668.
2. The assessee, an individual has filed his return of income for AY 2013-14 declaring a total income of Rs. 9,75,610/-. The Assessing Officer initiated proceedings u/s 147 of the Act, based on certain information and, thereafter, completed the assessment on 27.09.2021 making addition of Rs. 3,98,667/- to its gross profit and addition of Rs. 38,44,000/- u/s 69A of the Act to the total income returned. The said assessment was subsequently set aside to the file of the Assessing officer by the Ld. CIT(A) vide order dated 07-10-2024 for de novo assessment. The set aside assessment was completed vide order dt 6-3-2026, wherein additions were made: i) towards disallowance of expenses of Rs. 10,76,000/- ii) disallowance towards cash expenditure in violation of sec. 40A(3) of Rs. 17,66,159/- iii) an addition of Rs. 3,98,668/- on account of suppression of sales being determined at 6.36% of the gross profit. These additions have been upheld by the Ld. CIT(A) vide the impugned order dated 14-5-26. Against the same, the assessee has preferred appeal before us, challenging the addition of Rs.10,76,759/- being disallowance of 20% of expenditure claimed, and the addition of Rs.17,66,159/- being the disallowance made invoking sec. 40A(3) of the Act.
3. The Ld. AR submitted that the assessee is engaged in the business of purchase and sale of raw hides and skin of cow, buffalo, goat, sheep etc. as a sole proprietor. It was submitted that the assessee maintained proper books of account which are duly audited by Chartered Accountant from time to time. In regard to the impugned addition made towards disallowance of expenses of Rs.10,76,000/- being 20% of Rs. 53,83,795/- it was submitted that the assessee had furnished all the relevant details, books of account- cash book, ledger and vouchers. With reference to certain discrepancies pointed out by the Assessing officer, it was contended that as such there was no discrepancy in the accounts, that the local accountant being illiterate had wrongly recorded some of the expenses under different heads giving different nomenclature in the profit and loss account, in cash book and in ledgers. It was submitted that a detailed clarification was filed before the Assessing officer along with the ledger extracts and cash book. It was represented that the complete details of expenses, copy of bills and supporting documents were duly submitted before the learned Assessing officer and that there was no basis for the Assessing officer to disallow the expenses. It was contended that the Assessing officer did not consider the submissions made, did not point out any defects in the accounts which were statutorily audited, did not refer to any defect in the clarification filed but proceeded to make the impugned disallowance. It was contended that without rejecting the books of account, the Assessing officer resorted to disallowance of expenses at 20% of the expenses claimed, which is arbitrary. Reliance was placed on the decision of Hon’ble Delhi High Court in the case of PCIT v Forum Sales (P) ltd, (160 taxmann.com 93). The Ld. AR argued that the Assessing Officer without rejecting the books of account could not have made the impugned disallowance and requested to delete the impugned addition.
4. In regard to the addition made under sec. 40(A) (3), it was contended that Rule 6DD (e) lays down an exception to sec. 40A(3) of the Act as per which, where payment is made for the purchase of produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming, disallowance cannot be made under sec. 40A(3) of the Act. It was contended that the Assessing Officer without appreciating that the assessee is engaged in the purchase of raw hides and skin of animals and that cash payment made for purchase of raw material is exempt under Rule 6DD(e) of the Income Tax Rules. had arbitrarily made the impugned addition. It was also submitted that there was no single payment exceeding Rs.20,000/-to a single person in a day. The Ld. AR filed a paper book and written submission in support of various contentions and vehemently argued for deletion of both the impugned additions.
5. On the other hand, the Ld. DR argued that the impugned additions be upheld as the Ld. CIT(A) has considered all the contentions of the assessee in detail, and that no interference is called for.
6. We have heard the rival contentions and perused the material available on record, the written submission filed by the Ld AR and the paper book filed. It is seen that the assessee in response to the notice issued under sec. 142(1) had produced the ledger extracts for the various expenses such as, thela expenses, supervision expenses, Unting charges, Yexpense, Inspection charges, Suiring expenses, AI Expenses. The Assessing officer noted that the ledger extract for the expenses relating to fees, sales promotion, Accounting charges, Salary, General expenses, Selection charges, Measuring charges were not furnished. It was submitted to the Assessing officer that Y expenses represent salary expenses, Unting expenses refer to Accounting charges, Suiring expenses refer to Measuring expenses, Inspection charges refer to selection charges, AI expenses refer to General expenses and thus the ledger extracts for all the major expenses were filed. It was further clarified that the Accountant was illiterate and had mixed up the nomenclature and wrongly recorded some of the expenses under different heads in the cash book, ledger and profit and loss account. Based on such clarification, cash book was submitted rectifying the discrepancies. However, the Assessing officer took the view that as two versions of cash book were submitted the accounts were not reliable, and hence proceeded to make the impugned disallowance of expenses at 20% of the expenses claimed of Rs.53,83,795/- It is pertinent to note that the Assessing officer has not found any expenditure to be bogus or unsupported by vouchers. The Assessing officer has not pointed out or referred to any defect in clarification given by the assessee nor on the revised details filed. There was no pointer to indicate that the expenses were not genuine. The Assessing officer also did not choose to reject the audited books of account. In these factual circumstances, we are of the view that the impugned disallowance of expenses, based on mere conjecture is not justified. Hence, the Assessing officer is directed to delete the impugned addition made of Rs.10,76,759/-.
7. In regard to the addition made under sec. 40A(3) of the Act, it is noted that the assessee had submitted the vouchers for expenses except few. The Assessing officer noted that some of the expenditure incurred exceed Rs.20,000/- and payment was made to single person. Few sample vouchers were referred in the assessment order. The assessee’s explanation was called for. It is seen that the assessee vide reply dated 9-2-26 had represented that there was no payment to single person in one day in excess of Rs.20,000/-, that the payments referred to by the Assessing officer in his notice were paid to several persons each of which are below Rs.20,000/-, that in some cases payment have been made to some illiterate raw material suppliers who have not maintained any bank account, that in some cases the assessee was compelled to make payment as the recipients were in urgent need of fund, and that sec. 40A(3) of the Act would not be attracted in such cases in view of the exceptions provided in Rule 6DD of the Income Tax Rules. The Assessing officer without examining further such submissions made by the assessee, concluded that disallowance is attracted under sec. 40A(3) of the Act. Therefore, we are of the view, that this issue needs further verification. Accordingly, we set aside the impugned addition and remit this issue back to the file of the Assessing officer with a direction to examine the contentions of the assessee as to whether the payments have been made to different persons, as to the business expediency of the assessee in making payment exceeding Rs.20,000/- and as to whether any of the payments covered by the exceptions in Rule 6DD of the Income Tax Rules and to re-determine or re-compute the total income based on such verification. The assessee shall furnish necessary details in support of these contentions and the Assessing officer is at liberty to make necessary inquiries for the purpose. As a result, the impugned assessment on this issue is set aside to file of the Assessing officer with the above direction.
8. As a result, the appeal of the assessee is partly allowed.
Order is pronounced on 16th October, 2026.
