INDUSTRIAL TRAINING & RESEARCH INSTITUTE (ITRI),BENGALURU vs. ITO, WARD 4(3)(2), BENGALURU

PDF · subscribers
ITA 2071/BANG/2026Status: DisposedITAT Bangalore25 August 2026AY 2016-178 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal held that the mode of payment (cash vs. bank) alone cannot determine the genuineness of an expense. It emphasized the need to examine the cash book, sales records, and other supporting evidence to ascertain if the expenditure was actually incurred and related to the assessee's activities.

What were the facts?

The assessee, a trust, claimed various operating expenses. The Assessing Officer (AO) disallowed a significant portion of these expenses due to a lack of complete supporting documents, particularly for cash payments. The CIT(Appeals) partially allowed some expenses paid through the bank but confirmed disallowances for cash payments.

What were the issues?

Whether expenses paid in cash, without complete supporting vouchers or corresponding bank withdrawals, can be disallowed solely on the basis of the mode of payment. The genuineness and allowability of operating expenses when documentary evidence is incomplete.

Which sections of the Income-tax Act were involved?

Section 40A(3)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, BANGALORE BENCHES, BANGALORE

Before: SHRI WASEEM AHMED & SHRI YOGESH KUMAR US

PER SHRI WASEEM AHMED, ACCOUNTANT MEMBER: This appeal is filed by the Assessee against the order of Ld. CIT (Appeals) - NFAC. DELHI vide DIN: ITBA/APL/S/250/2024-25/1073557921(1) dated 21-Feb-2025 for the Assessment Year 2016-17.

2.

At the outset, we note that the appeal has been filed by the assessee with a delay of 387 days and accompanied by a delay condonation petition and an affidavit to this effect. The assessee in the condonation petition has explained that the trust is presently not functioning. It became aware of the appellate order only on 07.10.2025, and its concerned authorised signatory was seriously ill. Due to these circumstances, the income-tax portal could not be regularly monitored. When the tax consultant subsequently accessed the portal, the assessee was advised to file the appeal before the Tribunal, which was done without further delay. It was submitted that the delay was neither intentional nor due to negligence and the explanation was also supported by an affidavit of the authorised signatory.

3.

The Ld. DR, on the other hand, opposed the condonation petition and submitted that the delay of 387 days was substantial and had not been satisfactorily explained.

4.

We have heard both the parties and considered the petition and affidavit filed by the assessee. The assessee has explained that the trust was not functioning and its concerned officer was seriously ill. Due to these circumstances, the income-tax portal could not be monitored, and the appellate order did not come to its notice in time. After the tax consultant accessed the portal and informed the assessee, necessary steps were taken to file the appeal.

4.1 The Hon’ble Supreme Court in Collector, Land Acquisition, Anantnag v. Mst. Katiji [1987] 167 ITR 471 (SC) has held that substantial justice should be preferred over technical considerations while deciding a request for condonation of delay. Further, in N. Balakrishnan v. M. Krishnamurthy [1998] 7 SCC 123, the Hon’ble Supreme Court held that the length of the delay is not decisive and that the acceptability of the explanation is the relevant consideration.

4.2 In the present case, the explanation given by the assessee appears reasonable and bona fide. There is nothing on record to suggest that the delay was deliberate or that the assessee intended to gain any advantage by filing the appeal late. Therefore, in the interest of substantial justice, the delay of 387 days is condoned, and the appeal is admitted for adjudication on the merits.

4.3 The issues raised by the assessee are interconnected and pertains to the disallowances of normal business operating expenses like payment of Rent, marketing expenses, office expenses, telephone expenses, electricity Charges, Consultation charges, books & periodicals, etc.

4.4 The relevant facts are that the assessee is a trust formed with the objective of imparting advanced skill development training. For the year under dispute, the assessee trust filed the return of income showing sales of ₹ 24,75,484/- and total expenses of ₹ 24,95,412/-, resulting in a net loss of ₹19,928/- only.

4.5 During the assessment proceedings, the assessee furnished details such as bank statements, statements of income, profit and loss account and balance sheet. However, it did not furnish complete supporting documents for the expenses claimed. The AO noted that in respect of rent, the assessee claimed an expenditure of ₹4,32,000/- only. However, on verification of the bank statement, it was found that only ₹94,380/- had been paid towards rent during the relevant year. Since the assessee did not furnish any evidence to explain or support the balance claim of rent payment, the AO disallowed the difference of ₹3,37,620/- only.

4.6 Likewise, the AO further noted that the assessee had not furnished ledger extracts, bills, vouchers or any other supporting evidence for marketing expenses of ₹1,39,548/-, office expenses of ₹2,75,890/-, consultation charges of ₹50,009/-, books and periodicals of ₹41,791/-, telephone charges of ₹29,302/- and electricity charges of ₹99,785/-. In the absence of any documentary evidence to establish that these expenses were actually incurred and related to the assessee's activities, the AO disallowed the entire amount claimed under these heads. Accordingly, the AO made a total disallowance of ₹9,74,035, comprising the disallowed rent of ₹3,37,620/- and the other unsupported expenses of ₹6,36,415, and added the same to the income of the assessee.

5.

The aggrieved assessee preferred an appeal before the learned CIT(A).

6.

The Ld. CIT(A) examined each of the expenses separately. In respect of office rent of ₹3,37,620/-, the Ld. CIT(A) observed that the assessee claimed to have paid the rent in cash but did not produce any proper evidence before the AO. Although a rent agreement was filed during the appellate proceedings, the same was not admitted as it was filed without complying with Rule 46A of the Income Tax Rules. Furthermore, the learned CIT(A) noted that the bank account did not show sufficient cash withdrawals to support the alleged cash payments of rent. The Ld. CIT(A) further observed that the cash payment of rent was also liable to be disallowed u/s 40A(3) of the Act. Accordingly, the entire disallowance of rent was confirmed.

6.1 The Ld. CIT(A) also confirmed the disallowance of marketing expenses of ₹1,39,548/- since the assessee did not furnish bills, vouchers, corresponding bank entries or any other evidence to prove that the expenditure was actually incurred.

6.2 With regard to office expenses of ₹2,75,890/-, the Ld. CIT(A) noted that only a ledger account was furnished without supporting bills or vouchers, which included certain housemaid expenses and the same were personal in nature. However, the Ld. CIT(A) held that the expenses paid through the bank were verifiable and could be allowed. Accordingly, the AO was directed to delete the disallowance to the extent of payments made through the bank, while the remaining cash payments were confirmed.

6.3 Likewise, the disallowance of consultancy charges of ₹50,009/- and books and periodicals of ₹41,791/- was fully deleted since the corresponding payments were reflected in the bank statement.

6.4 In respect of telephone charges of ₹29,302/-, the Ld. CIT(A) found that ₹29,170 had been paid through the bank and was supported by the bank statement. Therefore, the disallowance was deleted to that extent and only the cash payment of ₹132 was confirmed. As regards electricity charges of ₹99,785/-, the Ld. CIT(A) observed that though no electricity bills were furnished but several payments were reflected in the bank statement. The AO was, therefore, directed to delete the disallowance relating to the verified bank payments. However, the cash payments of Rs. 49,950/- and the amount of ₹11,738/-, which was not reflected in the ICICI Bank statement, were confirmed. Accordingly, the appeal of the assessee was partly allowed.

7.

Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

8.

The learned AR submitted that the disallowances sustained by the CIT(A) were primarily based on the mode of payment and absence of complete supporting vouchers, without properly examining the books of account and surrounding circumstances. The assessee had disclosed substantial sales of ₹24.75 lakhs, and the disputed expenses were incurred in the ordinary course of its training activities. It was contended that several payments, including marketing, office, electricity and other expenses, were verifiable from the bank statement and ledger. The AR submitted that cash payments could not be treated as non-genuine merely because corresponding bank withdrawals were unavailable and prayed for deletion of the disallowances or, alternatively, proper verification.

9.

The learned DR supported the order of the CIT(A). He submitted that the assessee failed to furnish bills, vouchers, confirmations and other documentary evidence to establish the genuineness and business purpose of the disputed expenses. The cash payments were particularly unsupported, and the disallowances were therefore justified.

10.

We have heard the rival submissions of both the parties and carefully examined the materials available on record. The dispute relates to the disallowance of normal operating expenses, including office rent, marketing expenses, office expenses, telephone charges and electricity charges. The AO disallowed these expenses mainly because complete bills, vouchers and ledger extracts were not furnished. The Ld.

CIT(A) granted relief in respect of certain payments reflected in the bank statement but confirmed the expenses paid in cash.

10.1 On examination of the order of the Ld. CIT(A), we find that the cash payments were primarily rejected because there were no corresponding cash withdrawals from the bank account. In our view, this approach is incomplete. The availability of cash cannot be decided merely by looking at withdrawals from the bank. The Ld. CIT(A) was required to examine the cash book, opening cash balance, daily cash receipts, cash sales and other entries recorded in the regular books of account. The fact that an expense was paid in cash does not by itself establish that the expense was not incurred.

10.2 The assessee had disclosed sales of ₹24,75,484/- during the year. Therefore, the possibility that cash generated from sales was used for meeting day-to-day operating expenses could not have been rejected without examining the sales records and the cash book. Further, no loan or other cash credit is stated to be appearing in the balance sheet. This aspect also required proper verification regarding the sources of cash before drawing an adverse conclusion regarding the source of the cash payments.

10.3 The Ld. CIT(A) allowed the office expenses and electricity charges only to the extent of payments made through the bank and confirmed the cash payments as unexplained. However, the mode of payment alone cannot decide the genuineness of an expense. A bank payment does not automatically establish that an expense is allowable, and similarly, a cash payment does not automatically make the expense non-genuine. The real questions are whether the expenditure was actually incurred, whether it related to the activities of the assessee and whether the amount claimed was reasonable.

10.4 In respect of rent, the Ld. CIT(A) also observed that the cash payment was liable for disallowance u/s 40A(3) of the Act. However, before applying the said provision, it was necessary to examine each payment separately, including the date, amount, identity of the recipient and the applicable monetary limit. The applicability of the exceptions provided in the relevant rules was also required to be considered. The entire cash rent could not have been disallowed merely by making a general observation that the rent was paid in cash.

10.5 As regards the marketing expenses of ₹1,39,548/-, the Ld. CIT(A) confirmed the disallowance on the ground that bills and vouchers were not produced. However, the ledger contains details of payments made to Naukri.com and other parties. On a simultaneous examination of the ledger and the bank statement, we find that the payments shown to Naukri.com on different dates appear to match the corresponding bank entries. The payments shown towards website expenses and to parties such as O Box, Smitanjali and Ganesh are also found appearing in the bank statement. At the same time, certain entries described as internet marketing expenses do not appear exactly matching with the banking entries. Therefore, the entire claim could neither have been rejected nor accepted without a proper reconciliation and verification.

10.6 We also observe that these are normal expenses which may ordinarily arise while carrying on training and related activities. In cases where the business activity is not disputed but complete vouchers are unavailable, the Revenue authorities should examine the nature and reasonableness of the expenditure. After considering the turnover, nature of activity, past-history and available supporting materials, a reasonable disallowance may be estimated, instead of rejecting the entire expenditure solely for want of complete vouchers and want of payment through banking channel only.

10.7 In view of the above, we set aside the findings of the Ld. CIT(A) on the disputed cash expenses and marketing expenses and restore the matter to the file of the AO for fresh examination. The AO shall verify the cash book, opening and closing cash balances, cash sales, daily cash availability and the corresponding expense ledgers. The AO shall also reconcile the marketing expense ledger with the bank statement and verify the identity of the parties, purpose of the payments and their business connection.

10.8 Where adequate evidence is available, the expenditure shall be allowed in accordance with law. Where the expenditure is found to have been incurred for the assessee’s activities, but complete supporting vouchers are unavailable, the AO shall determine a reasonable amount after considering the nature of the expense and the surrounding facts. No disallowance shall be made merely because the payment was made in cash or because there was no corresponding withdrawal from the bank. The assessee shall be given a reasonable opportunity to furnish the cash book, ledgers, bills, vouchers, confirmations and other supporting evidence. Accordingly, the grounds raised by the assessee are allowed for statistical purposes. 11. In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced in the open court on 25th August, 2026 Sd/- Sd/- YOGESH KUMAR US WASEEM AHMED JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore Dated: 25th August, 2026 Vms Copy to: INDUSTRIAL TRAINING & RESEARCH INSTITUTE (ITRI), NO 296 1ST MAIN 1ST BLOCK 1 KORAMANGALA, BENGALURU-560034, KARNATAKA ITO, WARD 4(3)(2), 80 FEET ROAD, BMTC BUILDING, 6TH 2 BLOCK, KORAMANGALA, BENGALURU-560095, KARNATAKA 3 THE PCIT / CIT, 4 THE D.R., ITAT, BANGALORE BENCH 5 GUARD FILE By Order ASSISTANT REGISTRAR / I.T.A.T., BANGALORE

More judgments on Section 40A(3)

All 3,278 judgments and leading authorities on Section 40A(3) →

Recent GST High Court judgments

Search GST case law →