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Facts
The assessee, M/s Apex Builders, filed a return of income for AY 2012-13. The AO made additions for disallowance of interest paid without TDS, excessive cash purchases, unverified cash expenses, and personal use of vehicle expenses. The CIT(A) upheld some disallowances and partly allowed the appeal.
Held
The Tribunal remanded the issue of disallowance of interest payment for non-deduction of TDS back to the AO, directing the assessee to provide proof of tax payment by the recipient. The disallowance for cash purchases exceeding limits was upheld due to violation of Section 40A(3). The disallowance for unverified cash expenses was deleted.
Key Issues
Whether disallowance under Section 40(a)(ia) for interest payment without TDS is justified when the recipient has paid taxes; Whether cash payments exceeding prescribed limits violate Section 40A(3); Whether unverified cash expenses are justified.
Sections Cited
143(1), 143(2), 142(1), 194A, 40(a)(ia), 40A(3), Rule 6DD, 36(1)(iii), 271(1)(c)
AI-generated summary — verify with the full judgment below
Order PER LALIET KUMAR, J.M This is an appeal filed by the Assessee against the order of the Ld. CIT(A)-1, Ludhiana dt. 30/01/2018 pertaining to A.Y. 2012-13. 2. At the outset the Registry has pointed out that the appeal filed by the Assessee is barred by limitation by186 days. 3. After considering the condonation application filed by the assessee in the present appeal, we condone the delay for which sufficient cause is shown, and admit the appeal for adjudication.
Briefly, the facts of the case are that M/s Apex Builders, a firm engaged in civil and road construction work, filed its return of income for the Assessment Year 2012–13, declaring an income of Rs . 4,52,050/-. The return was filed electronically on 30.09.2012 and was processed under Section 143(1) of the Income Tax Act, 1961, on 19.05.2013. The case was later selected for scrutiny under the Computer-Aided Scrutiny Selection (CASS) and a notice under 2 Section 143(2) was issued on August 19, 2013. Further, a questionnaire along with a notice under section 142(1) was issued on 05.02.2014. The assessee was represented by its authorized representative, Chartered Accountant Mr. Pankaj Garg, who attended the proceedings and furnished the required details and books of account for verification.
4.1 The AO observed that the assessee had paid interest amounting to Rs.20,079/- to Kotak Mahindra Prime Ltd. and Rs.2,04,226/- to HDB Financial Services Ltd. without deduction of tax at source (TDS) as required under section 194A. The assessee submitted that these NBFCs had assured them that no TDS was necessary due to their exemption status, but failed to produce any certificate to that effect. Based on CBDT Circular No. 10/DV/2013, which clarified that even paid amounts fall under the purview of section 40(a)(ia), the AO disallowed the entire amount of Rs . 2,24,305 under the said section.
4.2 Further, the AO noted multiple instances of cash purchases exceeding Rs . 20,000/- made to the same party on the same day, in violation of section 40A(3) of the Act. The total amount of such purchases aggregated to Rs . 16,33,037/-. No satisfactory explanation for seeking the deduction and falling under the exception mentioned in Rule 6DD was provided by the assessee. Therefore, the Assessing Officer had disallowed the entire amount of Rs. 16,33,037/-.
4.3 Additionally, the AO observed another set of cash purchases totaling Rs. 10,24,000/-, for which the names of the parties were not disclosed, leading to the conclusion that these were non-genuine transactions. As no adequate clarification was submitted, this amount was also added back to the income of the assessee.
4.4 With respect to personal expenditures, the AO found that vehicle repairs and maintenance, car insurance, car depreciation, telephone expenses, and mobile depreciation amounting to Rs.2,56,919 were debited to the profit and loss account. As no log books or call registers were maintained, and considering 3 the likelihood of personal use, 1/5th of these expenses (Rs.51,384) was disallowed.
4.5 Finally, the AO noticed that an advance of Rs.1,00,000 was made to Mr. Pankaj Garg, C.A., which was outstanding as on 01.04.2011. While the assessee had borrowed funds on which interest was paid, no interest was charged on this advance. Applying the rationale of the Punjab & Haryana High Court in the case of CIT vs. Abhishek Industries Ltd., the AO disallowed notional interest of Rs.12,000 under section 36(1)(iii).
4.6 As a result of these additions, the AO computed the total assessed income at Rs.33,96,780/- and initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income.
Against the order of the AO, the assessee went in appeal before the Ld. CIT(A). The Ld. CIT(A) reviewed the case of M/s Apex Builders, who had filed an appeal against the assessment made by the AO for the Assessment Year 2012– 13. The firm had originally declared an income of Rs.4,52,050/-, but after scrutiny, the AO assessed it at Rs.33,96,776/-, leading to a significant increase in tax liability. One of the main issues was the disallowance of interest payment of Rs.2,04,226/- made to financial institutions without deducting tax at source (TDS). The firm argued that the recipients had already paid tax on this income, but since they could not provide the necessary certificates to prove it, the Ld. CIT(A) upheld the AO’s decision to disallow the expense.
5.1 Another issue was related to cash payments amounting to Rs.16,33,037/- made in excess of the limit prescribed under section 40A(3) of the Income Tax Act. The firm claimed that these were payments to transporters, which have a higher permissible limit. However, the AO found that these payments were actually for retail purchases and not transportation, and the firm could not prove otherwise. Therefore, this disallowance was also confirmed. Additionally, the AO had disallowed Rs.10,24,000/- worth of cash expenses recorded in the 4 books as "cash paid as per voucher" without providing the names of recipients or purposes of payment. Since the firm failed to give proper explanations during both assessment and appeal, the Ld. CIT(A) considered these expenses non- genuine and upheld the disallowance.
5.2 Regarding vehicle expenses, the AO had disallowed 1/5th of the total amount assuming personal use. The Ld. CIT(A) felt this was excessive and reduced the disallowance to 1/10th, stating that no clear evidence was presented to show personal use. Lastly, the AO had disallowed an interest amount of Rs.12,000 on the grounds that the firm had advanced Rs.1 lakh to a Chartered Accountant for future services without any benefit to the business. However, since the AO did not prove that this advance came from borrowed funds, the Ld. CIT(A) allowed this amount and deleted the disallowance.
5.3 Accordingly, the Ld. CIT(A) partly allowed the appeal of the Assessee. The disallowance under Section 36(1)(iii) was deleted, and the disallowance for personal use was restricted to one-tenth. Other additions were confirmed.
Feeling aggrieved by the order of the Ld. CIT(A) the assessee came in appeal before me.
6.1 During the course of hearing the Ld. AR submitted that M/s Apex Builders is a genuine civil construction firm, and the additions made by the AO were unjustified. On the interest payment of Rs. 2,04,226/-, the Ld. AR argued that although TDS was not deducted, the recipients had disclosed the income and paid taxes. Hence, disallowance under section 40(a)(ia) was not warranted, relying on Merilyn Shipping and Vector Shipping rulings.
6.2 Regarding the cash payments of Rs. 16,33,037/-, the LD. AR contended these were made to transporters under business compulsion, and such payments are exempt under Rule 6DD, with the threshold limit being Rs. 35,000/-.
5 The Ld. AR relied upon the legal submission and the judgments filed in this regard.
6.3 On the disallowance of Rs. 10,24,000/- towards unverified cash expenses, the Ld. AR maintained that these were legitimate and supported by vouchers, and the AO made the disallowance without concrete evidence.
6.4 The Ld. AR concluded by requesting full relief, stating that the additions were based on assumptions and not facts.
Per contra, the Ld. DR relied on the order of the lower authorities. The Ld. DR supported the AO’s assessment, stating that all disallowances were made as per law. Regarding the interest of Rs. 2,04,226, the DR argued that since TDS was not deducted and no certificate was provided to show that tax was paid by the recipient, disallowance under Section 40(a)(ia) was proper. Regarding cash payments of Rs. 16,33,037/-, the Ld. DR maintained that these violated section 40A(3) and were not covered under Rule 6DD, especially as they were for purchases and not transport, as falsely claimed.
7.1 The Ld. DR further supported the disallowance of Rs. 10,24,000/- in cash expenses, as the appellant failed to provide any details or proof of purpose. On car expenses, the DR justified the estimated disallowance for personal use due to lack of records. Lastly, the DR defended the Rs. 12,000/- disallowance under section 36(1)(iii), stating there was no evidence that the advance was not from borrowed funds. Therefore, the appeal should be dismissed.
We have heard the rival contention and perused the material available on the record. Coming to the disallowance under Section 40(a)(ia) of Rs.2,24,305/-, the assessee made interest payments to Kotak Mahindra Prime Ltd. and HDB Financial Services Ltd. without deducting TDS, claiming exemption based on verbal assurances but failed to produce Form 26A or any supporting documentary evidence.
6 8.1 The CIT(A) upheld the disallowance relying on CBDT Circular No. 10/DV/2013 and the decision in CIT v. Crescent Export Syndicate (2013) 33 taxmann.com 250 (Cal), which held that Section 40(a)(ia) applies to amounts “paid” as well as “payable.”
8.2 In the judgment of the Hon'ble Delhi High Court in CIT v. Ansal Landmark Township Pvt. Ltd. (2015) 377 ITR 635 (Del), it was held that the second proviso to Section 40(a)(ia) introduced by the Finance Act, 2012 is curative and retrospective. If the assessee furnishes evidence that the recipient filed a return and paid taxes, no disallowance is warranted.However, since the assessee in this case has not furnished Form 26A or any proof of return filing and tax payment by the recipient, the benefit of Ansal Landmark cannot be extended to the assessee. Hence, this issue is remanded back to the file of the Ld. Assessing Officer with the direction to the assessee to submit the evidence of payment of taxes by the recipient. The Ld. Assessing Officer is directed to decide the issue in accordance with law, keeping in mind the decision of the Delhi High Court in the case of Ansal Landmark (supra) and also the evidence which the assessee may file to prove that the taxes were paid by the recipient on the payment made by the assessee.
Now I will deal with the issue of disallowance of Rs.16,33,037/- under Section 40A(3). The AO observed that the assessee made cash purchases exceeding Rs.20,000/- in a day to a single party, thus violating the provision. Although the assessee claimed that the payments were made to transporters which were within the higher limit of Rs.35,000/-. The Ld. CIT(A) had called for the remand report from the Assessing Officer on the documents / submnissions filed by the assessee before him. In the remand report dated 20.02.2017, the AO specifically analyzed the nature of the payments and concluded as under:
These bills are part of the purchase bills recorded under the head ‘Retail Purchases’ amounting to Rs.1,15,03,087/- in the Profit & Loss account. The assessee has separately accounted for ‘Freight & Cartage’ at Rs.2,96,561/-. Therefore, the amount of Rs.16,33,037/- cannot be said to be transport payments as claimed by the assessee.
Thus, in my view, it has been established by the Revenue that the payments in question were not made to transporters but to suppliers for the purchase of construction materials. The assessee before me had failed to contradict the findings of fact given by the Assessing Officer. In my view, these payments were part of routine retail purchases, givenby the assessee to one party in a single day in cash, without the support of exceptional circumstances under Rule 6DD. For the completeness of the record, I am reproducing below some of the cash payments made by the assessee on a single day to one person only.
Date Vouchers Nos. Party Nature of Amount Transaction 18/06/2011 101 to 106, 169 Tulsi Transport Claimed as 1,18,450/- Co. freight, found as purchase 26/09/2011 174-175 Baba Road Cash against 40,000/- Lines GR Nos. 839- 840 28/09/2011 180-183 Baba Road Cash against 80,000/- Lines GR Nos. 847- 850 06/12/2011 232-236 Baba Road Cash against 1,00,000/- Lines GR Nos. 893- 897 10.1 The total disallowed amount under this head comprises multiple such payments aggregating to Rs.16,33,037/-, all of which exceeded the permissible cash limits and were made without supporting any urgent business necessity or covered exception. 10.2 In my view, the explanation offered by the assessee, that the payments were made to transporters, stands rebutted by the AO in the remand report with reference to the books of account and profit & loss statement. The payments were found to be part of retail purchases, not transport charges. The separate accounting of ‘Freight & Cartage’ at Rs . 2,96,561/- confirms that the present 8 disallowance does not relate to transporters and hence the threshold of Rs . 35,000/- is not applicable. In view of the above the ground raised by the assessee is required to be dismissed.
11. In addition to raising grounds on merits, the assessee contended that the issue is squarely covered in its favour by the judgment of the Hon’ble Supreme Court in the case of Atar Singh Gurmukh Singh [(1991) 191 ITR 667 (SC)], and by several decisions of coordinate Benches of the Tribunal, including Raja & Co., M/s A. Daga Royal Arts, ITA No. 1065/JP/2016, and Excel Engineers vs. JCIT, ITA No. 1588/Kol/2013. According to the assessee, these decisions support the claim that the impugned disallowance under Section 40A(3) is unwarranted.
12. Per contra, the Ld. Departmental Representative submitted that the reliance on Atar Singh Gurmukh Singh and other similar decisions is wholly misplaced, as they pertain to the unamended provision of Section 40A(3), prior to the amendment brought in by the Finance Act, 2008 w.e.f. 01.04.2009. The amendment made a significant departure by providing that any payment or aggregate of payments made to a person in a day exceeding Rs.20,000 (now Rs.10,000), otherwise than by account payee cheque/draft or electronic clearing system, shall be disallowed. The Ld. DR emphasized that these amendments are substantive in nature and are binding.
13. I have given my thoughtful consideration to the rival submisisons made by the parties on this point of law. The legislative intent behind the amendment was to curb cash transactions and promote banking channels to ensure accountability and traceability in business transactions. The Memorandum explaining the Finance Bill, 2008 makes this purpose abundantly clear. The provision is thus enacted with a clear anti-abuse objective, which must be enforced strictly.
14. The Hon’ble Supreme Court in Commissioner of Income Tax-III v. Calcutta Knitwears, (2014) 6 SCC 444; (2014) 362 ITR 673 (SC); [2014] 43 taxmann.com 446 9 (SC) laid down the law that in taxing statutes, there is no equity, and a provision must be interpreted strictly based on its language. It was held that “taxing statutes have to be construed strictly. The court cannot add or subtract words in the provisions of taxing laws. The intention of the Legislature is to be gathered from the language used in the statute. Once the language is unambiguous, effect must be given to it irrespective of the consequences.”
In the present case, the assessee has not brought any material on record to establish that the impugned cash payments were covered under any exceptions listed under Rule 6DD. In the absence of any such evidence, and considering the amended provision which is clear, objective, and leaves no scope for ambiguity, the assessee's contention cannot be sustained. Moreover, decisions that continue to apply Atar Singh Gurmukh Singh without addressing the amended law are rendered per incuriam and are not of binding precedent value.
Accordingly, applying the binding statutory language, the strict rule of interpretation endorsed by the Hon’ble Supreme Court in Commissioner of Income Tax-III v. Calcutta Knitwears, Ludhiana (supra) and finding no valid explanation under Rule 6DD, we uphold the disallowance made by the Assessing Officer under Section 40A(3) of the Act.
Accordingly, the disallowance under Section 40A(3) is upheld.In the result, this ground raised
by the Assessee is dismissed.
18. Concerning the disallowance of Rs.10,24,000/- on account of unverifiable purchases, the Ld. AR submitted that the disallowance is unwarranted as the assessee had duly furnished vouchers in support of the purchases in question. In contrast, the Ld. DR relied on the findings of the lower authorities, asserting that the assessee failed to produce party-wise names or vouchers for several cash purchases. It was pointed out that the entries were vague and non-descriptive, such as “cash paid as per voucher,” and therefore, the addition ought to be sustained.