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Facts
The assessee filed its return of income for AY 2017-18 declaring Nil income. The AO made an addition of Rs. 41,39,084/- under Section 40A(2)(b) of the Income Tax Act, 1961, for alleged purchases from an associated concern, citing the tax audit report. The CIT(A) upheld this disallowance.
Held
The Tribunal held that the AO had erroneously used the tax audit report of a prior year (AY 2016-17) to make the addition for the current AY 2017-18. The assessee had demonstrated that no such purchase was made in the relevant year and that the tax audit report for AY 2017-18 was not required.
Key Issues
Whether the disallowance under Section 40A(2)(b) made by the AO based on the Tax Audit Report of a prior year is sustainable when no such purchase was made in the current year.
Sections Cited
143(3), 40A(2), 270A, 40A(2)(b)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: SHRI B.M. BIYANI & SHRI PARESH M. JOSHI
आदेश/ O R D E R
Per B.M. Biyani, A.M.:
Feeling aggrieved by order of first appeal dated 09.02.2024 passed by learned Commissioner of Income-Tax (Appeals)-Addl/JCIT (A)-12, Mumbai [“CIT(A)”] which in turn arises out of assessment-order dated 20.12.2019 passed by learned DCIT/ACIT, Khandwa [“AO”] u/s 143(3) of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2017-18, the assessee has filed this appeal on following grounds:
“1. On the facts and circumstances of the case and in law the learned Commissioner of Income tax (Appeals) erred in confirming the addition amounting to Rs. 4139084/- under Section 40A(2)(b) of the Act. The Appellant prays the said arbitrary disallowance be directed to be deleted.
Page 1 of 8 AY 2017-18 2. The CIT(A) failed to appreciate and ought to have held that the AO has not perused the audit report correctly and neither questioned the reasonableness of purchase from related party. Accordingly, the Appellant prays that the said disallowance be directed to be deleted.”
The background facts leading to present appeal are such that the assessee-company filed return of income of AY 2017-18 declaring a total income of Rs. Nil (with a claim of carry forward of loss at Rs. 3,85,39,235/-).
The case was selected for scrutiny and the AO issued notices u/s 143(2)/142(1) which were complied by assessee. Ultimately, the AO completed assessment u/s 143(3) after making two additions, namely (i) addition of Rs. 1,96,59,655/- on account of suppression of sales and (ii) disallowance of Rs. 41,39,084/- u/s 40A(2). Aggrieved, the assessee carried matter in first-appeal whereupon the CIT(A) deleted the addition on account of suppression of sales but upheld the disallowance u/s 40A(2). Still aggrieved, the assessee has come in next appeal before us.
The sole issue involved in present appeal is the disallowance of Rs. 41,39,084/- u/s 40A(2) made by AO and upheld by CIT(A).
At first, we extract the order passed by AO in this regard:
“(ii) Disallowance u/s 40A(2)(b):- Further auditor in Form 3CD at column no. 23 have furnished the particulars of any payment made to persons specified u/s 40A(2)(b) that includes purchases made from Gupta Trading Co., an associated concern, at Rs. 41,39,084/- whereas in the P&L a/c of ITR has been shown NIL; please explain the nature of purchases and furnish ledger of purchases along with bills of purchases. Failure to which same will be Page 2 of 8 income. In his reply uploaded on 19.12.2019, the assessee has mentioned that in this connection we hereby draw your kind attention that the assessee company had neither purchased any goods nor sale any unit in the open market. Further we would like to draw your kind attention that the clarification you require is pertaining to the F.Y. 2015-16 Tax Audit Report.
The contention of the assessee is misleading because the auditors have clearly mentioned in the audit report the details of payments made to persons specified u/s 40A(2)(b). Therefore, amount of Rs. 41,39,084/- is disallowed as assessee failed to furnish any proof of purchases. The same is added to the total income of the assessee. Penalty proceedings u/s 270A are hereby initiated for under reporting of income.”
Now, we extract the order passed by CIT(A) reading as under:
“Ground No. 1.5 & 1.6 - The appellant has contended that the AO has erred in viewing the TAR pertaining to previous year i.e. A.Y. 2016-17 and made a disallowance of Rs. 41,39,084/-.
In this regard, the assessment order was perused and it was observed by the AO that the appellant had made purchases from an associated concern
(Gupta Trading Co.) at Rs. 41,39,084/-. The AO contends that in the P/L account of ITR the column has been shown as Nil.
In order to verify the veracity of the claim of the appellant, the ITR of A.Y.
2017-18 was downloaded from CPC 2.0. The following was observed relating to Section 40A(2)(b):
In view of these grounds no. 1.5 & 1.6 are dismissed.”
Page 4 of 8 made a straight forward submission that the AO has made addition on the footing that in Form No. 3CD (Tax Audit Report) at Column No. 23, the auditors have furnished the particulars of payments made to persons specified u/s 40A(2)(b) which includes purchase of Rs. 41,39,084/- from M/s Gupta Trading Co. Ld. AR immediately carried us to the copy of Form No. 3CD of preceding AY 2016-17 to demonstrate that the impugned purchase of Rs. 41,39,084/- from M/s Gupta Trading Co. was reported by auditors in Form No. 3CD of preceding AY 2016-17. He submitted that there is no Form No. 3CD of current AY 2017-18 since there was no requirement of tax audit because the turnover of assessee was less than prescribed limit for audit. He referred the Balance-Sheet of assessee of current AY 2017-18 and explained that the same was audited by statutory auditors for the purpose of Companies Act since the assessee is a company but, however, there was no tax audit done and consequently no form No. 3CD. Ld. AR submitted that there was in fact no purchase made by assessee from M/s Gupta Trading Co. during the previous year relevant to current AY 2017-18 under consideration. Thus, by means of these submissions, Ld. AR demonstrated that the AO has picked the Form No. 3CD of preceding AY 2016-17 and taken the impugned purchase of Rs. 41,39,084/- therefrom for making disallowance u/s 40A(2).
Then, Ld. AR referred the CIT(A)’s order re-produced above to explain that the CIT(A) has gained a wrong understanding to uphold the AO’s action.
Page 5 of 8 AY 2017-18 and preceding AY 2016-17 and observed that the assessee has mentioned “Nil” in both ITRs against sub-item No. (a) of Item No. 9 relating to “Amounts paid to persons specified in section 40A(2)(b)”. Ld. AR submitted that the heading of Item No. 9 of ITRs reads as “Amounts debited to the profit and loss account, to the extent disallowance under section 40A”. Therefore, the details in sub-item No. (a) of Item No. 9 of ITRs are required to be given only to the extent of amount disallowable u/s 40A(2) i.e. the amount in excess of fair market value of goods purchased. Ld. AR went on explaining that in current AY 2017-18, there was no Form No. 3CD (and there was no purchase also from M/s Gupta Trading Co.), therefore the assessee reported “Nil” in ITR of current AY 2017-18. Further, in preceding AY 2016-17, there was Form No. 3CD in which the auditors reported the particulars of payments made to persons specified u/s 40A(2)(b) irrespective of whether there is any disallowable portion or not but in ITR, the assessee has to report only disallowance portion out of such payment. Since there was no disallowable portion, the assessee reported Rs. Nil in sub-item (a) of Item No.
9 in preceding AY 2016-17. However, the CIT(A) has not understood these technical aspects and made a wrong conclusion just by comparing ITRs of two years. He submitted that the CIT(A) has not taken in account that there was no Form No. 3CD in current AY 2017-18 and the AO has wrongly referred to the Form No. 3CD of preceding AY 2016-17.
Page 6 of 8 no Form No. 3CD of current AY 2017-18 before AO; the AO has wrongly picked a Form No. 3CD of preceding AY 2016-17 and made addition in current AY which is abruptly wrong and unsustainable.
Replying to this, Ld. DR for revenue only relied upon orders of lower authorities but, however, could not controvert the submissions of Ld. AR.
We have considered rival contentions of both sides and perused the orders of lower-authorities as well as the material held on record to which our attention has been drawn. Admittedly, the AO has made impugned disallowance by stating “Further auditor in Form 3CD at column no. 23 have furnished the particulars of any payment made to persons specified u/s 40A(2)(b) that includes purchases made from Gupta Trading Co., an associated concern, at Rs. 41,39,084/-….”. But the assessee categorically claimed before AO “Further we would like to draw your kind attention that the clarification you require is pertaining to the F.Y. 2015-16 Tax Audit Report.” Even before us, the assessee has filed copy of Form No. 3CD of F.Y. 2015-16 and successfully demonstrated that it was the F.Y. 2015-16 relevant to preceding AY 2016-17 in which the auditors made reporting of purchase of Rs. 41,39,084/- from M/s Gupta Trading Co. u/s 40A(2)(b). Further, the Ld. AR has loudly narrated in open court that there was no Form No. 3CD in current AY 2017-18 as there was no tax audit. Ld. DR for revenue is not able to controvert these categorical claims of assessee. Thus, it is quite clear that the AO has picked Form No. 3CD of wrong year and made addition in current year. Being so, we have no Page 7 of 8 year is wrong/baseless and cannot be sustained. In that view of matter, we delete the disallowance made by AO. The assessee succeeds in this appeal.
Resultantly, this appeal is allowed.
Order pronounced in open court on 21/03/2025