CANON GRANITES PRIVATE LIMITED,THRISSUR vs. ACIT,CIRCLE-1(1), THRISSUR

This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 19/03/2024 in respect of the A.Y. 2013-14 and raised the following grounds: “A. Order of the Commissioner Income Tax (Appeals) dated 19.03.2024 'hereinafter referred to as CIT (A)] is illegal, arbitrarily and liable to be set aside.

The assessee is doing the business of extraction and sale of granite. The assessee filed their return of income on 25/09/2013. Thereafter the case was selected for compulsory manual scrutiny for which the assessee appeared and filed their explanations to the various issues raised by the AO. The assessee’s books of accounts were audited and the audited report in form 3CA and 3CD were filed. The AO on verification of the documents and the bank statements, had alleged that the assessee had made payments in excess of Rs. 20,000/- in a day towards the expenses which is in violation of section 40A(3) of the Act. The assessee filed their detailed reply and submitted that raw materials were purchased through their lorry drivers and the materials purchased is below Rs. 20,000/- and therefore no single transaction exceeds Rs. 20,000/-. The assessee also explained the facts and circumstances under which the materials were purchased from various small time quarry owners and the manner of payment to each of the quarry owners and submitted that therefore the disallowance u/s. 40A(3) is not warranted. The assessing officer not accepted the explanation offered by the assessee but without verifying the genuineness of the claim made by the assessee had made the assessment in which the disallowances were made u/s. 40A(3) of the Act. The assessee challenged the said order before the Ld.CIT(A). The assessee also relied on the Rule 6DD(k) as an alternative argument. The Ld.CIT(A) had extracted the submissions made by the assessee and also the findings of the AO and finally confirmed the order of the AO on different reasoning.

The said order of the Ld.CIT(A) is under challenge before this Tribunal.

At the time of hearing, the Ld.AR submitted that the Ld.CIT(A) had not discussed the issue in detail but extracted the submissions made by the assessee as well as the finding of the AO and finally gave a finding that the reasons given by the assessee that the raw materials were purchased from small dealers could not be accepted since the materials were transported from small quarry owners who have no license to operate the said business and therefore the said purchases would be an unauthorised purchases and it should not be encouraged since such mining causes inexplicable damage to the nature. The Ld.AR submitted that without examining the claim made by the assessee, the findings given by both the authorities are not correct. The Ld.AR also further submitted that the another alternative plea raised by the assessee that Rule 6DD(k) would be applicable was not at all considered by the Ld.CIT(A) and therefore prayed to allow the appeal.

The Ld.DR relied on the orders of the lower authorities and submitted that the AO had passed the assessment order in an elaborate manner which was affirmed by the Ld.CIT(A) and requires no interference.

We have heard the arguments of both sides and perused the materials available on record.

The only dispute to be decided in this appeal is whether the disallowance made by the AO u/s. 40A(3) is correct or not.

We have perused the assessment order in which the Managing Director of the assessee company filed a detailed explanations about the modus operandi of the purchases. By considering the said explanation offered by the assessee, the facts emerges are that the assessee is a company dealing in granites and purchases the raw materials from the various quarry owners whether they are licensed or not through their lorry drivers for which everyday they gave cash to the drivers to procure the raw materials from various persons. The lorry drivers procured the materials from various persons and bills were also raised and the total expenses on the particular day were recorded in the books of accounts. From the said facts we came to the conclusion that the assessee had expended more than Rs. 20,000/- on a single day. But the explanation offered by the assessee could not be brushed aside without examining the issue at the assessment stage itself. When the assessee’s contention is correct, then naturally, the provision 40A(3) would not attract. No doubt the books of accounts are the evidence to show that the cash payments were made on various dates exceeding Rs. 20,000/- but that should not be the sole reason to doubt about the genuineness of the claim made by the assessee. In fact the AO in his order had observed that since the payment or aggregate of payments exceeds Rs. 20,000/- to a person in a day, otherwise than by an account payee cheque or by draft, the disallowance made u/s. 40A(3) is in order and he discussed some orders in support of his conclusion. Further, in the assessment order, the AO had observed that the assessee had not brought any material on record to show that the payments were made in cash due to unavoidable circumstances and the payments were made after banking hours. From the above said findings given by the AO, the AO was of the view that no proper records were produced to show that the necessity of paying the cash and also about the situation warrants the payment in cash, etc.

While framing the assessment, the AO had not at all considered the submissions made by the assessee that the payments made in a single day does not relates to an individual but it comprises the payments made to various persons through various drivers and therefore without verifying the documents properly, the said explanation could not be rejected by the AO. Even though the parties names were mentioned, the assessee’s explanation is that the several lorry drivers who are acting as agents of the assessee had collected the raw materials and therefore the said payments could not be termed as a single payment to a single seller.

Before the Ld.CIT(A), the assessee also took an alternative plea that the lorry drivers were acted as agents of the assessee and therefore the purchases effected through the said drivers could not be denied u/s. 40A(3) of the Act in view of the Rule 6DD(k) of the Rules. This plea of the assessee was not at all discussed by the Ld.CIT(A) while deciding the issue. In fact, in the appeal order, the most of the pages contains the extract of the submissions made by the assessee and the finding of the AO. The Ld.CIT(A) had also not considered the claims made by the assessee. Instead the Ld.CIT(A) had given a finding that the act of purchasing the raw materials from the small quarry owners who have no license to operate the said quarries would cause an injury to the nature and therefore the said purchases should not be encouraged.

We do not find that the said finding of the Ld.CIT(A) will hold good for the issue on hand. The Ld.CIT(A) ought to have considered the submissions made by the assessee and he has to give a finding that whether the explanations offered by the assessee is a correct one or not and if he founds that the same are correct, necessarily the assessee is entitled for the relief.

We, therefore, inclined to set aside the order of both the authorities and remit the issue to the file of the AO for denovo consideration. We also make it clear that the assessee is at liberty to produce the necessary documents in support of their contention. Thereafter the AO would complete the assessment proceedings after giving a reasonable opportunity of being heard to the assessee.

In the result, the appeal filed by the assessee is allowed for statistical purposes.