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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI RAJESH KUMAR & SHRI AMARJIT SINGH
Per Rajesh Kumar, Accountant Member:
The present appeal has been preferred by the assessee against the order dated 17.01.2018 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2012-13.
The only issue raised by the assessee is against the confirmation of addition of Rs.1,76,83,146/- by Ld. CIT(A) as made by the AO by disallowing the expenses under the provisions of section 40A(3) of the Act.
2 M/s. Yati Enterprises 3. The facts in brief are that the assessee is in the business of building construction and is following percentage completion method to recognize the income. During the year the work in progress was Rs.7,26,36,202/- and accordingly disclosed net profit after interest and remuneration to partners at Rs.21,55,592/-. During the course of assessment proceedings, the AO observed that assessee has made payments to various parties through bearer cheques exceeding Rs.20,000/- in violation of provisions of section 40A(3) of the Act. The details of said payments are given on page No.2 & 3 of the assessment order. The AO came to the conclusion that these expenses were not allowable as the same were incurred in violation of section 40A(3) of the Act and consequently, rejecting the reply of the assessee that these payments were out of business exigencies and also the affidavit furnished by the assessee from some of the recipients. Thus the AO added the entire such payments to the income to the income of the assessee in the assessment framed u/s 143(3) of the Act dated 18.03.2015.
In the appellate proceedings, the Ld. CIT(A) dismissed the appeal of the assessee after calling for a remand report from the AO and after taking into account the submissions of the assessee by observing and holding as under: “(ii) Conclusion After considering the above stated facts of the case, I am of the opinion that the AO has rightly disallowed Rs.l,78,83.146/-u/s.40A(3] of the Act and the addition made by the AO has been further substantiated as follows:
a) on perusal of the assessment order, it is seen that the appellant has failed to give a reasonable explanation as to why the cash payments exceeding Rs.20,000/- has been made and the explanation given by the appellant is not covered by the exception Rule 6DD of the IT Rules and as such disallowance u/s.40A(3) is justified, b) Even in the remand proceedings also, the appellant has failed to substantiate and therefore, it cannot be covered by the exception under Rule 6DD of the IT
3 M/s. Yati Enterprises Rules. The benefit to be allowed for the exceptional circumstances as mentioned in the provisions contained in Rule 6DD are not automatic but the conditions precedent are to be proved by the appellant by furnishing documentary evidence, c) It is not that, the cash payments were made because there were no bank accounts and therefore, in the need of business the payments were necessary to be given in cash, d) The primary object of enacting section 40A(3) is twofold, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out of such transactions and, secondly, to inculcate the banking habits amongst the business community. Without prejudice of the above discussion in a), b) and c), the appellant has not proved in the assessment as well as remand proceedings, that the cash recipients have paid the taxes due on the cash receipts.
In view of the above stated facts, the addition made by the AO is sustained and the appeal of the appellant on this ground is dismissed.”
After hearing both the parties and perusing the material on record, we observe that the assessee is engaged in the business of building construction and recognize the revenue on percentage completion method meaning thereby that a certain percentage is applied to the work done depending upon the completion of work and thus the revenue is recognized on estimated basis. There is no dispute to this effect. We further note that during the year the assessee has made payments to various parties in cash exceeding Rs.20,000/- the genuineness whereof have not been disputed by both the authorities below. Therefore, we are of the view that where the genuineness of the transaction is not disputed, the provisions of section 40A(3) can not be applied. The case of the assessee is supported by the decision of Punjab & Haryana High Court in the case of Gurdas Garg vs. CIT(A), Bathinda (2015) 63 taxman.com 289(P&H) wherein the Hon’ble High Court has held that where the genuineness of the transaction is not disbelieved by the authorities below and a case of business expediency is made out, no disallowance under section 40A(3) could be made. We note that case of business expediency may be not specifically
4 M/s. Yati Enterprises covered by rule 6D of the I.T. Rules as the exceptions provided therein are not exhaustive as has been held in the case of Smt. Harshila Chordia vs. ITO (2008) 298 ITR 349 Rajastan. Therefore, we are not in agreement with the conclusion drawn by the authorities below. The assessee also relied on the decision of the co-ordinate bench of the Tribunal in the case of M/s. Lavens Constructions Pvt. Ltd. vs. ACIT 128 and 909/Mds/2010 A.Y. 2005-06 & 2006-07 order dated 30.04.2013 wherein under similar set of facts it was held that where the assessee was following a percentage completion method , no disallowance can be made under section 40A(3) and 40A(ia) of the Act. Relevant para is reproduced as under: “11. As regards the disallowances u/s 40A(3) and 40(a)(ia) of the Act are concerned, the CIT(A) was not justified in sustaining the disallowances. As the profits are assessed on estimate basis, no disallowance of expenses should be made. We, therefore, delete the disallowances made by the Assessing Officer u/s 40A(3) and 40(a)(ia) of the Act.”
We have also considered the written submissions filed by the Ld. D.R. dated 10.12.2019 and found that the defence taken by the Ld. D.R. and various case laws relied do not come to rescue of the department as same are distinguishable on facts. Accordingly, we are inclined to set aside the order of the Ld. CIT(A) and direct the AO to delete the disallowance.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 14.02.2020.