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Income Tax Appellate Tribunal, BANGALORE BENCH B, BANGALORE
Before: SHRI. N. V. VASUDEVAN & SHRI. ABRAHAM P. GEORGE
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'B', BANGALORE BEFORE SHRI. N. V. VASUDEVAN, JUDICIAL MEMBER AND SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER (Assessment Year : 2009-10) M/s. Kuteer Constructions, No.8, Srinivasa Niketan, Venkata Reddy Layout, 6th Block, Koramangala, Bengaluru 560095 .. Appellant PAN : AAIFK0732B v. Asst. Commissioner of Income-tax, Circle -7(2), Bangalore .. Respondent Assessee by : Shri. B. S. N. Prasad, Advocate Revenue by : Dr. P. K. Srihari, Addl.CIT Heard on : 22.09.2015 Pronounced on : 30.09.2015 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
In this appeal filed by assessee, its grievance is that CIT (A) confirmed disallowance to the extent of Rs.27 lakhs invoking Section 40A(3) of the Income-tax Act, 1961 (‘the Act’ in short). 02. Facts apropos are that assessee a civil contractor had filed his return for impugned assessment year declaring income of Rs.39,51,800/-. During the course of assessment proceedings, it was noted by the AO that assessee had paid Rs.33 lakhs towards contract charges and Rs.32 lakhs towards civil contract ITA.940/Bang/2014 Page - 2 expenditure. When explanations were sought assessee stated that payment of Rs.33 lakhs was made to one Shri. Thulasi Reddy and Rs.32 lakhs to one Shri. Veeresh. As per the assessee, such payments were made for the services rendered by them in connection with the contract work of the assessee. AO issued notice u/s.131 of the Act to Thulasi Reddy and Veeresh. Thulasi Reddy appeared and stated that he was doing plumbing, electrical and sanitary work of the assessee. As per Thulasi Reddy, he had received Rs.19 lakhs by cheque and the balance of Rs.14 lakhs by cash from the assessee. Assessee could not produce any bills or any documents in support of the payments effected to Thulasi Reddy in cash.
There was no response from Veeresh to the notice issued by the AO. However, the AO observed that all the payments to Veeresh were made in cash. He held that assessee could not substantiate the claim of Rs.46 lakhs paid to Thulasi Reddy and Veeresh. He made a disallowance of the above amount considering it as unexplained expenditure.
Aggrieved, assessee moved in appeal before the CIT (A). As per the assessee, it was not possible to produce the sub-contractors for examination due to the short period of time given by the AO. Submission of the assessee was that the entire sub-contract payments were disallowed just for a reason that these were paid in cash without considering the volume of work done. As per the assessee, the concerned sub-contractors had to effect payments to illiterate workers and therefore cash payment was a must. Assessee also pointed out that Veeresh, one of the two sub-contractors had moved from his original address ITA.940/Bang/2014 Page - 3 and this was the reason why summons could not be served. Assessee pointed out that both these contractors had filed their tax-returns for F. Y. 2008-09 in which the gross amounts received by them were shown. Thus according to the assessee, genuineness of the expenditure was truly proved by him.
CIT (A) sought a remand report from the AO. In the remand report, AO stated that the second contractor, namely, Veeresh also appeared before him. According to the AO even though both parties had confirmed receipt from the assessee, they had not maintained any books of account. Section 40A(3) stood attracted in respect of the payments made by assessee in cash. CIT (A) thereafter was of the opinion that assessee had paid Rs.13 lakhs to Veeresha and Rs.14 lakhs to Thulasi Reddy in cash. According to him, Section 40A(3) of the Act, stood attracted. He sustained disallowance to the extent of Rs.27 lakhs.
Now before us, Ld. AR strongly assailing the orders of lower authorities submitted that original disallowance by the AO was for a reason that these were unexplained expenditure. CIT (A) had on the other hand confirmed part of the disallowance for a reason that there was a violation of Section 40A(3) of the Act. As per the Ld. AR, assessee was not given an opportunity to explain why the cash payments would not be hit by Section 40A(3) of the Act. According to him, assessee would be saved by Rule 6DD. Even otherwise As per the Ld. AR, no verification was done as to whether the payments had in the aggregate, on any day, exceeded Rs.20,000/-.
Per contra, Ld. DR submitted that the issue required a fresh look by the AO in the facts and circumstances of the case.
ITA.940/Bang/2014 Page - 4
We have heard the rival contentions and perused the orders. It is not disputed that Thulasi Reddy and Veeresh were sub-contractors of the assessee for the civil work. It is also not disputed that Rs.13 lakhs was paid to Veeresh and Rs.14 lakhs was paid to Thulasi Reddy in cash by the assessee. Originally disallowance was made by the AO for a reason that assessee was unable to produce supportive records for these payments. However, the CIT (A) had found that Section 40A(3) was attracted towards cash payments. Section 40A(3) of the Act is reproduced here under :
40A(3)(a) Where the assessee incurs any expenditure in respect of which payment is made in a sum exceeding twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee bank draft, no deduction shall be allowed in respect of such expenditure ; (b) where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the amount of payment exceeds twenty thousand rupees : Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under this sub-section where any payment in a sum exceeding twenty thousand rupees is made otherwise than by an account payee cheque drawn on a bank or account payee bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.
ITA.940/Bang/2014 Page - 5
First proviso clearly mentions that exceptional circumstances prescribed in the Rules would be a good reason for applying the said section. Hon’ble Gujarat High Court in the case of Anupam Tele Services v. CIT (366 ITR 122) had given an exposition of what could be construed as exceptional circumstances. We find that the said section is applicable only where payment or aggregate of payments on a given day exceeds Rs.20,000/-. In our opinion assessee was not given sufficient opportunity to explain his stance. Matter requires a fresh look by the lower authorities. We therefore set aside the orders of lower authorities and remit the issue back to the file of AO for consideration afresh in accordance with law.
In the result appeal of the assessee is allowed for statistical purpose. Order pronounced in the open court on 30th day of September, 2015.