Income Tax Act, 1961 – Sections 92CA(3), 92BA and 40A(3) - the assessee filed its return for AY 2014-15, declaring a total income of Rs.3,78,47,420. During scrutiny, the Assessing Officer (AO) referred specified domestic transactions (SDT) to the Transfer Pricing Officer (TPO) for benchmarking. The TPO, rejecting the Comparable Uncontrolled Price (CUP) method applied by the assessee, proposed an upward adjustment of Rs.80,06,666 by limiting the interest rate on loans to a related party to 15%, down from 18%. Additionally, cash payments for land purchases worth Rs.8,00,000 were disallowed under Section 40A(3), and an ad hoc disallowance of Rs.6,14,622 was made for administrative expenses lacking proper documentation. The CIT(A) partly upheld the AO’s disallowances but reduced the ad hoc expense disallowance to 5% - Whether the upward adjustment by the TPO under Section 92CA(3) was valid post-omission of Section 92BA(i) - Whether cash payments for land purchases could be disallowed under Section 40A(3) despite being treated as part of the closing stock - Whether an ad hoc disallowance for administrative expenses was justified based on incomplete documentation – HELD - The omission of Section 92BA(i) by the Finance Act, 2017, with effect from April 1, 2017, rendered related party transactions ineligible as SDT for AY 2014-15. Applying the principle in PCIT v. Texport Overseas Pvt. Ltd. (2020), the tribunal ruled that the omission must be treated as if the provision never existed. Consequently, the TPO’s adjustment of Rs.80,06,666 was invalid and deleted - Payments for land purchase were added to the closing stock as work-in-progress and not claimed as an expense. Citing PCIT v. Prosperous Buildcon Pvt. Ltd. (2024), the ITAT clarified that Section 40A(3) applies only to claimed expenses. The matter was remanded to the AO to verify if the payments were excluded from profit and loss statements and decide accordingly - Given the self-made vouchers and absence of proper bills, the ITAT upheld the CIT(A)’s decision to restrict the disallowance to 5% of Rs.61,46,226, amounting to Rs.3,07,311, considering the likelihood of personal expenses - The appeal was partly allowed. The upward adjustment under Section 92CA(3) was quashed, and the disallowance under Section 40A(3) was remanded for verification. The ad hoc disallowance for administrative expenses was upheld as reasonable

 

2024-VIL-1794-ITAT-RPR

 

IN THE INCOME TAX APPELLATE TRIBUNAL

RAIPUR BENCH RAIPUR

 

IT(TP)A No. 1/RPR/2024

Assessment Year: 2014-15

 

Date of Hearing: 30.09.2024

Date of Pronouncement: 13.12.2024

 

GOLDBRICKS INFRASTRUCTURE PVT LTD

 

Vs

 

ASST. COMMISSIONER OF INCOME TAX

 

Assessee by: Shri R. B. Doshi, CA

Revenue by: Shri S. L. Anuragi, CIT-DR

 

BEFORE

SHRI RAVISH SOOD, JM

SHRI ARUN KHODPIA, AM

 

ORDER

 

Per Arun Khodpia, AM:

 

This is an appeal by the assessee, directed against the order of Commissioner of Income Tax (Appeals), Ahmedabad-13, [(in short “Ld. CIT(A)”] u/s 250 of the Income Tax Act, 1961 (in short “the Act”), for the AY 2014-15, dated 25.04.2024, which in turn arises from the order of Asstt. Commissioner of Income Tax-1(1), Raipur (in short “Ld. A.O.”), u/s 143(3) r.w.s. 144C of the Act, dated 19.12.17.

 

2. The grounds of appeal raised by the assessee are as under:

 

1. Ld. CIT(A) erred in conforming disallowance of Rs.80,06,666/- made by AO on account of upward adjustment made by Transfer Pricing Officer u/s 92CA(3) while determining arm’s length price in relation to interest paid to related party. The disallowance made by AO and confirmed by Ld. CIT(A) is illegal, arbitrary and not justified.

 

2. Without prejudice to above ground, the disallowance made by AO and confirmed by Ld. CIT(A) is illegal & unsustainable inasmuch as the provisions of sec. 92BA have been amended vide Finance Act, 2017 to exclude specified domestic transactions which are contained u/s 92BA(1) r.w.s. 40A(2)(b) of the Act from purview of transfer pricing regulations.

 

3. Ld. CIT(A) erred in confirming disallowance of Rs.8,00,000/- on account of payment for purchase of land, invoking sec. 40A(3). The disallowance made by AO and confirmed by Ld. CIT(A) is arbitrary and not justified.

 

4. Ld. CIT(A) erred in confirming disallowance of Rs. 3,07,311/- out of Rs.6,14,622/- made by AO, being 5% of various expense such as travelling expenses, business promotion expenses, loading & boarding expenses, pooja expenses etc. The disallowance made by AO and confirmed by Ld. CIT(A) is illegal, arbitrary and not justified.

 

5. The appellant reserves the right to add, amend or alter any of the ground/s of appeal.

 

3. The brief facts of the case are that the assessee, a Private Limited Company have filed its E-return in Form ITR-6 on 28.11.2014, declaring a total income of Rs. 3,78,47,420/-. Subsequently, the case of the assessee was selected for complete scrutiny through “CASS”. Statutory notices u/s 143(2) and 142(1) are issued in due course. In compliance, required details were furnished by the assessee. During the course of assessment proceedings, Ld. AO observed that the assessee has carried out a “Specified Domestic Transactions” (SDT) during the relevant year to the extent of Rs. 8.18 Crore. Accordingly, a reference u/s 92CA(1) of the Income Tax Act has been made to Transfer Pricing Officer (TPO) at Ahmedabad on 13.12.2016, for the purpose of computation of Arm’s Length Price (ALP) in relation to SDT recorded in form 3CEB. Accordingly, the Deputy Commissioner of Income Tax (TPO)-1, Ahmedabad has issued a notice u/s 92CA(2) of the Act along with questionnaire to the assessee on 20.02.2017. In response to the notice, the assessee through its counsel attended the hearing before the Ld. TPO and filed the details. Going through the details and records of the assessee, it was observed by the Ld. TPO, that the assessee had entered into the following SDT, details of which are extracted from Form 3CEB in the assessment order, as under:

 

 

4. Ld. TPO, qua the aforesaid SDT have observed that the assessee has used “Comparable Uncontrolled Price” (CUP) method as “Most Appropriate Method” (MAM) to bench mark the interest expenses incurred by the assessee. The assessee has selected six comparable, however, as per Ld. TPO, the assessee has failed to submit any cogent explanation about how this comparable are selected. Hence, the comparable chosen by the assessee has been rejected and a show cause notice dated 11.10.2017 was issued stating that the assessee has paid interest @15% to the same lender, therefore, there was no reason to pay interest @18% and accordingly it is proposed to benchmark the interest @15%. In response, the assessee furnished its reply supporting contention along with facts and figures to substantiate @18% charged by the assessee is at Arm’s Length and, therefore, the adjustment of Rs.80,06,666/- as proposed by the Ld. TPO is unjustifiable. The response of assessee has been considered by the Ld. TPO, however, the same was not found convincing, accordingly, the adjustment of Rs. 80,06,666/- is recommended to be made to the total income of the assessee by revising the same upward. The observation of Ld. TPO in this respect are as under:

 

7. The assessee's reply has been duly considered but not acceptable. The assessee has, in his reply, relied upon external CUP whereas internal CUP was available. Therefore, the assessee adoption of external CUP is rejected. The OECD guidelines mandate that internal CUP is preferred over external CUP. Therefore, using internal CUP, the rate of interest is benchmarked @15%. In this regard the 3% tolerance limit [15x3/100 = 0.45%] makes the chargeable interest While the interest paid by the assessee [18%] exceeds the maximum [15.45%] of tolerance limit. Therefore, this contention of the assessee is not acceptable. The assessee has paid interest @18% on ICD of Rs.29 crores to Urban Infrastructure Venture Capital Fund UILT during F.Y 13-14. During the same financial year, the assessee has paid interest @15% to the same lender. Since the assessee has paid interest to the same lender @15% therefore, there was no reason to pay the interest @18% Accordingly it is proposed to benchmark the interest @ 15%. The interest paid by the assessee is benchmarked @15% and adjustment is worked out as under.

 

	Interest paid@18%	Interest benchmarked @15%	Adjustment proposed.
1/4/13 to 30/6/2013	11198375	9331979.17	1866395.83
1/7/2013 to 30/09/2013	11829452	9857876.67	1971575.33
1/10/2013 to 31/12/2013	12366099	10305082.50	2061016.50
1/1/2014 to 31/3/2013	12646067	10538389.17	2107677.83

 

Accordingly, in view of the facts of the case, an adjustment of Rs. 80,06,666/- is proposed to be made to the total income of the assessee in order that the SDT undertaken by the assessee company are at arm's length. The total income of the assessee company is thus revised upwards by Rs. 80,06,666/- consequent to such upward adjustment.

 

It is hereby clarified that the discussions and findings in this order are applicable only for reference in relation to AY 2014-15 and not to any subsequent AYs.

 

5. The recommendations / directions by the TPO vide order dated 31.10.2017 u/s 92CA(3) of the Act are taken into consideration by the Ld. AO and as proposed the addition of Rs.80,06,666/- has been made to the income of the assessee. The relevant observations in the assessment order qua the adjustment on account of SDT are as under:

 

3. The TPO has stated in its Order that "during the course of assessment proceedings, it is seen that the assessee has used CUP method as MAM to benchmark the interest expenses. The assessee has selected 6 comparables. However, the assessee has failed to submit any cogent explanation about how these. comparables are selected. Hence, the comparable chosen by the assessee has been rejected and the assessee was issued a show-cause notice vide letter dated 11.10.2017, which is given in the body of the TPO's Order.

 

4. In order to make adjustment in respect of specified Domestic Transaction following observation has been made by the TPO in its order dated 31.102017 which is reproduced as under-

 

“In response to this show-cause notice, assessee furnished a submission which was found to be not acceptable. The TPO stated that, the assessee has in his reply, relied upon external CUP whereas internal CUP was available. Therefore, the assessee adoption of external CUP is rejected. The OECD guidelines mandate that internal CUP is preferred over external CUP. Therefore, using internal CUP, the rate of interest is benchmarked @ 15%. In this regard the 3% tolerance limit makes the chargeable interest @15.45%. While the interest paid by the assessee [18%] exceeds the maximum [15.45%] of tolerance limit. Therefore, this contention of the assessee is not acceptable. The assessee has paid interest on ICD of Rs. 29 crores to Urban Infrastructure Venture Capital Fund UILT during F.Y. 13-14. During the same financial year, the assessee has paid interest @15%, therefore, there was no reason to pay the interest @18%.

 

Accordingly, it is proposed to benchmark the interest @15%. The interest paid by the assessee is benchmarked @15% and adjustment is worked out as under:

 

	Interest paid@ 18%	Interest benchmarked @15%	Adjustment proposed
1/4/13 to 30/6/2013	11198375	9331979.17	1866395.83
1/7/2013 to 30/09/2013	11829452	9857876.67	1971575.33
1/10/2013 to 31/12/2013	12366099	10305082.50	2061016.50
1/1/2014 to 31/3/2013	12646067	10538389.17	2107677.83
			80,06,665.50

 

Accordingly, in view of the facts of the case, an adjustment of Rs. 80,06,666/- is made to the total income of the assessee in order that the SDT undertaken by the assessee company are at arm's length. The total income of the assessee company is thus revised upwards by Rs. 80,06,666/- consequent to such upward adjustment.

 

5. In conformity with the Arm’s Length Price determined by the TPO, Ahmedabad, as discussed above, an addition of Rs. 80,06,666/- in order that the SDT undertaken by the assessee company are at arm's length is hereby made to the total income of the assessee. A copy of order passed by TPO is enclosed as part of this order as Annex-‘A’. Penalty proceedings u/s 271(1)(c) of the I. T. Act are initiated separately on this issue for furnishing inaccurate particulars of income.

 

6. Apart from aforesaid addition, Ld. AO had also made certain additions on account of violation of provisions of section 40A(3) for Rs. 8,00,000/-, and estimated disallowance for Rs.6,14,622/-, thus, the total income of the assessee has been determined after the aforesaid additions at Rs.4,72,68,708/-.

 

7. Aggrieved with the aforesaid order, assessee preferred an appeal before the Ld. CIT(A), however, the contention of the assessee before the First Appellate Authority are considered to be partly acceptable, therefore, the appeal has been disposed of as partly allowed. The relevant observations of Ld. CIT(A) while deciding the appeal of assessee pertaining to each ground of appeal are extracted hereunder for the sake of completeness of facts and information:

 

4. The first ground of appeal is with regard to disallowance of Rs. 80,06,666/- being difference between 18% rate of interest paid for loan taken from related party and ALP @ 15% of interest payable determined by AO/TPO by applying Internal Cup Method. I have considered the facts of the case, the appellant's submission made during the appellate proceedings carefully. During the assessment proceedings, the TPO found that for benchmarking the interest expenses/payment made to the associated party i.e. M/S. Urban Infrastructure Venture Capital Fund, the appellant used external CUP methods as most appropriate method (MAM). Further, the appellant has selected 6 comparables for benchmarking the interest payment. The appellant failed to submit any cogent explanation as to how the 6 comparables were selected. Therefore, the TPO has issued a show case letter for rejecting the comparables selected by the appellant and proposed to use controlled internal CUP as MAM available in the books of accounts of the appellant for benchmarking the interest payment. It was found by the TPO that the appellant paid interest @ 18% on ICD of Rs. 29 Crores to Urban Infrastructure Venture Capital Funds during F.Y. 2013-14 and to the same lender during the same financial year paid interest @ 15% on ICD of Rs. 16.5 crores. Relying on the TP guidelines issued by OECD which states that traditional transactional method are regarded as preferable to other method and choice of internal CUP is preferred over external CUP and internal CUP gives more accurate results, if found available. Accordingly, the TPO, after considering the reply of the appellant, benchmarked the rate of interest @ 15% on ICD of Rs. 29 Crores availed from Urban Infrastructure Venture Capital Funds during F.Y. 2013-14 and made an adjustment of Rs. 80,06,666/-. I have considered the appellant's submission made on this ground of appeal and not found convincing to differ with the findings recorded by the TPO/AO. In this case, the appellant failed to give any justification as to how there is a variation in payment of interest to the same party in the same financial year. The appellant availed loan from Urban Infrastructure Venture Capital Funds during F.Y. 2013-14 @ 15% on ICD of Rs. 19.5 Crores, however, paid interest @ 18% for the loan availed in F.Y. 2011-12 on ICD of Rs. 29 Crores. As per the loan agreement dated 1st July, 2011, loan amount of Rs. 29 Crores was availed by the appellant @ 18 %. As per the repayment terms of the aforesaid loan, the loan amount is payable on demand or before the expiry of 9 months from the date of disbursement or extended period as mutually agreed upon. Therefore, if the duration of the loan amount would not have been extended, beyond 9 months then the period would have expired on 31st March, 2012. There is no evidence furnished by the appellant with regard to the extension of the loan of Rs. 29 Crores for the relevant financial year i.e. 2013-14. It is also not in dispute that the appellant was able to obtain loan from same party i.e. Urban Infrastructure Venture Capital Funds during F.Y. 2013-14 @ 15%, then there is no justification to extend or continue the old loan @ 18% from Urban Infrastructure Venture Capital Funds during F.Y. 2013-14. The appellant has not been able to adduce any evidence with regard to differential rate of payment of interest to the associated concern. Further, the appellant also availed loan from LIC Housing Finance @ 15% which further proves that the ALP @ 15% interest is correctly determined by the AO. The appellant has relied on his own case for A. Y. 2011-12 where the CIT(A) deleted the disallowance of interest payment of Rs. 56,57,267/- made u/s 40A(2)(b). I have perused the Ld. CIT(A)'s order and found that the facts of the case in A.Y. 2011-12 was different and the same was disallowed u/s 40A(2)(b) of the Act and the Transfer Pricing Regulation was not statute. In the impugned appeal, the disallowance of interest is made under Transfer Pricing Regulation and the TPO has rightly applied internal CUP method for benchmarking the interest payment made to related party. Further, the instance of loan availed from same party at different rate was not present in A.Y. 2011- 12. In view of above stated facts, I concur with the finding of the TPO/AO and downward adjustment of interest payment of Rs. 80,06,666/- is confirmed. As regard of disallowance of higher rate of interest paid to related party is concern, I rely on the decision of Punjab & Haryana High Court — Remesh Chand (HUF) Vs. CIT Karnal, 35 taxmann.com (2013) which reads as under:

 

"Section 40A(2) of the Income-tax Act, 1961 - Business disallowance - Excessive or unreasonable payments [Interest payments to relative] - Assessment year 2007-08 Addition was made in appellant's account because of higher rate of interest paid by appellant to his mother as against market rate - Whether since transaction in question was not a genuine and bona fide transaction, Tribunal was justified in confirming addition of interest paid on old loan at higher rate of interest by applying provisions of section 40A(2)(b) - Held, yes [Para 9] [In favour of revenue]"

 

5. The second ground of appeal is with regard to disallowance of expenses of Rs. 8,00,000/- u/s 40A(3) of the Act. The appellant has purchased agricultural land of 0.235 hector at a price of Rs. 8 lac and the payment was made in cash against the provisions of section 40A(3) of the Act. The AO made the addition for violation of section 40A(3) of the Act. Il have considered the assessment order and the submissions of the appellant carefully. The appellant's main argument for seeking relief is that the Ld. AO has not pointed out any defect on the said transaction and neither doubted the genuineness of the transactions nor he has doubted the identity of payee. Further, the appellant submitted that it has purchased agricultural land from Bharti and the payment made to agriculturist is covered Under rule 6DD of the l. T. Rules. The appellant's contention and submission is considered-carefully and not found acceptable as the purpose of section 40A(3) of the Act is to discourage transaction in cash and genuineness of transactions is not a ground to grant relief to the appellant. The provisions of section 40A(3) is in the nature of penal provision which is applicable, even if the transaction is genuine and the identity of payee is known. The appellant is unable to prove under which clause of rule 6DD is applicable in its case which exempt disallowance of expenses made in cash u/s 40A(3) of the Act. The appellant has relied on various case laws and the same has been perused and not found applicable in the appellant's case. The Hon'ble Gujarat High Court in the case of Rajmoti Industries v. Assistant Commissioner of Income-tax, 45 taxmann.com 72 after considering the many decisions which are relied by the appellant confirmed the disallowance made u/s 40A(3) of the Act. The relevant portion of findings is as under

 

Section 40A(3) of the Income-tax Act, 1961 - Business disallowance - Cash payments exceeding prescribed limits (Crossed cheque v. Account payee cheque) - Assessment year 2007-08 - Whether there is clear distinction between a crossed cheque and an account payee cheque as in account payee cheque banks are directed to credit amount of an account of payee cheque only in account of payee and no other person while crossed cheques are endorsed in favour of a person other than drawee making it difficult to trace constituent of money and thus, crossed cheque is violative of section 40A(3) - Held, yes [Paras 14 and 161 [In favour of revenue] Circulars & Notifications: Circular No. 1 of 2007, dated 27- 4-2007

 

Further, the decision of Ramesh Chand (HUF) Vs CIT P&H High Court decision — 35 taxmann.com 63 favorable to the department is applicable.

 

In view of above discussion, I do not find any merit in the submission of the appellant and the addition made u/s 40A(3) of the Act of Rs. 80,00,000/- is confirmed.

 

6. The third ground of appeal relates to disallowance of 10% expenses amounting to Rs. 6,14,622/-. The AO during the assessment proceedings found that the appellant has incurred various expenses of Rs. 61,46,226/- through self-made vouchers and hence the veracity of such expenses cannot be ascertained. Therefore, the AO was of the view that some personal expenses must have been incurred which is not in the nature of expenses Wholly and exclusively incurred for the purposes of business and accordingly, disallowed 10% of such expenses. During the appellate proceedings, the appellant submitted that the AO has disallowed by making a general statement that expenses were partially supported b} bills or debited through self-made vouchers and did not point out any instance of defect in expenses claimed by the assessee. Accordingly, the appellant requested to; delete the adhoc disallowance. I have considered the submission of the appellant and the AO's argument. The finding of the AO is correct keeping in view the nature of expenses incurred by the appellant through self made vouchers and an element of personal expenses claimed cannot be ruled out. Therefore, L uphold addition to the extent of 5% of various expenses claimed by the appellant as against the 10% disallowed by the AO. Accordingly, addition of Rs. 3,07,311/- is confirmed.

 

7. In the result, the appeal is Partly Allowed.

 

8. Aggrieved with the aforesaid decision of Ld. CIT(A), the assessee is in appeal before us, assailing the order of Ld. CIT(A) in terms of the grounds of appeal raised in the present case.

 

9. At the outset, Shri R. B. Doshi, CA, Authorized Representative of the Assessee (in short “Ld. AR”), have argued the matter and submitted a written synopsis summarizing the arguments, the same is extracted hereunder:

 

Goldbricks Infrastructure P. Ltd.

 

AY 2014-15

IT (TP) A No. l/RPR/2024 (Assessee)

 

Ground no. 2

(Legal ground- sec. 92BA amended)

 

Submission of assessee

 

1. Adjustment of Rs. 80,06,666/- made on account of interest paid to Urban Infrastructure Venture Capital Fund. Interest paid @ 18%, AO has benchmarked interest rate at 15%.

 

2. Sec. 92BA amended w.e.f. 01.04.2017

 

* Clause (i) of sec. 92BA omitted without saving clause. Since this clause has been omitted from the provision, therefore, it would be construed as if this clause never existed in law.

 

* On account of omission, transaction undertaken by appellant with related parties would not fall within the definition of "specified domestic transaction" as per sec. 92BA and therefore no adjustment can be made under said section.

 

* Order u/s 92CA(3) was passed on 31.10.2017. Order u/s 143(3) r.w.s. 144C(3) was passed on 29.12.2017. Both are without jurisdiction, invalid and liable to be quashed.

 

* Provision of sec. 92BA(i) stood omitted and reference to the Transfer Pricing Officer is illegal. Reliance on :-

 

* PCIT vs. M/s Texport Overseas Pvt. Ltd (2020) 271 Taxman 170 (Kar.), PN 103 to 106 of PB, relevant findings at PN 103, 104 (para no. 5), PN 105 (para no. 6 & 7).

 

* Mahindra Two Wheelers Ltd. vs. DCIT (2022) 219 TTJ 136 (Mumbai), PN 107 to 122 of PB, relevant findings at PN 1 13, 1 14 & 1 15, para no. 11,12 & 17.

 

* IMC Limited vs. PCIT (2023) 226 TTJ 180 (Kol), PN 123 to 131 of PB, relevant findings at PN 13 1, para no. 19.

 

* Ammann India Pvt. Ltd. vs. ACIT (2022) 192 ITT) 680 (Ahd.), PN 132 to 137 of PB, relevant findings at PN 135, para no. 9.

 

* S.B. cotgin Pvt. Ltd. vs. PCIT (2021) 62 CCH 287 (Nag.), PN 138 to 145 of PB, relevant findings at PN 143 to 145, para no. 1 1,17 & 18.

 

 

* Bhartia-SMSIL (JV) vs. ITO (2020) 59 CCH 135 (Gm.), PN 146 to 169 of PB, relevant findings at PN 169, para no. 11.

 

Ground no. 3

(Disallowance u/s 4QA(3) - Rs. 8,00.000/-)

 

Submission of assessee

 

1. Payments not claimed as expense/not debited to profit & loss a/c

 

i) Land purchased not debited to profit & loss a/c. Same was part of work-in progress (closing stock). Ledger showing entry of purchase is at PN 99 of PB. Figure of WIP as per balance sheet is at PN 45 of PB, calculation is at PN 102 of PB.

 

ii) Audited P/L a/c is at PN 35 of PB and relevant schedule of expenses at PN 47 to 49 of PB. Submission made before CIT(A), para no. 19, PN 7 of PB. Since no expenditure claimed, no disallowance u/s 40A(3) could be made. Reliance on:-

 

* PCIT vs. Prosperous Buildcon Pvt. Ltd. (2024) 463 ITR 132 (Del.), PN 170 to 176 of PB, relevant findings in PN 174, para no. 12 & 12.1.

 

* Vikrant Happy Homes Pvt. Ltd. vs DCIT(2022) 218 TTJ 1 (Pune), PN 177 to 180 of PB, relevant findings in PN 178 & 179, para no. 4 & 6.

 

2. Genuine payments outside the ambit of sec. 40A(3)

 

i) AO has not doubted genuineness of the parties or payment or transaction.

 

ii) Payment made on a/c of business exigency. Under compulsion, as seller insisted for cash payment. Property registered on 06.12.2013, seller refused to accept balance payment through banking channel as this was final payment, sale deed was signed by seller & only registry was to be affected. Seller would not have had any control over assessee.

 

iii) Object of sec. 40A(3) is not to disallow genuine expenditure. Business exigency required to be considered. Merely because payments made in excess of limit provided o u/s 40A(3), no disallowance can be made. AO has not raised any doubt about genuineness of expenditure. Sec. 40A(3) not attracted. Reliance on:-

 

o Daga Royal Arts vs ITO (2018) 196 TTJ 541 (Jp.), PN 185 to 208 of PB, relevant findings in PN 200 & 201 of PB.

 

* DCIT vs Amisha-in-Sky Creations in ITA no. 351 to 354/RPR/2014 order dt. 16.04.2018, PN 209 to 228 of PB. Relevant observations at para no. 20 & 21 of order, PN 219 of PB.

 

* M/s M.K. Agrotech Private Ltd. vs. Addl. CIT (2019) 412 ITR 351 (Karn), PN 181 to 184 of PB.

 

* S.D. Minerals Pvt. Ltd. vs JCIT in ITA no. 554/SRT/2019 vide order

 

* 03.02.2020.

 

* Attar Singh Gumukh Singh vs ITO (1991) 191 ITR 667 (SC)

 

 

* CIT vs M/S Sitaram Anilkumar in Income Tax reference no. 102 of 1999, order dt. 23.()8.201 1 of Chhattisgarh High Court. Relevant observations in para no. 3 & para no. 6 to 8 of judgement.

 

* Geo Connent Ltd. vs DCIT (2022) 65 CCH 589 (Del.).

 

* Anupam Tele Services vs ITO (2014) 366 ITR 122 (Guj.).

 

Ground no. 4

 

(Adhoc disallowance - Rs.3,07,311/-)

 

Submission of the assessee

 

1. Books produced before AO (para 7, PN 5 of assessment order). All supporting bills verified by AO. No specific defect pointed out.

 

2. Addition made on presumption and estimated basis.

 

3. Net profit ratio increased from last year, from 2.97% to 6.15%, PN 24 of PB.

 

4. Reliance on:

 

* ITO vs. Adhunik Khanan Va Parivahan Theka Sahkari Samiti Ltd. (2014) 41 CCH 86 (Jodh.)

 

* Order of Hon'ble Raipur Bench in M/S Porwal Industries v/s ITO in ITA no. in No. 258/RPR/2017 dt. 05.04.2022.

 

10. Ld. AR also furnished before us a summary of case laws comprising of citation and relevant observations qua the issue that, where genuineness of party and payment is not doubted, disallowance u/s 40A(3) of the Act, cannot be made. The summary is culled out as under:

 

Goldbricks Infrastructure P. Ltd.

 

AY 2014/15

 

IT(TP) A 1/RPR/2024

 

In the following cases, it was held that where genuineness of party & payment is not doubted, disallowance u/s 40A(3) cannot be made: -

 

SN	Particulars of case	Relevant observations
1.	ACIT vs R.P. Real Estate Pvt. Ltd (2015) 44 CCH 699 (RPR)	Hon'ble ITAT observed in para no. 7 of its order that there is considerable force in the assessee's submission that there was reasonable cause for making payment in cash. On the basis of above observations & relying upon the decision in Saraswati Housing & Developers vs Addl. CIT 142 ITD 198 (Del.), Hon'ble jurisdictional ITAT held that since the payees are illiterate villagers who demanded some of the payment in cash; there is no dispute regarding identity of payees and genuineness of transaction, the disallowance made by AO was rightly deleted by CIT(A).
		This decision has been affirmed by Hon'ble Chhattisgarh High Court in Tax Case (Income tax appeal) no. 13 of 2016 order dt. 01.03.2016, (2016) 95 CCH 86 (Chhattisgarh).
2.	ACIT vs R. P. Real Estate P. Ltd. (2016) 95 CCH 86 (Chhattisgarh) in Tax Case (Income tax appeal) no. 13 of 2016 order dt.01.03.2016.	Vide para 4, Hon'ble High Court noted that the Tribunal had observed that full payment was made under the registered deeds which was not disputed by the AO and neither the identity nor genuineness was in dispute and that the cash payment was out of business compulsion. Vide para 5, Hon'ble High Court held that reasoning of the Tribunal and interpretation of sec. 40A(3)not having been assailed, no substantial question of law arises.
3.	DCIT vs RCP Infratech Pvt. Ltd. in ITA No. 114/RPR/2014 order 11.05.2017 of Raipur Bench	Seller of land were either illiterate villagers or new to the buyer and the assessee had no option but to purchase the land on the terms and conditions of the seller; there was business compulsion; the sellers appeared before Sub- Registrar who satisfied himself about the identity of the seller. Hon'ble Tribunal, considering the decision in Gurdas Garg vs CIT (2015 (8) TMI 569 (P&H) and Rakesh Kumar vs ACIT (2016) 46 CCH 270 (Asr.), upheld deletion of disallowance. This decision has also been confirmed by Hon'ble Chhattisgarh High Court in Tax case no. 154 of 2017 order dt.08.02.2018 of Hon'ble Chhattisgarh High Court.
4.	CIT v M/s Sitaram Anilkumar in Income Tax reference no. 102 of 1999, order dt. 23.08.2011 of Chhattisgarh High Court	Disallowance u/s 40A(3) was made by the AO. Hon'ble High Court noted vide para no. 6 of its order that in CIT vs Achal Alloys Pvt. Ltd. (1996) 218 1TR 46 (MP), it was held that no question of law arises where the genuineness of payment has not been doubted. It also referred to similar proposition laid down by it in CIT vs Vijay Kumar Goyal in ITA 24 of 2001 dt.22.04.2010 and CIT vs M/S Bukhari Enterprises in ITA 11 of 2004 dt. II .08.2011and held that since genuineness of transaction is not in doubt, the tribunal was justified in deleting the disallowance.
5.	DCIT vs Amisha-in Sky Creations in ITA no.354/RPR/2014 dt. 16.4.2018	It was held in para no. 20 that where genuineness of payment nor identity of payee is doubted, sec.40A(3) is not applicable, relying on Anupam Tele Services 366 ITR 122 (Guj.)
6.	Geo Connent Ltd. vs DCIT (2022) 65 CCH 589 (Del. Trib.) in ITA No.2896 & 2958/De1./2018 dt. 29.08.2022	Hon'ble Tribunal considered the provisions of sec.40A(3) and Rule 6DD(j) which existed from 01.04.1970 to 27.07.1995 and observed vide para 10 that a reading of 1 st proviso to sec. 40A(3) read with Rule 6DD(j) shows no disallowance u/s 40A(3) can be made if transaction is genuine and the payment is made due to business expediency and other compelling factors. Hon'ble Tribunal for this proposition noted the ratio laid down in the case of Attar Singh Gurmukh Singh vs ITO 191 ITR 667 (SC).   Vide para 10, Hon'ble Tribunal observed that Hon'ble Supreme Court observed that provisions are not intended to restrict business activity and while interpreting the provisions, Hon'ble Supreme Court had held that the terms of sec. 40A(3) are not absolute and that consideration of business expediency and other relevant factors are not excluded.   Hon'ble Tribunal thereafter considered the decision in the case of Anupam Tele Services and other decisions on the subject, including that in the case of A. Daga Royal Arts and noted vide para14 that the ratio laid down in the judicial decisions is that genuineness of payment, if not doubted and if recipient made a pre-condition of payment of cash and the payment was made due to business expediency, amount cannot be disallowed.
7.	Harshila Chordia vs ITO (2008) 298 ITR 349(Raj.)	It was held that the exceptions provided in Rule 6DD are not exhaustive and that the said rule must be interpreted liberally.
8.	M/S a Daga Royal Arts vs ITO (2018) 196 TTJ 541	The assessee, real estate dealer, made cash payments for purchase of land which the AO disallowed u/s 40A(3). Hon'ble Tribunal laid down following propositions: -
		i) There has been no change in the provisions of section 40A(3) in so far as considerations of business expediency and other relevant factors are concerned, as existed at relevant point in time and as considered by the Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh and the provisions of section 40A(3)as exist now and relevant for the impugned assessment year i.e. AY 2013-14 (para 25 of order). ii) Vide para 27, it considered the question whether the legal proposition so laid down by the Hon'ble Supreme Court regarding consideration of business expediency and other relevant factors has been diluted by way of delegated legislation in form of Income Tax Rules when the parent legislation inform of section 40A(3)to which such delegated legislation is subservient has been retained in its entirety. iii) It held vide para no.27that"we do not believe that by virtue of these amendments, the legal proposition so laid down by the Hon'ble Supreme court regarding consideration of business expediency and other relevant factors has been diluted in any way." iv) Vide para no. 28, it was held that the intention of legislature is to curb the chances to use or create black money and to ascertain whether payment was genuine and it was out of disclosed sources. It further held that business expediency and other relevant factors continue to be relevant which needs to be considered while determining the exception. v) Vide para no. 32, it was held that the genuineness of transaction and it being free from evasion of tax is relevant consideration which should be examined before invoking sec. 40A(3).
9.	M. K. Agrotech P. Ltd. vs Addl. CIT (2019) 412 ITR 351 (Karn.)	The AO made disallowance u/s 40A(3).The ground for disallowance was that the drafts were not crossed. Vide page 355, it was held by Hon'ble High Court that the judgement of Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh reported in 191 ITR 667 (SC) is squarely applicable to the facts of the case. It noted the observations of Hon'ble Supreme Court made vide page no. 672 of the reports wherein it was held by Hon'ble Supreme Court that sec.40A(3)must be read along with Rule 6DD and if genuineness of the transaction is proved, the transaction is out of the purview of Sec.4()A(3). Following the decision of Hon'ble Supreme Court, it was held by Hon'ble High Court that the disallowance is not justified.
10.	Anupam Tele Services vs ITO (2014) 366 ITR 122(Guj.)	Assessee made cash payments to Tata Tele services Ltd. Cash a ent was made due to direction iven b a ee, non-observance where of would have adversely affected the business of assessee. The High Court noted the observations of Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh 191 1TR 667 (SC), where in it was held that section 40A(3) is not intended to restrict the business activities. The terms of section 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bonafide transactions are not taken out and it is open to the assessee to establish to the satisfaction of AO the circumstances under which payment in the manner prescribed in section 40A(3)was not practicable.   Hon'ble High Court observed that the paramount consideration of section 40A(3)is to curb and reduce the possibility of black money transactions. As held in the case of Attar Singh Gurmukh Singh, section 40A(3) does not eliminate considerations of business expediency. The assessee was compelled to make cash payments as the supplier insisted for cash payment.
11.	CIT vs Samwon Precision Mould Mfg. India P. Ltd. (2018) 401 ITR 486 (Del.)	Cash payment made to farmers at the time of registration of sale deed is outside ambit of sec. 40A(3), following R. P. Real Estate's decision of Raipur bench.
12.	Vijayeta Buildcon (P.) Ltd. vs ACIT (2021) 186 ITD 493 (Jp.)	Genuineness of transaction having been proved & source of payment also proved to be out of explained money, sec.40A(3) not attracted.
13.	ITO vs Dhanshree Ispat (2017) 50 CCH 86 (Pune Trib.)	It was held by Hon'ble ITAT, following the decision in Attar Singh Gumukh Singh vs ITO in (1991) 191 ITR 667 (SC) that the object behind introduction of 40A(3) is to curb circulation of un accounted money and to stop its use.
14.	Minerals Pvt. Ltd. Vs J CIT in ITA No. 554/SRT/2019 dt. 03.02.2020

 

11. Backed by the aforesaid submissions, it was the prayer by Ld. AR that the additions made by the Ld. AO and to the extent sustained by the Ld. CIT(A) are liable to be deleted being illegal, arbitrary and unjustified.

 

12. Per contra, Shri S. L. Anuragi, Ld. CIT-DR, representing the revenue, have placed his reliance on the order of Revenue Authorities and have requested to uphold the same.

 

13. We have considered the rival submissions, perused the material available on record and case laws relied upon. After a thoughtful consideration to the facts, circumstances and the mandate of law applicable in the present case, our adjudication to the grounds of appeal would be as under:

 

14. Ground No. 1 & 2: Assailing the upward adjustment made by the Transfer Pricing Officer u/s 92CA(3), thereby disallowance made by the Ld. AO and confirmed by the Ld. CIT(A).

 

14.1 At the outset, it was argued by Ld. AR that clause(i) of section 92BA has been omitted by the Finance Act, 2017 w.e.f. 01.04.2017, accordingly, the revenue was not empowered make any adjustment qua the impugned transaction carried out by appellant with related parties, as such transactions would no more qualify to be brought within the definition of “Specified Domestic Transactions” after the aforesaid amendment in section 92BA, therefore, no adjustment can be made under the said section. Ld. AR, to substantiate the aforesaid claim, placed his reliance on the judgment by Hon’ble Karnataka High Court in the case of PCIT vs M/s Taxport Overseas Pvt. Ltd. (2020) 271 taxman 170 (Kar), wherein Hon’ble High Court has held as under:

 

5. Having heard learned Advocates appearing for parties and on perusal of records in general and order passed by tribunal in particular • is clearly noticeable at Clause (i) of Section 92BA of the Act came to be omitted w.e.f. 01.04.2017 by Finance Act, 2017. As to whether omission would save the acts is an issue which is no more res-intigra in the light of authoritative pronouncement of Hon'ble Apex Court in the matter of KOHL4PUR CANESUGAR WORKS LTD. v. UNION OF INDIA reported in AIR 2000 SC 811 where under Apex Court has examined the effect of repeal of a statute visa-vis deletion/addition of a provision in an enactment and its effect thereof. The import of Section 6 of General Clauses Act has also been examined and it came to be held:

 

"37. The position is well known that at common law, the normal effect of repealing a statute or deleting a provision is to obliterate it from the statute book as completely as if it had never been passed, and the statute must be considered as a law that never existed. To this rule, an exception is engrafted by the provisions of Section 6(1). If a provision of a statute is unconditionally omitted without a saving clause in favour of pending proceedings, all actions must stop where the omission finds them, and if final relief has not been granted before the omission goes into effect, it cannot be granted afterwards. Savings of the nature contained in Section 6 or in special Acts may modify the position. Thus the operation of repeal or deletion as to the future and the past largely depends on the savings applicable. In a case where a particular provision in a statute is omitted and in its place another provision dealing with the same contingency is introduced without a saving clause in favour of pending proceedings then it can be reasonably inferred that the intention of the legislature is that the pending proceedings shall not continue but fresh proceedings for the same purpose may be initiated under the new provision.”

 

6. In fact, Coordinate Bench under similar circumstances had examined the effect of omission of sub-section (9) to Section 10B of the Act w.e.f. 01.04.2004 by Finance Act, 2003 and held that there was no saving clause or provision introduced by way of amendment by omitting sub-section (9) of Section 10B. In the matter of GENERAL FINANCE CO. vs. ACIT, which judgment has also been taken note of by the tribunal while repelling the contention raised by revenue with regard to retrospectivity of Section 92BA(i) of the Act. Thus, when clause (i) of Section 92BA having been omitted by the Finance Act, 2017, with effect from 01.04.2017 from the Statute the resultant effect is that it had never been passed and to be considered as a law never been existed. Hence, decision taken by the Assessing Officer under the effect of Section 92BI and reference made to the order of Transfer Pricing Officer- TOP under Section 92CA could be invalid and bad in law.

 

7. It is for this precise reason, tribunal has rightly held that order passed by the TPO and DRP is unsustainable in the eyes of law. The said finding is based on the authoritative principles enunciated by the Hon'ble Supreme Court in Kolhapur Cane sugar Works Ltd referred to herein supra which has been followed by Coordinate Bench of this Court in the matter of M/s. GE Thermometrias India Private Ltd., stated supra. As such we are of the considered view that first substantial question of law raised in the appeal by the revenue in respective appeal memorandum could not arise for consideration particularly when the said issue being no more res integra.

 

14.2 Considering the aforesaid judgment of Hon’ble Karnataka High Court which is followed by various coordinate benches of this Tribunal refer to by the Ld. AR in his synopsis (supra), coming to the facts of present case that the order of TPO was passed on 31.10.2017 and the assessment order by the Ld. AO on 29.12.2017, being both the date falls after 01.04.2017, therefore, the issue in present case is expressly covered by the ratio of judgment rendered by the Hon’ble Karnataka High Court in the case of M/s Taxport (supra), hence the addition made on the basis of omitted provision of the law is unsustainable and have no standing in the eyes of law. Consequently, the addition of Rs.80,06,666/- made as an upward adjustment treating the transaction with related party as SDT is directed to be deleted. In result, ground no. 1 & 2 of the present appeal of the assessee stands allowed.

 

15. Ground No. 3: Regarding addition u/s 40A(3) for Rs. 8,00,000/-

 

15.1 The addition made by the Ld. AO u/s 40A(3) was for the reason that during the year under consideration, the assessee has made a cash payment of Rs. 8,00,000/- to Mr. Naresh Bharti and Mr. Basant Bharti against the purchase of land (0.235 Hectare) for which an explanation was sought from the assessee. In response, the assesses explained that the payment is made to a villager, whose village has no bank, but the same was not considered acceptable by the Ld. AO, therefore, an addition u/s 40A(3) of the Act was made.

 

15.2 When the matter was carried before the Ld. CIT(A) and the issue of addition u/s 40A(3) was raised by the assessee pleading that the Ld. AO has not pointed out any defect in the said transaction and neither doubted the genuineness of transaction nor he has doubted the identity of payee. It was also the submission by the assessee that the land purchased is agricultural land and the sellers are agriculturist covered under Rule 6DD of the IT Rules. Such contentions of the appellant could not convince the Ld. CIT(A), therefore, the addition was confirmed.

 

15.3 Before us, it was the submission by Ld. AR that the land purchased by the assessee was part of work in progress (closing stock), the same was not debited to P & L A/c, since no expenditure was explained no disallowance u/s 40A(3) could have been made, reliance is placed on following judgments:

 

PCIT VS Prosperous Buildcon Pvt. Ltd. (2024) 463 ITR 132 (Del.)

 

12. It is this order of the PCIT which, as noticed above, has been reversed by the Tribunal. What is not in dispute is that the respondent/assessee had not claimed any expenditure with regard to the cash that was withdrawn. The reason for this was that the said money was utilised for the purchase of a parcel of land, which in the books of accounts of the respondent/assessee was shown as stock-in-trade, which in essence got neutralised being reflected in the closing stock.

 

12.1 Therefore, clearly the provisions of Section 4()A(3) of the Act were not applicable. Thus, the order passed under Section 263 of the Act wrongly took recourse to Section 40A(3) of the Act and therefore, in our view, correctly set aside by the Tribunal.

 

Vikrant Happy Homes Pvt. Ltd. Vs DCIT (2022) 218 TTJ 1 (Pune)

 

4. Before us, the Id. AR, Shri Sanket Joshi submits that the assessee purchased certain lands/plots and made cash payments aggregating to Rs.3,50,000/- under exceptional circumstances exceeding Rs.20,000/-. He submits that all these lands are appearing under the closing stock as on 31-03- 2012 and no deduction is claimed in respect of purchases for which cash payments are made. He contends vehemently that the provisions u/s. 40A(3) of the Act is not attracted towards expenses/purchases when there is no deduction claimed and argued that it is settled law that section 40A(3) of the Act only restricts the deductions which are otherwise allowable. He submits that the cash payments are genuine and the provisions u/s. 40A(3) is not attracted towards the genuine cash payments which were identified and acknowledged by payee. Further, the said cash payments were made keeping in view the business exigency to finalize the deal and to avoid the competitors in snatching the deal.

 

6. Heard both the parties and perused the material available on record. As noted above the contention of the ld. AR is that the assessee did not claim the deduction and the provisions u/s. 40A(3) cannot be held to be invoked against such payments exceeding the limit Rs.20,000/-. He also placed on record Agreements at Page Nos. 1 to 20 which are true English translation of Agreements between the assessee and respective payees to show that the payments exceeding Rs.20,000/- totaling to Rs.3,50,000/- were incurred for genuine transaction, the transaction of which identified and acknowledged by the payees. We note that it is settled law as rightly pointed by the ld. AR when there is no deduction no disallowance would follow but however, in the present case, the CIT(A) by placing reliance on the Rule 6DD held the assessee does not fall under any of the exception provided therein. The CIT(A) also affirmed the view of the AO that though non-claiming of deduction the assessee debited the said expenditure involving cash payments exceeding Rs.20,000/- to the profit and loss account, which, in our opinion, the provisions under section could be invoked. Another aspect as raised by the Id. AR is that the said expenditure were incurred for the business exigency though the expenditure debited to profit and loss account which is neutralized by showing the purchase of lands as stock in trade as on 31-03-2012 on credit side. According to him the provisions u/s. 40A(3) is not applicable.

 

15.4 Based on aforesaid submissions, it was the prayer that the addition u/s 40A(3) was uncalled for as the assessee has not claimed the payment made in cash for Rs.8,00,000/- for purchase of land in its P&L A/c as an expenditure. To substantiate this fact, Ld. AR drew our attention to page no. 99 to 102 of the APB showing ledger account of land, Basant Bharti (advance for purchase of land), Naresh Bharti (advance for purchase of land) and calculation or work in progress for FY 2013-14. On perusal of all such evidence, it is evident that cash payment of Rs. 4,00,000/- each to Mr. Basant Bharti and Naresh Bharti were made on 06.12.2013 and this amount is added as cost of land purchase while computing the amount of closing work in progress (WIP) for Rs.4,06,57,33,852/-, which is matching amount of WIP in the audited balance sheet of the assessee, placed before us at page no. 45 of the APB under the head “Inventories” in note no. 14 attached with notes on financial statements for the year ended 31.03.2014. It was, therefore, the prayer that the amount of purchase of land, which was treated as working in progress (closing stock), also not claimed as expenditure therefore, provisions of section 40A(3) are not attracted.

 

15.5 Per contra, Ld. CIT DR placed his reliance on the impugned orders of revenue authorities.

 

15.6 We have considered the rival submissions, perused the material available on record and the case laws referred to supra. Going through the judgment of Hon’ble Delhi High Court in the case of PCIT vs Prosperous Buildcon Pvt. Ltd. (surpa), wherein, it is Laid down that if the assessee had not claimed any expenditure with regard to cash withdrawn and utilized for the purchase of a parcel of land which is treated as stock in trade in the books of assessee, the provisions of section 40A(3) are not applicable. Adverting to the facts of present case, as per the copies of books of accounts furnished before us, the assessee have not claimed such expenditure in its P&L A/c, therefore, in principle the provisions of section 40A(3) are not triggered, however, since such contention has been raised first time before the tribunal, therefore, there was no occasion for the revenue authorities to check this aspect in light of the judgment in the case of PCIT vs Prosperous Buildcon Pvt. Ltd. (surpa), under such circumstances, for verification of the facts and veracity of the claim of assessee, in all fairness the matter needs to be restore back to the file of Ld. AO for the limited purpose of verification that the expenditure has not been claimed by the assessee in its P&L A/c or while computing the taxable income for the relevant year and accordingly, to decide the issue afresh in light of aforesaid judgment relied upon by the assessee. Needless to say, reasonable opportunity of being heard shall be provided to the assessee in the set aside assessment proceedings.

 

15.7 Before parting with, apropos, the contention that genuine payments are outside the ambit of section 40A(3), we may herein observe that as per the legislative intent applicability of section 40A(3) would not have its application only in the cases covered by exceptions as carved out under Rule 6DD of the Income Tax Rules, 1962. This issue has been dealt with at length by the SMC Bench of ITAT, Raipur in the case of Shubh Karan Mahnot vs. ITO in ITA 155/RPR/2023 vide order dated 29.11.2023, wherein the observations of the Bench are as under:

 

11. Apropos the claim of the Ld. AR that no disallowance of the assessee’s claim was called for with respect to the aforesaid expenses, viz., (i) godown rent; and (ii) electricity charges, for the reason that the A.O. has not doubted the genuineness of the expenses incurred by the assessee, I am unable to persuade myself to subscribe to the same. As the specific instance where the applicability of Section 40A(3) of the Act would stand suspended, has specifically been carved out by the legislature in all its wisdom in Rule 6DD of the Income Tax Appellate Tribunal Rules, 1962, therefore, the claim of the Ld. AR that in case the genuineness of the expenditure has not been doubted, then no disallowance u/s. 40A(3) of the Act was called for in the hands of the assessee does not merit acceptance.

 

12. In so far, the judgment of the Hon’ble High Court of Chhattisgarh in the case of ACIT Vs. M/s. R.P Real Estate Pvt. Ltd (supra) as has been pressed into service by the Ld. AR is concerned; the same supports my aforesaid view. On a careful perusal of the aforesaid judgment of the Hon’ble High Court, it transpires that the Hon’ble High Court had observed that as payment made by the assessee before them was to the villagers who had no bank account and, therefore, had insisted on cash payments, was covered by the Rule 6DD(g), therefore, disallowance u/s.40A(3) of the Act was not called for in its case. The claim of the Ld. AR that the Hon’ble High Court had observed that in case the genuineness of the expenditure is not doubted, then no disallowance u/s. 40A(3) of the Act could be made, is not discernible from the order of the Hon’ble High Court.

 

13. Apropos the judgment of the Hon’ble Supreme Court in the case of Attar Singh Gurmukh Singh Vs. ITO (supra) would not assist the case of the assessee before me. Addressing the concern of the assessee before them, i.e., draconian provision of Section 40A(3) would restrict the business activities, and thus, for the said reason, the said statutory provision was in itself ultra-vires, the Hon’ble Apex Court had observed that the provisions of Section 40A(3) were to be read along with the exceptions carved out in Rule 6DD. Accordingly, the Hon’ble Apex Court had observed that a conjoint reading of the provisions of Section 40A(3) and Rule 6DD revealed that the restraint intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business. In my considered view, the judgment of the Hon’ble Apex Court in the aforesaid case further fortifies my conviction that the only exception to the application of Section 40A(3) can be traced in Rule 6DD.

 

14. Apropos the judgment of the Hon’ble High Court of Punjab & Haryana in the case of Gurdas Garg Vs. Commissioner of Income Tax, Bathinda (supra), I find that the Hon’ble High Court had though observed that as the genuineness of the transaction made in cash was not disbelieved by the department, therefore, the same could not have been disallowed u/s. 40A(3) of the Act, but thereafter, at Para 15 of its judgment, it had categorically observed that while arriving at the aforesaid conclusion, it had wrongly referred to the pre-amended Rule 6DD. Accordingly, the Hon’ble High Court had observed that Rule 6DD had, thereafter, been amended vide Notification dated 10.10.2018 by the Ministry of Finance (Department of Revenue), CBDT. Backed by the aforesaid facts, the Hon’ble High Court observed that as it had pronounced the judgment in the open court, it was not open for it to examine the Effect of the amendment to Rule 6DD. As the Hon’ble High Court in the aforesaid case, had admittedly observed that while disposing off the appeal for A.Y. 2009-10, it had by mistake referred to the earlier pre-amended provision, i.e., that appliable up to 10.10.2008, therefore, the said judicial pronouncement would by no means assist the case of the assessee before me. In fact, the aforesaid judgment of the hon’ble High Court in the case of Gurdas Garg Vs. Commissioner of Income Tax (supra) supports my aforesaid conviction that Section 40A(3) of the Act would only not be applicable in a case/situation as has been explicitly carved out in Rule 6DD and not otherwise.

 

15. Thus, in terms of my aforesaid observations, I am unable to persuade myself to concur with the contention of the Ld. AR that as the genuineness of both the aforesaid expenses, viz. (i) payment of godown rent and (ii) payment of electricity expenses, had not been doubted by the lower authorities, therefore, the same could not have been disallowed u/s. 40A(3) of the Act.

 

15.8 Respectfully following the aforesaid view adopted by the SMC Bench of ITAT, Raipur, wherein the case laws referred to by the Ld. AR are discussed in detail, we are of the considered opinion that the applicability of section 40A(3) would only exclude the cases which are exclusively covered under Rule 6DD. Under such circumstances, we cannot concur with the contentions of the Ld. AR based on the contention that the genuineness of the parties or payments which though was not doubted by the Ld. AO, thus provisions of section 40A(3) cannot be invoked.

 

15.9 In result, Ground No. 3 of the present appeal is partly allowed for statistical purposes.

 

16. Ground No. 4: Regarding adhoc disallowance of 10% from various expenses such as travelling, business promotions lodging and boarding, pooja expenses, confirmed by Ld. CIT(A) at 5% for Rs.3,07,311/-.

 

16.1 On this issue, the observations of Ld. AO are as under:

 

7. During the course of scrutiny, bills, vouchers were produced in respect of expenses claimed in trading and profit and loss account. Following expenses have been claimed which are partially supported by bills. Further, some of the expenses are debited through self-made vouchers hence the veracity of such expenses are ascertainable in toto. This fact was also confirmed in the order sheet entry dtd. 25/11/2017.

 

 

Under the provisions of the I.T. Act, 1961, where all the expenses wholly and exclusively incurred for the purpose of the business of the assessee carried out during the previous year relevant to assessment year are allowable expenses, the expenses incurred for personal and non-business purposes are not deductible.

 

It is seen from the Profit & Loss Account for the year ended 31.03.201 that the assessee has debited the above administrative and other expenses therein. The nature of these expenses are such where involvement of personal an non business expenses cannot be ruled out, most of these expenses are through self-made vouchers which are not supported by proper bills hence the veracity of such expenses are not verifiable/ascertainable in-toto.

 

Accordingly, an amount of Rs. 6,14,622/- being 10% of Rs. 61,46,226/- is hereby disallowed and the same is added to the total income of the assessee for the relevant year.

 

16.2 The issue is assailed before the First Appellate Authority, wherein the disallowance is reduced to 5% with the following observations:

 

6. The third ground of appeal relates to disallowance of 10% expenses amounting to Rs. 6,14,622/-. The AO during the assessment proceedings found that the appellant has incurred various expenses of Rs. 61,46,226/- through self-made vouchers and hence the veracity of such expenses cannot be ascertained. Therefore, the AO was of the view that some personal expenses must have been incurred which is not in the nature of expenses wholly and exclusively incurred for the purposes of business and accordingly, disallowed 10% of such expenses. During the appellate proceedings, the appellant submitted that the AO has disallowed by making a general statement that expenses were partially supported by bills or debited through self-made vouchers and did not point out any instance of defect in expenses claimed by the assessee. Accordingly, the appellant requested to the delete the adhoc disallowance. I have considered the submission of the appellant and the AO's argument. The finding of the AO is correct, keeping in view the nature of expenses incurred by the appellant through self-made vouchers and an element of personal expenses claimed cannot be ruled out. Therefore, j uphold addition to the extent of 5% of various expenses claimed by the appellant as against the 10% disallowed by the AO. Accordingly, addition of Rs. 3,07,311/- is confirmed.

 

16.3 Apropos, the adhoc addition on estimated basis by the Ld. AO for 10% of certain expenses amounting to Rs. 61,46,226/-, on perusal of orders of Ld. AO and Ld. CIT(A), it is transpiring that such expenses are claimed by the assessee through self-made vouchers which are not supported with proper bills, therefore, the veracity of such expenses could not be verified by the Ld. AO and before Ld. CIT(A), the assessee had submitted that the disallowance was made only on the basis on general statement without pointing out any instance of defect in the expenses claimed. However, since the nature of expenses incurred by the appellant and as the same were supported with self-made vouchers the element of personal claimed was not ruled out. As there was no further explanation by the assessee regarding the self-made vouchers which are not supported with proper bills, we do not find any infirmity in the order of Ld. CIT(A), therefore, the decision of LD. CIT(A) to sustain the addition to the extent of 5%, merits substance and acceptable, we, therefore, uphold the same. Consequently, Ground No. 4 of the present appeal of assessee stands dismissed.

 

17. Resultantly, the appeal of assessee is partly allowed, in terms of our aforesaid observations.

 

Order pronounced in the open court on 13/12/2024.

 

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