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Unity Industries, Bangalore vs. Income Tax Officer - (Income Tax Appellate Tribunal) (18 Nov 2020)

When assessee proves business/commercial expediency, disallowance under Section 40A(3) of IT Act is unwarranted

MANU/IL/0438/2020

Direct Taxation

The assessee is a partnership firm engaged in the business of manufacturing and fabrication of machine components. The assessment under Section 143(3) of Income Tax Act, 1961 (IT Act) was completed vide order. Subsequently, the Assessing Officer (AO) issued notice under Section 154 of the IT Act for the reason that, the assessee had made cash transaction amounting to Rs.1,25,738 during the relevant assessment year in contravention of provisions of Section 40A(3) of the IT Act. The assessee submitted objections vide letter to the notice issued under Section 154 of the IT Act. It was submitted that, the assessee firm commenced its operation in August 2013 and the bank account of the assessee firm was not active. It was stated that, the assessee had some business orders in the meanwhile and for purchase of raw material out of commercial expediency had to make cash payments, since the assessee was new in the field. The objections raised by the assessee was rejected and the AO passed an order under Section 154 of the IT Act by adding a sum of Rs.1,25,738 to the total income by invoking the provisions of Section 40A(3) of the IT Act.

Aggrieved by the order passed by the AO under Section 154 of the IT Act, the assessee filed an appeal to the first appellate authority. The CIT(A) confirmed the order of the Assessing Officer passed under Section 154 of the IT Act. Aggrieved by the order of the CIT(A), the assessee has filed present appeal before the Tribunal. The learned Counsel for the assessee submitted that the AO has not doubted the genuineness of the transaction and order passed under Section 154 of IT Act is a mere change of opinion, which is outside the purview of the said section.

The jurisdictional High Court for assessment year 2005-2006 in case of M.K. Agrotech Private Limited v. Addl.CIT had held that, if the assessee proves the genuineness of the business expediency, it can still claim the expenditure, as an allowable deduction. In the instant case, the AO has not doubted the genuineness of the transaction. Therefore, taking proceedings under Section 154 of the IT Act only goes to show that, it is only a mere change of opinion, which is outside the mandate of the said section. The Hon'ble Supreme Court in the case of ITO v. Volkart Brothers held that, a mistake apparent on the record must be an obvious and patent mistake and not something which could be established by a long-drawn process of reasoning on points on which there might conceivably be two opinions. Since the assessee in the given facts, had proved that, there is commercial / business expediency in making cash purchases, the mistake cannot be stated to be obvious and apparent from record.

In view of Judgment of the Hon'ble jurisdictional High Court in the case of M.K. Agrotech Pvt. Ltd. v. Addl.CIT and the order of Jaipur ITAT in the case of A. Daga Royal Arts v. ITO, present Tribunal observed that, the disallowance under Section 40A(3) of the IT Act, in a proceedings is uncalled for and present Tribunal quash the same. The appeal filed by the assessee is allowed.

Tags : DISALLOWANCE   ADDITIONS   LEGALITY  

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