In a recent case, the Delhi Income Tax Appellate Tribunal (ITAT) held that cash paid to sundry creditor on supply of buffalo meat could not be disallowed under Section 40A(3) of the Income Tax Act, 1961 and set aside the assessment order passed by the lower authority.
The assessee, Fazal Frozen Food (P) Ltd. engaged in the business of processing and trading of buffalo meat. During the course of assessment, the Assessing Officer disallowed the 20% of the total cash credit of Rs.2,18,28,275/- after examined the sundry creditor.
Thereafter, the Assessing Officer examined the purchase of raw material. On this issue, the Assessing Officer noted that against total purchases of Rs.2,66,64,300/- perusal of details of payment, it is seen that the assessee paid only Rs.48,35,025/- against the purchases made during the year.
The Assessing Officer issued notice under Section 133(6) of the Income Tax Act to the suppliers. One of the supplier denied to have any business with the assessee, the amount pertains to him that is Rs.9,91,425/- which is shown paid to him during the year under consideration.Theater the assessing officer disallowed the payment and considering as cash payment under Section 40A(3) of the Income Tax Act.
The AO not only disallowed the above amount, but also 10% of the total purchase amounting to Rs.1,63,55,491/- on the ground of unverified payment.
Aggrieved assessee filed appeal before the Tribunal. The CIT(A) has not only confirmed the addition but also enhanced the same. Against this, assessee filed the present appeal before ITAT.
K. Sampath, counsel for the assessee submitted that disallowance is being made on the ground that the payments are being made in cash and higher than Rs.20,000/-.
It was further submitted that, if the suppliers did not maintain books of account, the assessee could not be faulted for that and disallowance could not be made in the hands of the assessee.
Moreover, counsel for the assessee submitted that in assessee’s own case for Assessment Year 2007-08 this ITAT has similarly deleted the addition under Section 41 of the Income Tax Act.
Indu Bala Saini, counsel for the revenue assisted the decision of the lower authorities.
The two member bench of tribunal, observed that disallowance under Section 40A(3) in this case has not been made on the basis of anything found from the assessee’s books. Rather this case has been made out that the suppliers did not maintain books of account and the same could not be traced.
It was also noted that the suppliers are small types of butchers living in various locations and are illiterate as noted by the Tribunal. Instead of money receipts, the assessee was using a slip system, which in such areas is not uncommon. The recipients of such types of slips do not preserve such slips and this is not an uncommon phenomenon.
Therefore, the tribunal of Shamim Yahya, Accountant Member and Astha Chandra, Judicial Member held that disallowance made under Section 40A (3) Income Tax Act is not reasonable. Hence, the appeal filed by the assessee was allowed.
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