In a recent ruling, the Chennai bench of the Income Tax Appellate Tribunal (ITAT) upheld the disallowance of ₹88 Lakhs in knitting charges under Section 40A(3) as cash payments exceeding the prescribed limit.
The assessee, Sri Arumuga Cottspin Pvt Ltd, a manufacturer of cotton and synthetic yarn, was subjected to a survey under Section 133A. The survey revealed cash deposits of ₹19.02 Crore made during the demonetisation period. The company claimed that such deposits were from cash sales of clothes, which were recorded in its books and reflected in revised VAT returns files before the survey.
The assessing officer, not convinced about the cash sales, cited a lack of buyer confirmations, and the timing of the revised VAT returns made an addition under the provisions of Section 69A of the Income Tax Act. Similarly, the AO had disallowed 30% of the knitting charges due to the non-deduction of TDS under Section 40(a)(a) and also disallowed the entire amount under Section 40A(3) because such payments were made in cash.
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Aggrieved by this addition, the assessee moved an appeal to the Commissioner of Income Tax (Appeals) [CIT(A)], where the CIT(A) confirmed the disallowance made by AO under Section 40A(3) because the assessee failed to provide proof that the cash payments were within the prescribed limit. The CIT(A) also deleted the disallowance made under Section 40(a)(a), stating that it would lead to double taxation.
On filing an appeal to the ITAT, it was observed that the company’s books were audited with no noted defects. The ITAT observed that the commercial tax department accepted the revised VAT returns. The Tribunal asserted that invoking Section 69A of the Income Tax is unwarranted when sales are correctly recorded and proved. The addition of ₹19.02 Crore was therefore deleted.
Similarly, regarding the disallowance of knitting charges under Section 40A(3), the tribunal acknowledged that while some payments exceeded the set cash payment limits, others did not.
The ITAT bench, consisting of Mahavir Singh (Vice President) and Manoj Kumar Aggarwal (Accountant Member), held that the disallowance was restricted to ₹23 lakhs per the payments that violated the cash payment provisions. The tribunal also allowed the set-off of carry-forward losses and directed the assessing officer to verify and grant additional relief to the assessee.
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