Additions u/s 40A(3) of Income Tax Act can’t be Initiated by AO without Furnishing Necessary Evidences: ITAT orders for Re-Consideration [Read Order]

The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) held that additions under Section 40A(3) of the Income Tax Act, 1961 cannot be initiated by the assessing officer without furnishing necessary evidences.

There was a search action in the case of the assessee under Section 132 of the Income Tax Act. Consequent to this search action, notice under Section 153A of the Income Tax Act was issued to the assessee. The assessee made payment of various expenditures exceeding Rs.20,000/- in cash while purchasing the land.

The Authorized Representative submitted that the payments are made for the purchase of land. The genuineness of payment to the payee who is identifiable and all these payments are duly recorded in the assessee’s books of accounts and also supported by registered sale deeds.

It was also submitted that being a genuine cash payment, Section 40A(3) of the Income Tax Act cannot be applied. For this purpose, he relied on the CBDT Circular No.6-P dated 6.7.1968 for the proposition that this provision is designed to counter tax evasion by showing various fictitious expenditures in cash and to frustrate the proper investigation by the department as to the identity of the payee and reasonableness of the payment.

The Departmental Representative submitted that provisions of Section 40A(3) of the Income Tax Act will come into operation only in a case and circumstances as may be prescribed having regard to the nature and extent of banking facility available, consideration of business exigency and other relevant factors and such cases have been prescribed under Rule 6DD of the Income Tax Rules, 1962.

In this case, no exceptions are provided under Rule 6DD of the Income Tax Rules, 1962, which is applicable to the assessee, and thus there is no error in the reason given by the lower authorities to make or sustain addition towards expenditure incurred in cash in excess of Rs.20,000/- otherwise addition by crossed cheque or DD.

The Two-member bench comprising of Chandra Poojari (Accountant member) and Beena Pillai (Judicial member) held that the assessee has not proved the existence of business exigency in making the payment by way of cash otherwise by crossed cheque or DD or electronic clearance system through bank and Assessing Officer also not carried necessary enquiry on this count by examining all the sale deeds entered by the assessee with the parties.

So, in the interest of justice, the entire issue in dispute was remitted back to the file of the Assessing Officer for reconsideration. Accordingly, the issue in these appeals with regard to the addition made under Section 40A(3) of the Income Tax Act is remitted back to the Assessing Officer for fresh consideration to decide the same after giving an opportunity of hearing to the assessee.

Thus, the appeal of the assessee was partly allowed.

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