Income Tax Appellate Tribunal (ITAT), Chennai bench has held that the disallowance of total purchase under section 40 A(3) will sustain when cash is paid for purchases over the prescribed limit and ordered the AO to enquire into the applicability of the above-said section in the assessee’s case.
The assessee challenged the order of the Commissioner of Income Tax (Appeals), Puducherry, dated 31.08.2018.
The assessee, the proprietor of Honey Dew Foods, engaged in the business of trading in hot bread and was a franchise holder for M/s. B & M Hot Breads Pvt. Ltd. The assessee was entitled to a sum of Rs.90,750/- per month or 8% of net sales after deduction of taxes.
The Assessing Officer noticed that the assessee has made cash payment over the prescribed limit u/s.40A(3) of the Act, for purchases and disallowed total purchases amounting to Rs.2,58,98,591/-. On appeal, the CIT(A) confirmed additions made by the Assessing Officer.
It was evident that the assessee has accounted for purchases in its books of account and made cash payments for said purchases over the prescribed limit provided u/s.40A(3) of the Act. It was observed that when cash payments are made for any expenses over the prescribed limit, provisions of section 40A(3) cannot be applied, because, the real nature of transactions needs to be ascertained.
The Tribunal observed that when the assessee acts as a commission agent and earns a commission on total sales, then even if, for practical purposes, transactions are treated as purchase & sales and in this case, the assessee claims that though he has reported purchases as his purchases, said purchases are made on behalf of the principal, and his income was only commission on net sales.
Shri V Durga Rao, JM and Shri G Manjunatha, AM while allowing the appeal set aside the issue to the file of the Assessing Officer and direct the Assessing Officer to reconsider the issue and decide the applicability of provisions of section 40A(3) of the Income Tax Act, 1961.
The Appellant was represented by Mr S.Sridhar and the Respondent was represented by Mr V.Nandakumar.
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