ITAT Deletes Rs 10.76 Lakh Expense Disallowance, Remands Rs 17.66 Lakh Cash Payment Issue:

The ITAT Kolkata has directed the Assessing Officer (AO) to delete an expense disallowance of Rs 10.76 lakh made against Saiyed Zaharul Alam for Assessment Year 2013-14. The Tribunal also sent back a separate disallowance of Rs 17.66 lakh under Section 40A(3) of the Income Tax Act for fresh verification.

Saiyed Zaharul Alam (assessee), a sole proprietor engaged in the purchase and sale of raw hides and skins of animals, had filed his income tax return (ITR) for the Assessment Year 2013-14, declaring an aggregate income amounting to Rs 9.75 lakh. The Assessing Officer (AO) completed the assessment under Section 147 of the Income Tax Act, making additions amounting to Rs 3.98 lakh to its gross profit and Rs 38.44 lakh under Section 69A of the Act to the total income returned.

During the reassessment proceedings, the AO disallowed 20% of the claimed expenses and made another addition for cash payments under Section 40A(3). The CIT(A), NFAC, upheld both additions, prompting the assessee to approach the Tribunal.

The Income Tax Appellate Tribunal (ITAT) observed that the AO had neither identified any bogus or unsupported expenses nor pointed out defects in the clarification provided. Since the audited books of account were also not rejected, the Tribunal held that the disallowance was unjustified and directed its deletion.

On the disallowance under Section 40A(3), the assessee argued that payments were made to different persons and that certain cash payments qualified for exceptions under Rule 6DD of the Income Tax Rules. Rule 6DD(e) provides an exception for specified purchases of animal husbandry produce, including hides and skins, subject to applicable conditions.

The tribunal noted that the AO had not properly examined these submissions. Consequently, the tribunal held that "we set aside the impugned addition and remit this issue back to the file of the Assessing officer with a direction to examine the contentions of the assessee as to whether the payments have been made to different persons, as to the business expediency of the assessee in making payment exceeding Rs.20,000/- and as to whether any of the payments covered by the exceptions in Rule 6DD of the Income Tax Rules and to re-determine or re-compute the total income based on such verification."

The assessee has been instructed to provide supporting details, after which the AO will recompute the income as required. Accordingly, the ITAT partly allowed the assessee’s appeal in its order dated October 16, 2026.