Manipulation made in Cash Expenses Ledger to save disallowance U/S 40A(3), ITAT upholds Additions made by AO

In this case, the assessee has submitted a ledger account of material purchases, and it was observed by the AO that the assessee has made payments of Rs. 5,80,12,836/- towards material purchases which were paid in cash.

It was further observed that the ledger account submitted in original assessment proceedings and in the assessment proceedings in pursuance to the revisionary order passed by ld. Pr. CIT, the assessee has submitted two different sets of material consumed ledger accounts.

In Second Set, the assessee has tried to bifurcate these cash payments to bring down cash payments in a day to below the threshold limit of Rs. 20,000/-.

Additions by Assessing Officer:

The AO observed that the assessee has not produced books of accounts, and hence availability of cash in hand cannot be verified. The AO observed that the payments have been made exceeding Rs. 20000/- in cash on single day, and no explanation has been offered by the assessee, which led AO to invoke provisions of Section 40A(3) and cash payments to the tune of Rs. 1,81,47,450/- towards labour payments stood added by the AO to the income of the assessee , vide assessment order dated 12.12.2017 passed by AO u/s 143(3) read with Section 263 of the 1961 Act.

Observations of CIT(A) who deleted the Additions

Aggrieved by assessment order dated 12.12.2017 passed by AO u/s 263 read with Section 143(3) , the assessee filed first appeal before ld. CIT(A), who was pleased to partly allow appeal of the assessee, by rejecting books of account u/s. 145(3) of the Act , as in view of ld. CIT(A), the AO was not able to verify books of accounts as the same were not produced before the AO and only photocopies of some ledger accounts were submitted. The ld. CIT(A) observed that additions made by the AO resulted into net profit percentage of more than 75% which as per ld. CIT(A) is impossible in any line of business. The ld. CIT(A) observed that the assessee is a civil contractor and has shown gross receipt of Rs.10,18,28,011/-. The ld. CIT(A) observed that the nature of work of the assessee required purchasing of sand, grit, soil, morang etc. and hire labour on day to day basis in a large amount, the payments were made in cash which cannot be made through cheque as the cash payment is made to building material suppliers and labours. The ld. CIT(A) observed that the suppliers of building material are generally truck drivers who do not accept cheques and labour also does not accept cheques. The ld. CIT(A) observed that if payment is otherwise genuine, then Section 40A(3) has no applicability even if the cash payment in a day is in excess of threshold limit. The ld. CIT(A) also gave finding that during original assessment proceedings u/s 143(3), the books of accounts were produced by the assessee, which were not rejected by AO u/s 145(3) of the 1961 Act. The ld. CIT(A) referred to Section 40A(3) and Rule 6DD of the Income-tax Rules, 1962. The ld. CIT(A) referred to decisions of the Courts and observed that ratio of law laid down by Hon’ble High Courts is that the object of Section 40A(3) is to check evasion of taxes so that payment is made from disclosed sources. It presupposes that the transaction must be a genuine transaction. The ld. CIT(A) observed that Rule 6DD relaxes the rigours of Section 40A(3) , in a genuine and bonafide cases to avoid harassment and hardship. It was observed by ld. CIT(A) that the practibility of Rule 6DD (j)(2) is to be judged from the point of view of businessmen and not from the point of Revenue. The ld. CIT(A) observed that where the payment is made in cash, the AO has to see that the transaction is genuine and allow the deduction. The ld. CIT(A) further observed that circular of Board is not exhaustive but illustrative, and the AO has to see the surrounding circumstances , consideration of business expediencies and the facts of each particular case. The ld. CIT(A) finally rejected books of accounts by invoking provisions of Section 145(3) of the 1961 Act and estimated net profits of the assessee @ 6% of gross receipts of Rs.10,18,28,011/- , which as per ld. CIT(A) was fair and judicious. The miscellaneous income of Rs. 11,45,654/- disclosed by assessee in its books of accounts were directed to be brought to tax , separately in addition to the income estimated by ld.CIT(A) @6% of gross turnover.

ITAT Order:

Section 40A(1) contain a non obstante clause, that provisions of Section 40A shall have effect not withstanding anything to the contrary contained in any other provisions of the 1961 Act , relating to computation of income under the head “Profits and Gains of Business or Profession” . Section 40A(3) requires that where the assessee incurs any expenditure in respect to which payment or aggregate of payments made to a person in a day, is made otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeding Rs. 20000/- , then no deduction of such cash expenses shall be allowed in respect of such expenditure while computing income chargeable to tax . It transpires that the assessee has admittedly made cash payments exceeding Rs.20,000/- towards material purchases and labour payments in cash in a day, which clearly is made otherwise than through account payee cheque or account payee bank draft, and there is clearly an infringement of Section 40A(3). Thus, no deduction of these cash expenses exceeding threshold limit in a day , can be allowed, in view of clear infringement/violation of Section 40A(3) , wherein Section 40A(1) contains a non obstante clause which stipulates that provisions of Section 40A(1) shall have effect notwithstanding anything to the contrary contained in any other provisions of the 1961 Act , relating to computation of income under the head “Profits and Gains of Business or Profession”.

It was for the assessee to have led evidences to substantiate that no such cash payments in excess of Rs. 20000 in a day was made, rather the assessee in assessment proceedings conducted by AO u/s 263 read with Section 143(3) instead of explaining that these cash payments are not hit by Section 40A(3) read with Section 40A(1), falsified the record by bringing on record second set of ledger’s of material purchases and labour payments. The assessee has tried to wriggle out of clutches of Section 40A(3) by producing second set of ledger account in the assessment proceedings conducted by AO consequent to revisionary order passed by ld. Pr. CIT u/s 263.

Once there is a clear infringement of provision of Section 40A(3) and the assessee is not able to demonstrate that its case falls under exceptions as contained in Rule 6DD of Income-tax Rules, 1962, the authorities are bound to make additions u/s 40A(3) , which is to be read with Section 40A(1) which carries a non obstante clause. It could not be demonstrated that the assessee case falls under exceptions as are contained in Rule 6DD of the 1961 Act, and by ld. CIT(A) erroneously granted relief to the assessee by applying Rule 6DD of the 1962 Rules although the assessee was not able to demonstrate that its case falls under exception as carved out in Rule 6DD of the 1962 Rules.

The 1961 Act is an code in itself. In case of non compliances of various applicable provisions of the 1961 Act, consequential penal provisions are prescribed in the 1961 Act itself which will get attracted and which has direct bearing on computing income chargeable to tax. The assessee has clearly infringed provisions of Section 40A(3) and made cash payments in excess of threshold limits with respect to material purchases and labour payments, and claimed these expenses as business expenses deductible from business income. It could not be demonstrated that the assessee case fell into exceptions as are contained in Rule 6DD of the 1962 Rules.

The assessee also failed to produce books of accounts, cash book , vouchers and invoices , and merely ledger accounts of material consumed and labour payments made were produced, and further that two different sets of ledger accounts were produced by the assessee in two different assessment proceedings , firstly in original assessment proceedings wherein the assessee admitted to have made cash payments in a day of more than Rs. 20000/- in violation of Section 40A(3) , towards material purchases and labour payments, secondly while in assessment proceedings consequent to revisionary order passed by ld. Pr. CIT u/s 263 of the 1961 Act, wherein the assessee produced different ledger accounts of material purchases and labour payments to show lower cash payments per day below threshold limit u/s 40A(3) to avoid being penalized u/s 40A(3). The AO rightly made additions u/s 40A(3), while ld. CIT(A) rejected books of accounts of the assessee and invoked provisions of Section 145(3) of the 1961 Act to frame best judgment assessment to bring to tax income @6% of gross receipts without any basis, despite clear mandate of Section 40A(3) read with Section 40A(1) which starts with non obstante clause .

The ld. CIT(A) fell into an error in relying on Rule 6DD of the 1962 Rules and granting relief to the assessee, without appreciating that the assessee is not able to explain and make out its case for falling into exception as carved out by Rule 6DD of the 1962 Rules, and rather in fact the assessee instead of explaining its case on merits, manipulated and came out with second set of ledger for material purchases and labour charges wherein it claimed that no cash payments exceeding Rs. 20000 was made in a day to a person, in assessment proceedings conducted by AO u/s 143(3) read with Section 263. While in first of ledger of material purchases and labour payments, filed by the assessee in original assessment proceedings conducted by AO u/s 143(3) read with Section 143(2), the assessee filed ledgers of material purchases and labour payments, where the cash payment in a day exceeding Rs. 20000/- in infringement of Section 40A(3) and no explanation was made rather the assessee falsified and manipulated the records by bringing altogether different set of ledger of material purchased and labour payments.

The AO has enclosed both the sets of ledger accounts in its assessment order. It was for the assessee to have demonstrated that It did not infringed provisions of Section 40A(3) , or to make out its case to fall under exceptions under Rule 6DD of the 1962 Rule , but no such case was made out by the assessee, while ld. CIT(A) fell into an error by granting relief to the assessee by granting relief by applying Rule 6DD of the 1962 Rules, without any basis or justification or any material whatsoever on record. We do not find any infirmity in the order of the Assessing Officer , the ld. CIT(A) has misdireted itself by applying net profit rate , despite the assessee having admitted to have cash payment in violation of Section 40A(3) of the Act and the case also does not fall under exceptions as are provided in Rule 6DD of the 1962 Rules. Under these circumstances, the appellate order passed by ld. CIT(A) cannot be sustained and is reversed and the assessment order passed by the Assessing Officer is confirmed so far as additions disallowance u/s. 40A(3) with respect to material consumed and labour payments are concerned.