Reopening u/s 148 based on Audit objection is valid if cash payments above Rs 20000 has escaped scrutiny

The brief facts of the case are that the assessee is engaged in the business of newspaper printing and publishing. For A.Y. 2011-12, assessment was completed u/s. 143(3) of the Act at total income of Rs. 2,87,710/- vide order dated 23-01-2014. Subsequently, the ld. A.O. initiated re-assessment proceedings on the ground that the assessee had made an expenditure of Rs. 19,78,745/- in cash which was in contravention of provision of section 40A(3) of the Act and therefore the same was liable to be disallowed. Before the ld. A.O, the assessee submitted that he has three branches- at Ahmedabad, Surat and Baroda and the payment debited in the ledger account of printing charges of all three branches is made in cash to various parties and not to any one single party even though the payments are made on a single day since the assessee settles the accounts with the parties once or twice a month as per the outstanding amount. The ld. A.O. however rejected the arguments of the assessee and held that the amount of Rs. 19,78,745/- claimed under the head printing charges for which payment is made in cash in contravention to section 40A(3) of the Act is not allowable.

Before ITAT: Cross Objections filed by the assessee

The learned AO has erred both on facts and in law by initiating re-assessment proceedings u/s 147 of the Act, on account of merely audit objection only, which is not permissible in the eyes of Law. Later on Ld. CIT (A) also erred by not giving his findings on the legal issue that reopening of assessment proceedings can be initiated only on Audit objection or not.

What ITAT Held?

We would like to place reliance on the decision of ITAT Hyderabad in the case of ITO v. Mayuri Construction ITA No.1740/Hyd/2018, wherein the ITAT held that reopening based on Audit objection is valid if cash payments above Rs. 20000 has escaped scrutiny. Moreover, we note that from reasons recorded, Ld. AO has also independently applied his mind to the issue, while initiating re-assessment proceedings.