No disallowance u/s 40A(3) where payments not claimed as expenditure

No disallowance u/s 40A(3) where payments not claimed as expenditure. ITAT deletes addition as alleged cash payment was made for purchasing fixed assets

ABCAUS Case Law Citation:
ABCAUS 2685 (2018) (12) ITAT

Important Case Laws Cited/relied upon:
ACIT V/s Jasmine Buildtech (P) Ltd

The appeal was filed by the assessee against the orders of Commissioner of Income Tax (Appeals) in confirming addition made by the Assessing Officer (AO) under section 40A(3) of the Income Tax Act, 1961 (the Act).

Notice u/s 148 of the Act was served upon the assessee after duly recording the reasons. Assessment proceedings u/s 143(3) r.w.s. 148 of the Act was completed after making a disallowance u/s 40A(3) of the Act for the alleged cash payment for purchase of property thereby violating the provisions of Section 40A(3) of the Act for the alaleged incurring expenditure in cash for a sum exceeding Rs.20,000/-.

The CIT(A) confirmed the view taken by the Assessing Officer that the assessee had violated the provisions of Section 40A(3) of the Act.

The assessee submitted that no expenditure had been claimed in the Profit & Loss Account and therefore no disallowance should have been made by AO u/s 40A(3) of the Act.

The Tribunal observed that the provisions of Section 40A(3) of the Act are violated if the assessee incur any expenditure in respect of which payment is made in a sum exceeding Rs.20,000/- otherwise then by account payee cheque drawn on a bank or by a account payee draft then in such situation no deduction shall be allowed for such expenditure.

The Tribunal opined that as per the provision of section 40A(3) of the Act, the first condition before making disallowance u/s 40A(3) is that an “expenditure has to be incurred” and thereafter it is to be seen that whether such expenditure has been incurred in cash?

The Tribunal observed that the year under appeal was the first year of the assessee firm. On perusal of the balance sheet it was noted that against the partners capital, in the asset side, there were two items namely fixed assets and cash in hand.

It was also observed that no Profit & Loss Account had been prepared as there was no occasion to prepare because there was no revenue and expenditure during the year.

The Tribunal also observed that the alleged cash payment was made for purchasing the property which had not been shown as stock in hand rather it had been shown under the heads fixed assets.

The Tribunal noted that the Co-ordinate Bench while adjudicating similar issue had held that where payments has not been claimed as expenditure then no disallowance u/s 40A(3) of the Act shall arise.

Following the decision of the Co-ordinate Bench the Tribunal opined that the as assessee had not incurred any expenditure during the year in cash and the alleged cash payment had been utilized for purchasing the fixed assets, both the lower authorities erred in sustaining the disallowance u/s 40A(3) of the Act.

Accordingly, the Tribunal directed the Assessing Officer to delete the addition.

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