Addition u/s 40A(3)
Section 40A(3) - No violation when the cash payments were made to Supervisors to manage business
Section 263 - Action not warranted when the AO has taken a concise decision of not making addition
1. Assessee is a contractor and his books of accounts are audited u/s 44AB of the Income Tax Act, 1961
2. The case of the assessee was selected for scrutiny
3. During the assessment proceedings, after examination of books of accounts and after verification of other details the addition was made to the tune of Rs.1 lac
4. The learned CIT issued notice u/s 263 and passed order u/s 263 and set aside the order of Assessing Officer with the directions to Assessing Officer to decide the issue afresh on merits in accordance with law
5. Aggrieved the assessee preferred appeal before the ITAT
Arguments by Assessee
Learned AR submitted that the basis on which proceedings by Commissioner were initiated u/s 263 for the so called violation of provisions of section 40A(3) was not correct as in fact the assessee had not made payments in violation of provisions of section 40A(3) and this angle was already examined by Assessing Officer before passing the assessment order. The learned AR in this respect invited our attention to a copy of questionair issued by Assessing Officer placed at paper book page 12 to 14 and our specific attention was invited to question No.19 placed at paper book page 13. Inviting our attention to reply to this notice, the learned AR took us to paper book page 15 to 17 and our specific attention was invited to reply to question No. 19 placed at paper book page 17. The learned AR further invited our attention to a copy of audit report placed at paper book page 2 to 11 and submitted that auditor in his report has not pointed out any violation in the provisions of section 40A(3) and in this respect our specific attention was invited to paper book page 5. The learned AR, therefore, submitted that the necessary examination was already done by Assessing Officer and therefore, action u/s 263 was not warranted.
Without prejudice the learned AR submitted that reassessment proceedings in this case were initiated on the basis of audit objection and which were later on dropped however, on the same date of dropping the reassessment proceedings proposal for initiation action u/s 263 was initiated on the basis of same audit objection which was not warranted by law as held by Punjab & Haryana High Court in the case of CIT V Sohana Woollen Mills,296 ITr 238 and in this respect filed a copy of the case law reported at 296 ITR 238.
Arguments by Revenue
The learned DR, on the other hand, submitted that the assessment order passed by Assessing Officer does not talk about the examination of this aspect and therefore, the action u/s 263 was rightly taken by Commissioner. He submitted that department had dropped proceedings u/s 147 to strengthen its case for action u/s 263.
We find that the examination of violation of provisions of section 40A(3) has been examined by Assessing Officer on three occasions and he had not found any violation of such provisions. The reply filed by the assessee clearly shows that to manage his business at various places the advances were made to various Supervisors engaged working in various locations and these Supervisors used to submit the details of material purchased by them and for making payments to labour and each payment was less than Rs.20,000/- and therefore, in fact, there was no violation of the provisions of section 40A(3).
In the case before us, we find that the Assessing Officer has already applied his mind and has taken a concise decision of not making addition for violation of provisions as there were no violation at all and therefore, the order passed by Assessing Officer was not erroneous and was not prejudicial to the interest of Revenue.