Appeal allowed on disallowance, penalty upheld under Section 271B. History of delays cited.

The appeal regarding disallowance under Section 40A(3) of the Income Tax Act was allowed for statistical purposes, necessitating a reassessment by the Assessing Officer. However, the appeal against the penalty under Section 271B was dismissed, upholding the penalty imposition. The tribunal found the penalty justified due to the history of delayed filings and lack of substantiated reasons. The order was issued on February 28, 2017, in Chennai.

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Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act.
2. Levy of penalty under Section 271B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(3) of the Income Tax Act:

The first appeal concerns the disallowance of Rs. 38,44,069 under Section 40A(3) of the Income Tax Act, 1961, which was confirmed by the Commissioner of Income Tax (Appeals). The assessee, engaged in the business of granite blocks, had filed a return of income disclosing Rs. 13,20,370. During assessment, the Assessing Officer noted cash withdrawals totaling Rs. 1,78,80,776 from the assessee's bank accounts. The officer analyzed these withdrawals and concluded that Rs. 38,44,069 was spent in cash for purchases, thereby violating Section 40A(3), which disallows deductions for cash payments exceeding Rs. 20,000 in a day to a person.

The assessee argued that the expenditures were bona fide and genuine, citing Supreme Court and Delhi High Court judgments to support that Rule 6DD of the Income Tax Rules, which provides exceptions to Section 40A(3), is illustrative and not exhaustive. However, the Commissioner of Income Tax (Appeals) upheld the disallowance, stating that the assessee's case did not fit within Rule 6DD's exceptions and emphasized the onus on the assessee to prove exceptional circumstances.

Upon appeal, the tribunal noted that the Assessing Officer's methodology for computing cash expenditure was incorrect. The officer should have compiled instances of cash payments exceeding the limit from the cash book and sought explanations for each. The tribunal thus set aside the lower authorities' orders and remitted the issue back to the Assessing Officer for fresh consideration in accordance with the law.

2. Levy of Penalty under Section 271B of the Income Tax Act:

The second appeal concerns the levy of penalty under Section 271B for failure to get accounts audited as required by Section 44AB. The assessee contended that the delay in audit was due to the sudden resignation of their accountant in August 2012, which left the books and accounting papers in disarray, necessitating significant effort to prepare the accounts.

The Departmental Representative argued that the assessee was habitually late in filing audit reports and that the resignation of an employee was not a valid reason for the delay. The tribunal noted that the audit report was filed along with the return of income on 31.03.2013, but not before the due date specified under Section 139(1). The tribunal emphasized that filing the audit report and the return of income are independent requirements and that the assessee failed to prove reasonable cause for the delay, such as substantiating the accountant's resignation.

Given the assessee's history of delayed filings and lack of substantiated reasons, the tribunal found the penalty under Section 271B justified and upheld the lower authorities' orders.

Conclusion:

The appeal concerning disallowance under Section 40A(3) was allowed for statistical purposes, requiring fresh consideration by the Assessing Officer. The appeal against the penalty under Section 271B was dismissed, affirming the penalty's imposition. The order was pronounced on February 28, 2017, at Chennai.

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