2018 (5) TMI 433 - AT - Income Tax

ITAT Overturns Disallowance under Section 40A(3)

The ITAT allowed the appeal, overturning the decisions of the lower authorities regarding the disallowance under Section 40A(3) of the Income Tax Act. ... Disallowance under the provision of Section 40A(3) - relationship between assessee and SMS Auto - Held that:- On perusal of other supporting evidence such as sale invoice issued by the SMS Auto wherein it was clearly recorded sale through China Automobile suggest that sale was directly made by SMS Auto to the parties. But, it was routed through its agent i.e. China Automobile. Similarly, we also note that the assessee has been registered under the West Bengal VAT under the category of agency business, which also suggest that assessee is acting as agent of SMS Auto. In view of above, we note that the situation of assessee is doubtful whether assessee is an agent of SMS Auto but AO was very much empowered under the provision of law to ascertain the facts that whether assessee is an agent of SMS Auto. But he failed to exercise his power given under the statute. In our considered view the benefit of doubt goes in favour of assessee. In view of the above, we have no hesitation to reverse the orders of Authorities Below. - Decided in favour of assessee. Issues:1. Disallowance under Section 40A(3) of the Income Tax Act.Analysis:Issue 1: Disallowance under Section 40A(3) of the Income Tax ActThe appeal was against the order of the Commissioner of Income Tax (Appeals) confirming the addition of a cash payment exceeding Rs. 20,000 to SMS Auto under Section 40A(3) of the Act. The assessee contended that as an agent of SMS Auto, the cash payment was permissible under Rule 6DD of the IT Rules, 1962. However, both the Assessing Officer and the CIT(A) disallowed the payment. The CIT(A) observed that the appellant failed to prove the agency relationship and upheld the disallowance. The ITAT noted that the appellant did not provide conclusive evidence of the agency relationship but highlighted the invoice indicating sales through SMS Auto. The ITAT found that the appellant's registration under West Bengal VAT as an agency business supported the claim of acting as an agent. Despite the lack of definitive proof, the ITAT ruled in favor of the appellant due to the AO's failure to investigate the relationship adequately. Consequently, the ITAT allowed the appeal, overturning the decisions of the lower authorities.This detailed analysis of the judgment highlights the key arguments, findings, and reasoning behind the decision to reverse the disallowance under Section 40A(3) of the Income Tax Act. The ITAT's emphasis on the lack of thorough investigation by the Assessing Officer and the benefit of doubt granted to the appellant based on supporting evidence enriches the understanding of the case and the legal implications involved.