2020 (4) TMI 263 - AT - Income Tax

Appeal partly allowed, remanded for further consideration. Adjustments under Sections 40A(2) and car expenses.

The appeal was partly allowed for statistical purposes. The Tribunal remanded specific issues back to the Assessing Officer for further consideration. ... Disallowance under section 40A(3) - Exemption under Rule 6DD - Remand for verification - Disallowance under section 40A(2) for payments to relatives - Burden of proof on assessee to justify reasonableness of payments - Apportionment of car expenses between business and personal useDisallowance under section 40A(3) - Exemption under Rule 6DD - Remand for verification - Burden of proof on assessee to justify reasonableness of payments - Whether the disallowance of cash purchases under section 40A(3) should be sustained or whether the assessee falls within the exceptions in Rule 6DD and the matter requires fresh consideration. - HELD THAT: - The Assessing Officer disallowed the cash payments to the supplier under section 40A(3) on the ground that payments were in cash despite banking facilities being available. The CIT(A) confirmed the disallowance because the assessee had not produced evidence from the payee showing insistence on cash nor demonstrated applicability of Rule 6DD. The assessee subsequently produced a letter from the payee asserting that payments were insisted to be made in cash and that purchases occurred after banking hours. Rule 6DD(j) exempts certain cash payments made when banks are closed. In the interest of justice and having regard to the new evidence, the Tribunal held that the assessee should be given an opportunity to prove that the payments were made under circumstances falling within Rule 6DD, and accordingly restored the issue to the file of the Assessing Officer for verification and fresh consideration. [Paras 5]Issue remanded to the Assessing Officer for verification of whether the cash payments fall within the exceptions in Rule 6DD; Grounds Nos. 1 to 5 allowed for statistical purposes.Disallowance under section 40A(2) for payments to relatives - Burden of proof on assessee to justify reasonableness of payments - Whether payments of salary to close relatives were excessive or unreasonable and liable to disallowance under section 40A(2), and if so, to what extent. - HELD THAT: - The Assessing Officer found that salaries paid to the assessee's mother, wife and two brothers were excessive and disallowed 50% under section 40A(2); the CIT(A) upheld that disallowance for lack of documentary proof of services rendered. The Tribunal examined the factual background that the family members continued the family business after the death of the assessee's father and that they assisted in day-to-day business. Finding the AO's 50% disallowance excessive on these facts, the Tribunal exercised its discretion to moderate the disallowance and granted a further deduction in favour of the assessee, while accepting that part of the payments were not supported as reasonable business expenditure. [Paras 6]Partly allowed; the Tribunal reduced the effective disallowance and granted additional deduction in favour of the assessee, thereby moderating the disallowance upheld by the authorities below.Apportionment of car expenses between business and personal use - Whether one-third of car expenses claimed should be disallowed as personal or non-business use, and whether that disallowance was excessive. - HELD THAT: - The Assessing Officer disallowed one-third of the car expenses on the basis that the proprietor-business with no branches did not justify four cars; the CIT(A) upheld the disallowance for lack of documentary proof that four cars were necessary. The Tribunal accepted that the assessee had four relatives attending to the business and that travel for purchases extended to other States, but found the one-third disallowance excessive on the facts. Exercising appellate discretion, the Tribunal restricted the disallowance to one-fourth of the car expenses claimed. [Paras 7]Partly allowed; the disallowance is reduced and restricted to one-fourth of the car expenses claimed.Final Conclusion: The appeal is partly allowed: the section 40A(3) addition is restored to the Assessing Officer for verification of Rule 6DD applicability; the section 40A(2) disallowance as to payments to relatives is moderated in part in favour of the assessee; and the disallowance of car expenses is reduced from one-third to one-fourth. The appeal is disposed of accordingly. Issues Involved:1. Disallowance under Section 40A(3)2. Disallowance under Section 40A(2)3. Disallowance of Car ExpensesDetailed Analysis:Disallowance under Section 40A(3) (Ground Nos. 1 to 5)The assessee purchased textile goods from SPM & Sons, Kollam for Rs. 20,44,371, entirely paid in cash. The Assessing Officer (AO) disallowed these payments under Section 40A(3) of the I.T. Act due to the cash payment exceeding the permissible limit. The assessee argued that the payments were made beyond banking hours and insisted upon by the seller, thus falling under the exemption provided in Rule 6DD. However, the CIT(A) upheld the AO's decision, stating the assessee failed to provide evidence that the payee insisted on cash payment and did not adequately explain how the payments were covered under Rule 6DD.Upon appeal, the Tribunal noted the assessee produced a letter from SPM & Sons, Kollam, stating the insistence on cash payments due to high demand for mill goods and banking constraints. The Tribunal decided to grant the assessee another opportunity to substantiate the claim that the payments fell within the conditions of Rule 6DD. The issue was remanded back to the AO for reconsideration. Thus, Ground Nos. 1 to 5 were allowed for statistical purposes.Disallowance under Section 40A(2) (Ground Nos. 6 & 7)The assessee paid salaries totaling Rs. 10.80 lakhs to his mother, wife, and two brothers. The AO disallowed 50% of these payments (Rs. 5.40 lakhs) under Section 40A(2), considering them excessive and unreasonable compared to the market value of the services rendered. The CIT(A) upheld this disallowance, stating the assessee failed to justify the reasonableness of the salaries.The Tribunal, after reviewing the submissions, acknowledged the contributions of the assessee's family members in running the business and the circumstances following the death of the assessee's father. It deemed the 50% disallowance excessive and allowed a further deduction of Rs. 2,70,000/-, confirming a disallowance of Rs. 2,70,000/-. Thus, Ground Nos. 6 & 7 were partly allowed.Disallowance of Car Expenses (Ground No. 8)The AO disallowed 1/3rd of the expenses claimed for four cars, reasoning that the assessee, running a proprietary business with no branches, did not need four cars. The CIT(A) upheld this view, noting the lack of evidence proving the necessity of four cars for business purposes.The Tribunal considered the assessee's argument that the cars were used by family members for business activities, including outstation purchases. It found the 1/3rd disallowance excessive and reduced it to 1/4th of the car expenses claimed. Thus, Ground No. 8 was partly allowed.General Grounds (Ground No. 9)Ground No. 9 was dismissed as it was general in nature and required no adjudication.ConclusionThe appeal was partly allowed for statistical purposes, with specific issues remanded for further consideration and adjustments made to the disallowances under Sections 40A(2) and car expenses. The judgment emphasized the need for the assessee to provide adequate evidence to substantiate claims under the relevant exemptions and deductions.