2023 (12) TMI 102 - AT - Income Tax

Bonus payment disallowance restricted to 20% upheld, Section 40A(3) cash payment addition deleted for inadequate verification

ITAT Chennai upheld CIT(A)'s decision restricting bonus payment disallowance to 20% instead of total disallowance by AO. Assessee couldn't provide ... Unproved bonus payment - disallowance of bonus paid to employees - HELD THAT:- As explained by assessee before the AO that, due to lapse of time he could not file necessary evidence to justify payment of bonus, but fact remains that he had paid bonus to staff on two occasions. CIT(A), after considering relevant facts has recorded categorical finding that, because of lapse of time for more than 8 years, the assessee could not able to gather necessary evidences. Therefore, taking into account totality of facts and circumstances of the case, and also to meet the ends of justice, restricted disallowance to the extent of 20% of amount disallowed by the AO. Although, the revenue has challenged findings of the CIT(A) on adhoc disallowance of expenses, but could not adduce any evidence to counter the findings or facts recorded by the CIT(A). Therefore, there is no error in the reasons given by the CIT(A) to restrict disallowance of bonus to the extent of 20% on actual expenditure disallowed by the AO and thus, we are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the revenue. Disallowance of expenditure u/s. 40A(3) - Payment of bonus on the ground that the appellant has paid bonus in cash exceeding Rs. 20,000/- to a person in a day, contrary to provisions of section 40A(3) - HELD THAT:- CIT(A), after considering relevant facts and also taking note of fact that, the tax auditor has not made any comments on cash payments in excess of prescribed limit contrary to section 40A(3), observed that the AO without verifying necessary cash book to ascertain the quantum of payments has simply made disallowance with a vague observation on the basis of bonus register, ignoring the arguments of the assessee that cash payment in a single day to any person does not exceeded the prescribed limit as per the provisions of section 40A(3). The findings of the facts referred by the ld. CIT(A) are uncontroverted by the revenue, except stating that the CIT(A) has given relief on the basis of presumption and unqualified report from the tax auditor. When the Assessing Officer has failed to make out a case of disallowance of expenditure u/s. 40A(3) with proper reasons, no fault can be attributed to the findings of the ld. CIT(A), which is based on evidences filed by the assessee. Therefore, we are of the considered view that there is no error in the reasons given by the ld. CIT(A) to delete additions made towards disallowance of expenditure incurred in cash u/s. 40A(3). Appeal filed by the revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer rightly disallowed Rs. 30,67,785 as unproved bonus payments where the assessee produced partial supporting evidence and explained loss of records due to lapse of time, and whether the first appellate authority erred in restricting the disallowance to 20% of the amount disallowed by the AO. 2. Whether the Assessing Officer rightly disallowed Rs. 42,52,095 under section 40A(3) for alleged cash payments in excess of the statutory limit on the basis of the bonus register alone, and whether the first appellate authority correctly deleted that disallowance where the tax auditor did not report quantification of such cash payments and the assessee disputed single-day excess payments. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Disallowance of unproved bonus payments (Rs. 30,67,785) Legal framework: Business expenses, including bonus payments, are allowable only when supported by evidence; burden of proof lies on the taxpayer to substantiate claimed expenses. When an Assessing Officer finds lack of supporting documents, he may make disallowance; appellate authorities can exercise discretion based on facts. Precedent Treatment: No specific precedents were cited or relied upon by the authorities in the record before the Tribunal; the Tribunal and CIT(A) decided on facts and established principles regarding burden of proof and assessment of reasoned adjustments. Interpretation and reasoning: The AO disallowed the entire unapparent portion of bonus payments (Rs. 30,67,785) because only Rs. 1,13,57,935 of claimed Rs. 1,44,25,720 was supported by evidence. The assessee explained inability to produce remaining records due to lapse of time and asserted that bonus payments were made on two occasions. The CIT(A) accepted lapse-of-time explanation and, taking totality of facts and in the interests of justice, made an ad hoc restriction of the AO's disallowance to 20% of the amount disallowed. The Tribunal observed that revenue did not produce any evidence to counter the factual findings recorded by the CIT(A) and that the CIT(A)'s exercise of discretion was based on the materials on record and the assessee's explanation. Ratio vs. Obiter: Ratio - where the taxpayer has produced partial evidence and offers a plausible explanation (loss of records due to lapse of time) and the assessing authority cannot conclusively quantify unsupported payments, the appellate authority may, on the facts, make an equitable/limited disallowance rather than sustain full disallowance. Obiter - the Tribunal's reference to 'ends of justice' and application of a 20% restriction is fact-specific and not laid down as a universal rule for similar cases. Conclusions: The Tribunal upheld the CIT(A)'s restriction of the disallowance to 20% as a justified exercise of discretion in the facts of the case, noting absence of contrary evidence from the revenue. The AO's full disallowance was not sustained. Issue 2 - Disallowance under section 40A(3) for alleged cash payments in excess of limit (Rs. 42,52,095) Legal framework: Section 40A(3) disallows expenditure where cash payments to a person in a day exceed the statutory limit (as then applicable). An AO seeking to disallow must demonstrate that cash payments in excess of the limit were made to a person on a single day; assessment must be founded on verification of relevant records (cash book, vouchers, contemporaneous documents). Precedent Treatment: The authorities below and the Tribunal proceeded on evidentiary assessment; no binding precedents were cited or overruled in the record. The Tribunal applied the established principle that disallowance under s.40A(3) requires clear evidentiary foundation. Interpretation and reasoning: The AO quantified the s.40A(3) disallowance based on the bonus register entries showing amounts exceeding the prescribed cash limit against individual employees on certain dates. The assessee countered that although register showed aggregated amounts, actual payments were made on different dates and that the tax auditor's report did not comment on any cash payments exceeding the statutory limit. The CIT(A) found the AO had not verified the cash book or otherwise established that payments to any person on a single day exceeded the limit, and that the audit report did not quantify such cash payments. The Tribunal emphasized that where the AO fails to make out a case with proper reasons and verification, the appellate finding to delete the disallowance, premised on evidences filed by the assessee and the absence of auditor qualification, cannot be faulted. Ratio vs. Obiter: Ratio - disallowance under s.40A(3) requires concrete verification (e.g., cash book, corroborative entries) showing that cash payments to a person in a single day exceeded the statutory limit; absent such verification and in presence of contrary explanation and lack of auditor qualification, the disallowance cannot be sustained. Obiter - remarks on the AO's 'vague observation' are evaluative of administrative fact-finding in this case and not a broader pronouncement on AO conduct. Conclusions: The Tribunal upheld the CIT(A)'s deletion of the s.40A(3) disallowance, finding that the AO did not establish the statutory trigger (single-day excess cash payments) with adequate verification and that the assessee's explanation and absence of auditor qualification supported deletion. Cross-references and General Observations Both issues turned on evidentiary sufficiency: Issue 1 involved the taxpayer's partial substantiation and loss of records due to lapse of time, allowing appellate mitigation; Issue 2 involved absence of AO verification against primary books (cash book) and lack of auditor qualification, precluding a s.40A(3) disallowance. The Tribunal repeatedly emphasized that revenue failed to adduce contrary evidence to impugn the factual findings of the CIT(A).