Whether re-opening of assessment is valid where cash payments over Rs. 20,000/- made by assessee escape scrutiny u/s 40A(3)?

Short Over view of the case:

Issue involved before ITAT was as to whether re-opening of assessment is valid where cash payments over Rs. 20,000/- made by assessee escape scrutiny u/s 40A?

The assessee is a firm engaged in the business as civil contractor filed its return of income for the AY 2008-09 on 14/10/2008 declaring total income of Rs. 65,254/-.

Initially, the return was processed U/s. 143(1) of the Act and thereafter the assessment was completed u/s. 143(3) of the Act wherein the assessee’s income was assessed at Rs. 2,85,250/-.

Subsequently, it was revealed by the Revenue’s Audit party that the assessee had made cash payments exceeding Rs. 20,000/- aggregating to Rs. 21,94,715/- towards expenditure which attracts the provisions of section 40A(3) of the Act and thereby the same has to be disallowed.

Therefore, the AO in agreement with the finding of the Revenue’s Audit reopened the assessment u/s 147 of the Act which was beyond the period of four years from the end of the relevant assessment year however within the limitation period specified under the Act.

During the course of re-assessment proceedings, the Ld. AO once again examined the books of accounts of the assessee and found the observation of the Audit Party to be correct.

The Counsel of the assessee Shri K. Khaja Hussain, Chartered Accountant had appeared on behalf of the assessee however, he could not controvert to the findings of the AO.

Therefore, the AO disallowed the expenditure incurred amounting to Rs. 21,94,715/- against which cash payments were made exceeding Rs. 20,000/- and added to the income of the assessee.

On appeal, the main issue before the Tribunal was whether re-opening of assessment is valid where cash payments over Rs. 20,000/- made by assessee escape scrutiny u/s 40A . ITAT held as under:

I find the order of the CIT (A) to be devoid of merit because he has not given a categorical finding as to why the provisions of section 40A(3) of the Act would not be attracted in the case of the assessee even though assessee had made cash payments exceeding Rs. 20,000/- aggregating to Rs. 21,94,715/-.

In fact he has simply brushed aside the issue by stating that all those payments were made during bank holidays which falls under exceptions mentioned in Rule 6DD of the IT Rules, 1962 without giving a clear cut finding on that regard.

Further since the CIT (A) has not obtained a remand report from the AO on the issue, his observations cannot be accepted.

From the above discussions, I hereby hold that the reopening of the assessment by the AO based on the Audit Objection is valid and I further hold that the order of the CIT (A) is devoid of merits and accordingly I hereby reinstate the order of the AO.

In the result, appeal of the Revenue is allowed.