I-T – Additions cannot be made u/s 40A(3) sans rejecting books of account: HC

AHMEDABAD,  : THE ISSUE IS – Whether additions can be initiated by the Department u/s 40A(3), without even rejecting the books of account. NO IS THE VERDICT.

Facts of the case

The assessee, who is a Commission Agent for purchase/sale of food-grain and holds the licence issued by the Agricultural Produce Market Committee, filed his return declaring income of Rs.25,400/- whereas the income was assessed u/s 143(3) at Rs.1,20,592/-. Subsequently, the case was reported u/s 147 on the ground that assessee had purchased goods of Rs.2,83,55,337/- wherein payments exceeding Rs.20,000/- were made in cash to various parties. The AO therefore called upon the assesee to furnish particulars with respect to the payments made to various farmers. Though the said amount was shown to be paid to various farmers and even the receipts were produced, however, the assessee could not furnish those farmers, by pleading that farmers were known by village name they come from and it was difficult to track them now.. The AO did not accept such explanation, and made disallowance of Rs.2,83,55,377/- u/s 40A(3), without rejecting the Books of Accounts.

On appeal, the FAA relying upon Rule 6DD(e)(i), deleted the disallowance u/s 40A(3) by observing that as the payment was made for agricultural produces, it was open for the assessee to make the payment in cash above Rs.20,000/-. On further appeal, the ITAT confirmed the order passed by the FAA.

On appeal, the HC held that,

++ assessee is engaged in the business as a Commission Agent for purchase/sale of food-grain/agricultural produces and is also holding licence issued by the Agricultural Produce Market Committee. In the Books of Accounts, the assessee has shown the amount of Rs.2,83,55,337/- paid to various farmers.. However, as the payments were exceeding Rs.20,000/- in cash, the AO made the disallowance u/s 40A(3). However, considering Rule 6DD(e)(i) and when the payment was made by cash exceeding Rs.20,000/-, it was permissible if the same was paid for purchase of agricultural produces. It is required to be noted that in the present case, in the Books of Accounts, the said payment was shown to be paid to various farmers and even the receipts were also produced but the assessee could not produce the farmers/ list of farmers for which a reasonable explanation was also given. However, without rejecting the Books of Accounts, the AO made the addition u/s 40A(3) which is

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