Facts of the Case

The assessee, a construction firm, claimed business expenditure for payments made to contractors and subcontractors in connection with project execution. During scrutiny assessment proceedings under Section 143(3) of the Income-tax Act, the Assessing Officer disallowed portions of the claimed expenditure on the ground that certain payments were made in cash in violation of statutory restrictions prescribed by Section 40A(3). The Commissioner (Appeals) upheld the disallowance. Dissatisfied with the appellate order, the assessee filed an appeal before the Income Tax Appellate Tribunal.

Issues Involved

  1. Whether the payments made to subcontractors and contractors were allowable as business expenditure.
  2. Whether cash payments in excess of stipulated limits attract disallowance under Section 40A(3).
  3. Whether the Assessing Officer correctly appreciated evidence in support of the claimed expenses.

Petitioner’s (Assessee’s) Arguments

  • The assessee contended that the expenses were genuinely incurred for carrying out business operations.
  • It was argued that subcontractor payments were essential for execution of contracts.
  • The assessee maintained that restrictions under Section 40A(3) should not apply to the specific payments, or that sufficient circumstances existed to justify cash payments.
  • It was further submitted that documentary evidence and vouchers were available in support of expenditure.

Respondent’s (Revenue’s) Arguments

  • The Revenue supported the findings of the Assessing Officer and Commissioner (Appeals).
  • It was submitted that cash payments exceeding prescribed limits, without deduction of tax at source or proper documentation, attract disallowance under Section 40A(3).
  • The Department contended that such payments lacked requisite compliance and therefore could not be allowed as business expenditure.

Court Order / Findings (ITAT)

  • Expenditure incurred wholly and exclusively for business purposes is allowable if supported by credible evidence.
  • However, restrictions imposed by Section 40A(3) on cash payments must be strictly adhered to; non-compliance results in disallowance to the extent of non-compliance.
  • The Assessing Officer’s action in disallowing payments made in violation of statutory provisions was justified where proper limits were exceeded without requisite justification or documentation.

Important Clarification

The Tribunal reiterated that business expenditure must satisfy both conditions of genuineness and statutory compliance. Payments made in contravention of cash payment limits attract disallowance even if otherwise genuine and incurred in the ordinary course of business.

Link to download the order –

https://itat.gov.in/public/files/upload/1626416145-257%20of%202018%20LPR%20Construction%20(Assessee%20Appeal)%20143%20Order.pdf

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