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September 24, 2022

In the absence of evidence of tax evasion, addition under section 40A(3) of the Income Tax Act is unsustainable

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

In the absence of evidence of tax evasion, addition under section 40A(3) of the Income Tax Act is unsustainable

Facts and Issue of the Case

The facts of the cae are that the assessee is engaged in the business of trading of medicine and is the stockist of H. L. Medicines. The assessee filed his return of income on 28.09.2012 reporting total income of Rs.6,67,340/-. Statutory notices were issued and served on the assessee which were complied by furnishing all the details including production of cash book, bank book, purchase ledger, sales ledger etc., which were examined on test check basis by the Ld. AO. In the course of assessment proceedings, Ld. AO noted that assessee has made payments in cash for purchases from M/s. Trishul Agency which exceeded Rs.20,000/- in a single day which is contrary to the provisions of section 40A(3) of the Act. It was noted by the Ld. AO that total payment of Rs.17,43,683/- were made for purchase of medicine in cash for which he proceeded to disallow the said business expenditure by applying provisions of section 40A(3) of the Act and added it back to the total income of the assessee. Aggrieved, the assessee went in appeal before the Ld. CIT(A) who also sustained the addition. Aggrieved, the assessee is now in appeal before the Tribunal.

Before us, Ld. Counsel for the assessee placed on record a written submission along with relevant documentary evidence in the paper book containing 37 pages. Ld. Counsel submitted that invoices of M/s. Trishul Agency were raised on different dates, all of which are below Rs.20,000/- and for which a ledger confirmation from M/s. Trishul Agency was referred to, placed in the paper book at pages 1-3. He pointed out that the purchases were made against different bills and none of such bills exceeded Rs.20,000/-.

Per contra, Ld. Sr. DR submitted that Ld. CIT(A) has rightly upheld the disallowance made by the ld. AO by noting that even though identity of the person from whom purchases having been made is established but the source of cash payment have not been established. He further submitted that Ld. CIT(A) noted that test of business expediency has also not been proved by the assessee and he thus supported and relied on the orders of the authorities below.

Observation by the Court

The court had heard rival submissions and perused the material on record. The issue for our consideration is in respect of disallowance made u/s. 40A(3) of the Act for the payments made in cash in excess of Rs.20,000/- for the purchases made by the assessee from M/s. Trishul Agency. From the perusal of the material placed on record and submissions made before us, it is an admitted fact that the genuineness of the party has not been doubted. Furthermore, it is an undisputed fact that all the payments of purchases made by the assessee from M/s. Trishul Agency pertains to invoices having value less than Rs.20,000/- each. It is also an admitted fact on record from the perusal of ledger account of both the parties i.e. the purchaser (assessee) and seller (M/s. Trishul Agency) that the purchases and corresponding sales are duly recorded in their respective books of accounts. Further, the purchases and sales registers were examined by the Ld. AO and from the perusal of the impugned order, there is no defect which has been pointed out, both for purchases and sales made by the assessee. Also it is important to note that the books of account were subjected to audit u/s. 44AB of the Act and have not been rejected by the Ld. AO in the course of assessment proceeding.

Considering the aforesaid facts and circumstances of the case and respectfully following the judicial precedents relied on hereinabove, we direct the AO to delete the addition of Rs.17,43,683/- made by invoking section 40A(3) of the Act. Accordingly, this appeal of the assessee is allowed.


The appeal of the assessee is allowed by the court.


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