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October 31, 2022

ITAT deletes the penalty under Section 271(1)(c) for additions to Section 40A(3)

ITAT deletes the penalty under Section 271(1)(c) for additions to Section 40A(3)

Facts and Issues of the Case

The assesse raised the following grounds of appeal:

1.  That the order of Learned C.I.T. (Appeals) is bad and against the facts and Law.

2. That the Learned C.I.T (Appeals) has wrongly upheld the addition made u/s 271(l)(c) of the Act.

3. That the Learned C.I.T (Appeals) has wrongly upheld penalty amounting to Rs. 2,75,688/- u/s 271(l)(c) on addition of Rs. 8,92,193/- on account of disallowance under section 40A(3).

4. That the learned Commissioner of Income Tax (Appeals) has wrongly ignored the fact that the notice u/s 271(l)(c) issued by the learned assessing officer was defective / invalid.

5. That the appellant craves leave to add, alter, amend or withdraw any grounds of appeal before the final hearing.”

The ld. AR inv i t ing atte nti on to the recor d submi tted that the o rde r passed is unsustainable in law. Proceeding to address the issues on merits, it was his submission that even on merits, the penalty has been wrongly invoked. It was his submission that all along the assessee has given an explanation that the assessee was engaged in the business of sand mine and is running crushers etc. It was his submission that the crushers are invariably functioning outside the city limits. In the facts of the present case, it was submitted that there were two types of payments made by the assessee for which the present action has been invoked. These facts, it was submitted, have been captured by the AO at page 3 of his order. Referring to the same, it was submitted, that it would show that most of these payments have been made for repair and maintenance of the machinery on account of break-downs etc. and the remaining payments have been made as bonus payments to the employees in September,2012. Referring to the same, it was submitted that the assessee has consistently argued that these payments were made either on holidays or on Saturday or Sunday.

On query, ld. AR submitted that this is the only year where such a penalty has been levied upon the assessee. The assessee, it was stated, is not a habitual offender. The payments made, it was submitted, were genuine payments for business and now the assessee has made arrangements to ensure that the payments made for breakdown etc. of machinery are also accepted through the Banking channel. The ld. Sr.DR relies upon the impugned order. It was her submission that admittedly the present case is a case where the assessee has made payments in cash. The argument that the payments are genuine, it was her argument, is not a relevant factor. The assessee’s explanation, it was submitted, has not been accepted. Accordingly, it was her prayer that the penalty may be confirmed.

Observation by the Court

The court have heard the submissions and perused the material on record. A perusal of the record shows that in the quantum proceedings the explanation of the assessee that addition u/s 40A( 3) on facts was not warranted, was rejected. The addition stood made. The issue was carried in appeal before the CIT( A) who also confirmed the addition by his order dated 16.10.2017. The assessee did not further agitate against the addition made in the quantum proceedings. The record shows that the assessee has claimed that some payments were made on a Sunday i.e. 31st March, 2013. It has also been observed that it being the last day of the Financial Year i.e. 31st March,2013 the Banks were functioning on the said date as per RBI directions. Hence, the claim that the payment made on a Sunday hence banks were not functioning was rejected considering the peculiar facts. It has also been noticed that there were payments made in cash to the assessee’s employees who admittedly otherwise were paid their salaries by cheques. These payments in cash were held to be in violation of the provisions. I find on going through the consistent explanations on record that the explanation may not be sufficient for the purposes of quantum proceedings, however, in the penalty proceedings the explanation is allowable. The argument discarded that cash payments for addressing machinery breakdown etc. on a Sunday when the Banks were open as per the directions of the RBI, I find considering the background of the specific case where the assessee was functioning outside the city limits, the explanation offered cannot be outrightly discarded in the penalty proceedings. The urgent need to clear payments by an assessee functioning outside residential/commercial areas in the peculiar facts by itself, no doubt, may not have been a valid explanation as far as the quantum proceedings are concerned, however, considering the requirements of the penalty provisions u/s 271( 1)( c) of the Act, I find the explanation deserves to be allowed. The explanation on facts is satisfactory.

Considering the peculiar facts and circumstances of the present case, I set aside the order quashing the penalty imposed. While so directing, it is made clear that the argument that payments are genuinely for the purpose of Section 40( A)(3) have no relevance. The evidence and explanation may be good enough to sustain the addition, however, in the penalty proceedings, the explanation considering the peculiar facts as set out herein has been accepted.

The other issues, accordingly, become redundant. Ground Nos. 1, 2 & 3 are allowed and Ground Nos. 4 & 5 require no adjudication. Said order was pronounced in the Open Court at the time of hearing itself.


In result appeal of the assessee is allowed by the court.


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