MOHD. AYAZ,LUCKNOW V. DCIT, RANGE-4, LUCKNOW

ITA 213/LKW/2025

AI Insights

The case involves an appeal by Mohd. Ayaz against the order of the CIT(A), which upheld the addition of Rs. 6,68,97,549 to the assessee's income under section 40A(3) of the Income Tax Act, 1961. The addition was initially made by the Assessing Officer (AO) on the grounds that 10% of the total purchases were presumed to be cash purchases exceeding Rs. 20,000, without specific identification of such payments. The CIT(A) dismissed the appeal due to non-compliance by the assessee in providing necessary documents. The Tribunal, however, found that the AO had not properly identified the specific payments violating section 40A(3) and thus allowed the appeal, deleting the addition.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 396429 (ITAT-LUCKNOW)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-05-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2017-2018
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VACHASPATI
• Assessee Lawyers: RAKESH GARG
• Keywords: Set aside; Reasonable cause
• Section: 143(3); 263; 40A(3)

Judgement Text

"1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW ‘B’ BENCH, LUCKNOW BEFORE SH. SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER AND SH. NIKHIL CHOUDHARY, ACCOUNTANT MEMBER ITA No.213/LKW/2025 A.Y. 2017-18 Mohd. Ayaz, 262/81/2 Katara Azam Beg, Billochpura, Lucknow-226004 vs. The DCIT, Range-4, Lucknow PAN:AIRPA6185H (Appellant) (Respondent) Assessee by: Sh. Rakesh Garg, Advocate Revenue by: Sh. Vachaspati, CIT DR Date of hearing: 21.05.2025 Date of pronouncement: 29.05.2025 O R D E R PER NIKHIL CHOUDHARY, A.M.: This is an appeal by the assessee against the orders of the ld. CIT(A), NFAC under section 250 of the Income Tax Act, 1961 dated 8.01.2025 dismissing the appeal of the assessee filed against the order of the National Faceless Appeal Centre dated 20.03.2023. The grounds of appeal are as under:- “01. Because the CIT(A) has erred in law and on facts in dismissing the appeal ex-parte without appreciating the facts and circumstances of the case. There being no valid service of notice as per section 282 (physical service), the order passed by CIT(A) be set aside, and the addition upheld by deleted. 02. Because the assesse was prevented by sufficient and reasonable cause in not making compliance to the notices issued under section 250 of the Act, in as much, the assesse was dependent upon his counsel, who on account of ill health, could not make necessary compliance, in any case there being no communication directly to the assesse, the order passed by the CIT(A) be set aside, the addition made and upheld be deleted. 03. Because the books of accounts being maintained, audited and no defects in the same having been pointed out, the CIT(A) has erred on facts and in law in upholding the addition of Rs.66,87,000/- made by the Assessing Officer being 10% of the total purchases, such disallowance being made under section 40A(3) without pointing out ITA No.213 /LKW/2025 A.Y. 2017-18 Mohd Ayaz 2 any infirmity in the account, the addition made being totally without any basis, the CIT(A) has erred on facts in upholding the same, the addition made be deleted. 04. Because undisputedly the assesse is carrying on business of Animal Husbandry, being that of Live Stock, Meat, Hide and Skin being specifically exempted under Rule 6D from the clutches of section 40A(3) there was no reason for the Assessing Officer to make any addition on estimate basis @ 10% of the total purchases; the same being erroneous, the CIT(A) has grossly erred in upholding the same ignoring the various provisions of the statutes and also the facts and circumstances of the case, the addition upheld by the CIT (A) be deleted. 05. Because there was no direction from the Pr. CIT u/s.263 to make any additions/variations in the total income, but the direction was only termed to make the assessment denovo after examination of books of account, such books of account being produced before the Assessing Officer, and no defects in the same having been pointed out, the Assessing Officer being fully satisfied with the books was not justified in making addition on adhoc basis, merely for the sake of addition by disallowing 10% of the total purchases, such addition being contrary to provisions of law, the addition made be deleted, the assessment be quashed.” 2. The facts of the case are, that in this case, an original assessment order was passed under section 143(3) on 9.12.2019 on a total returned income of Rs.33,76,700/-. Subsequently, an order under section 263 was passed by the Pr. CIT, Lucknow-1 on 8.03.2022, with a direction to make a proper enquiry and verification. Accordingly, fresh notices were issued to the assessee but the ld. AO records that proper compliance was not made by the assessee in response to the notices issued. On perusal of the return of income, the ld. AO observed that the assessee derives income from supply of Buffaloes and has shown sale of goods at Rs. 67,63,71,053/-. After deducting purchases and expenditures, the gross total income had been shown at Rs. 34,81,704/- and after deduction under Chapter VI-A, the net income from business had been shown at Rs.33,76,700/-. The case had been selected for scrutiny through CASS to examine the abnormal increase in cash deposits during the demonetization period as compared to the pre-demonetization period. Accordingly, the assessee was asked to submit the details of cash deposited in old specified bank notes amounting to Rs. 49,16,000/- alongwith the supporting documentary evidences. After seeking various adjournments, the assessee submitted that it deals in cattle supplies and furnished a copy of its audit report and bank statement. ITA No.213 /LKW/2025 A.Y. 2017-18 Mohd Ayaz 3 However, the ld. AO records that the assessee did not submit any details or explanation regarding the source of deposited in specified bank notes. Accordingly, the ld. AO proposed to treat the cash deposit of Rs. 49,16,000/- as unexplained money under section 69A of the Income Tax Act, 1961. However, from the final computation of income, it is not seen that the ld. AO actually made any such addition. Thereafter, the ld. AO turned his focus to purchases made by the assessee. The assessee claimed to have made purchases of cattle to the tune of Rs. 66,89,75,490/-. The ld. AO asked him to submit details of purchases with names and addresses, PAN of the parties from whom purchased with party wise purchase ledger, purchase invoices, mode of payment and party wise payment ledger etc,. In response, the assessee submitted that most of the cattle were purchased from the unorganized sector i.e. farmers and villagers and there were a huge number of transactions of small value. Therefore, it is practically impossible for the assessee to provide the details thereof to the ld. AO. It was also submitted that the transactions were covered under the exceptions mentioned in Rule 6DD. However, the ld. AO quoted from Circular No. 4/2006 which stated that the exception under Rule 6DD would not be available for payment for the purchase of livestock, meat, hides and skins from a person who is not proved to be a producer of these goods and is only a trader, broker or any other middleman by whatever name filed. The CBDT had laid down that, to claim the benefit of Rule 6DD, the following documents were to be filed:- i. A declaration from the person receiving the payment that he is a producer of meat. ii. A confirmation that the payment otherwise by account payee cheque was made on his insistence. iii. A further confirmation from a veterinary Doctor certifying that the person specified in the certificate is a producer of meat and slaughtering was done in his supervision (Circular No. 8/2006 dated 6.10.2010). ITA No.213 /LKW/2025 A.Y. 2017-18 Mohd Ayaz 4 Therefore, the ld. AO held that in the absence of any foolproof documents, the contention of the assessee that his transactions were covered under the exception Clauses of Rule 6DD could not be accepted. He held that in the absence of any foolproof documents, cash purchases exceeding Rs.20,000/- in violation of the provisions of section 40A(3) could not be ruled out. Therefore, he proposed to treat10% of the total purchase of Rs.66,89,75,490/- as cash purchase exceeding Rs.20,000/-. This total came to Rs.6,68,97,549/- and he proposed to disallow the same under section 40A(3) of the Act and asked the assessee to show cause. 3. The ld. AO thereafter records the fact that the assessee made a satisfactory response to the cash deposit of Rs. 49,16,000/- in specified bank notes during demonetization period. Accordingly, he did not take any adverse influence on this account. However, with regard to the disallowance under section 40A(3) since the assessee had not furnished the necessary documents as outlined earlier in this order and was admitting that the major item of cash expenditure was purchase of Cattles from unorganized sector and failed to provide evidence in tune with the above Circular and clarification, the contention of the assessee that the transactions were mentioned under Rule 6DD were not acceptable. Therefore, after considering the extent of transactions and the lack of proof submitted in this regard, he added back 10% of the same under section 40A(3) and thereby made an addition of Rs. 6,68,97,549/-. 4. Aggrieved with the said order, the assessee went in appeal before the ld. CIT(A). The ld. CIT(A) records the fact that he issued five notices to the assessee but did not receive any response with regard to any of them. He, therefore, concluded that the assessee was not interested in pursuing this appeal. He quoted from the assessment order and thereafter held that in the absence of any plausible explanation and documentary evidences in support of the claim, he did not find any merit in the ITA No.213 /LKW/2025 A.Y. 2017-18 Mohd Ayaz 5 contentions raised by the assessee in his appeal. Accordingly, he confirmed the addition and dismissed the appeal of the assessee. 5. The assessee is aggrieved at this summary disposal of his appeal by the ld. CIT(A). Sh. Rakesh Garg, Advocate (hereinafter referred to as the ld. AR) arguing the matter on behalf of the assessee submitted that the assessee was an individual who was a Buffalo supplier. Regular books of accounts had been maintained by the assessee which have been duly audited. No adverse findings had been recorded by the Chartered Accountant who had audited the account. No omission or mistake had been noticed by the ld. AO and the books and its trading results had been duly accepted. After proceedings under section 263, the ld. AO made an assessment on a total income of Rs. 7,02,74,249/- after treating 10% of the total purchases of Rs. 66,89,75,490/- as cash purchases. It was submitted that the assessee was prevented from by sufficient and reasonable cause in not making compliance to notices as his counsel was ill at the time and he could not make communication. It was submitted that the disallowance was made under section 40A(3) without actually pointing out any infirmity in the books of accounts. As such, the addition had been made without any basis and the ld. CIT(A) had erred in confirming the disallowance. It was further submitted that the assessee was carrying on a business of animal husbandry being that of livestock, meat, hide and skin and was specifically exempted under Rule 6DD from clutches of section 40A(3). Therefore, there was no reason for the ld. AO to make any addition on estimated basis @ 10% of the total purchases. It was further submitted that even ld. Pr. CIT had only directed to make assessment de novo after examination of books of accounts. The books of accounts had been produced before the ld. AO and no defects in the same were pointed out. Therefore, there was no justification for making the addition of 10% on account of section 40A(3). 6. We have duly considered the facts and circumstances of the case. Section 40A(3) relates to payment made in cash either individually or aggregate wise in a day ITA No.213 /LKW/2025 A.Y. 2017-18 Mohd Ayaz 6 in excess of Rs. 10,000/-, then the same shall not be deductible unless it falls under one of the exception Clauses in Rule 6DD. However, we note that for any disallowance to be made under this section, the actual amount which has been paid is required to be identified and disallowed. Such disallowances by their very nature cannot be made on an estimate basis presuming that a certain amount of expenses would be in violation of section 40A(3). Perusal of the order of the ld. AO does not show that he has carried out the exercise of identifying which payments have been made in violation of section 40A(3). Rather, he has, upon consideration of numbers, presumed that some payments would definitely have been made in violation of section 40A(3) as all the documentation that he called for had not been furnished before him. In such circumstances, the ld. AO may have been within his rights to reject the books of accounts and estimate the income of the assessee. However, he would not in our opinion be justified in estimating an addition under section 40A(3) unless he could identify instances of its violation. Since, the ld. AO has not conducted this exercise, the addition made on estimate basis is held to be unsustainable. Accordingly, it is deleted and the appeal of the assessee is allowed. 7. In the result, the appeal of the assessee is allowed. Order pronounced on 29.05.2025 in open Court. Sd/- Sd/- [SUDHANSHU SRIVASTAVA] [NIKHIL CHOUDHARY] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 29/05/2025 Sh Copy forwarded to: 1. Appellant – 2. Respondent – 3. CIT DR , ITAT, 4. CIT, 5. The CIT(A) By order Sr. P.S. "