Citation Codes

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Case Number

ITA 2877/DEL/2019

Attorney(S)

Acts

SECTION 154 INCOME TAX ACT 1961
9.2 Rule 6DD
"13.2 Sub-section (3) of section 40A

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Smart Summary

Income Tax Appellate Tribunal (Delhi Bench "G") — Summary of Order (15/03/2022)

Factual and Procedural Background

The assessee, Shiv Shakti Traders, a firm trading in iron and steel (PAN AAWFS7828J), filed its return of income on 29.9.2013 declaring total income of Rs. 12,98,577 for assessment year 2013-14. The case was selected for scrutiny. The Assessing Officer (AO) examined books, statutory audit report (Form 3CD), balance sheet and other financial statements and completed assessment on 17.12.2015 determining total income at Rs. 13,98,577 (including an adhoc addition of Rs. 1,00,000).

A Revenue Audit Party (RAP) later observed that payments for purchases of trading goods amounting to Rs. 23,72,40,000 were made either after cash withdrawals or by bearer cheques, allegedly contravening section 40A(3) of the Income Tax Act, 1961. On the basis of the audit objection, the AO issued a rectification order under section 154 dated 6.8.2018, disallowing Rs. 23,72,40,000 under section 40A(3) and recomputing the assessee’s total income at Rs. 23,86,38,577. The AO's record indicates that notices under section 154 were issued and an appearance was recorded, but the assessee or its authorised representative did not file substantive replies and the AO passed the rectificatory order ex parte.

The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], challenging the section 154 order as being without jurisdiction and contesting the disallowance under section 40A(3), contending that the AO had not questioned the genuineness of the expenditure, that the case was covered by Rule 6DD, and relying on authorities including CIT vs. Lucas T.V.S. Ltd. The CIT(A) upheld the AO’s rectification, relying on the principle that overlooking a mandatory provision in the original assessment is rectifiable (citing ITO vs. Ashok Textiles Ltd.). The assessee appealed to the Income Tax Appellate Tribunal (ITAT).

Procedural notes: The appeal was heard in ITAT. The assessee's counsel withdrew prior to the final hearing; the assessee did not appear on the final hearing date (09/02/2022). The Tribunal heard the Departmental Representative and proceeded on the record.

Legal Issues Presented

Whether the Assessing Officer had jurisdiction to rectify the original assessment under section 154 of the Income Tax Act on the basis of the Revenue Audit Party's objection regarding payments in violation of section 40A(3).
Whether the disallowance of Rs. 23,72,40,000 under section 40A(3) was legally sustainable on the facts of the case (including the assessee's contention that the genuineness of transactions and sellers were not doubted and that sales were accepted).
Whether the assessee's case fell within the exceptions prescribed by Rule 6DD (as amended), and if so, whether the AO should have applied Rule 6DD instead of disallowing expenditure under section 40A(3).

Arguments of the Parties

Assessee's Arguments (Appellant)

The order under section 154 was without jurisdiction; the disallowance under section 40A(3) was not permissible by way of rectification.
The AO had earlier accepted the expenditure and the related sales in the original assessment and did not doubt the genuineness or existence of the parties to whom payments were made; hence the later disallowance represented an impermissible change of opinion.
The disallowance was covered by Rule 6DD (the assessee claimed coverage under Rule 6DD but did not specify the exact sub-rule).
Reliance was placed on the decision of the Hon'ble Supreme Court in CIT vs. Lucas T.V.S. Ltd. (249 ITR 306) to the extent that the opinion of the audit party should not confer jurisdiction for rectification/reopening.

Revenue's Position (Respondent)

The AO acted within jurisdiction under section 154 because a mandatory provision of law (section 40A(3)) was overlooked in the original assessment and therefore the mistake was apparent from the record and capable of rectification.
The disallowance under section 40A(3) was supported by the RAP's findings that payments were made otherwise than by account-payee cheque/bank draft and thus triggered the statutory prohibition on deduction.
The CIT(A) and the AO relied on controlling authorities (e.g., ITO vs. Ashok Textiles Ltd.) holding that overlooking a mandatory provision in the original assessment can be corrected by rectification under section 154.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
T.S. Balaram ITO vs. Volkart Brothers, 82 ITR 50 (SC)	Interpretation of 'apparent' mistake under section 154 — something that appears ex facie and is not open to debate.	Included among authorities to define 'apparent mistake' that can be rectified under section 154; relied on as part of established jurisprudence.
CIT vs. Tata Engineering and Locomotive Co. Ltd., 108 ITR 869 (Bom)	Support for the view on the nature of 'apparent' mistakes under rectification jurisprudence.	Relied upon to demonstrate precedential support for rectification where mistake is ex facie.
CIT vs. Hero Cycles Pvt. Ltd., 228 ITR 463 (SC)	Authority that mistake may be of fact or law but must be apparent from the record to be rectified under section 154.	Relied upon by the Tribunal as a statement of law on rectification power.
CIT vs. Delhi Cloth & General Mills Co. Ltd., 197 ITR 223 (Del)	Requirement that the mistake must be glaring, obvious or self-evident to be correctable under section 154.	Cited to emphasize the standard for an apparent mistake capable of rectification.
ITO vs. Ashok Textiles Ltd., 41 ITR 732 (SC)	Holding that overlooking a mandatory provision of law in the original assessment under section 143(3) can be remedied by rectification under section 154.	Principal authority relied upon by the CIT(A) and accepted by the Tribunal to uphold the AO's jurisdiction to rectify the assessment under section 154 in present facts.
CIT vs. Janatha Steel Mills Pvt. Ltd., 294 ITR 668 (Ker)	Application of the Ashok Textiles principle by a High Court.	Cited as a supporting authority illustrating application of Ashok Textiles' principle.
CIT vs. Lucas T.V.S. Ltd., 249 ITR 306 (SC)	Concerned with reopening of assessment under section 147(b) on the opinion of an audit party; limits the use of audit opinion to confer jurisdiction for reopening.	Relied upon by the assessee but distinguished by the Tribunal: Lucas TVS dealt with reopening under section 147(b), not rectification under section 154; therefore it was held to be inapplicable to the present rectification context.
Circular No.1 dated 27.3.2009 (reported in 2009) 310 ITR (St) 42	Explains legislative intent of section 40A(3) as an anti-tax-evation measure requiring account-payee instruments to verify genuineness of transactions.	Referred to by the Tribunal to set out the legislative policy underpinning section 40A(3).

Court's Reasoning and Analysis

The Tribunal proceeded in two stages: first on the jurisdictional question under section 154, and second on the merits of disallowance under section 40A(3).

1. Jurisdiction under section 154:

The Tribunal reviewed the statutory scheme of section 154 (rectification of an order to correct a mistake apparent from the record) and surveyed relevant precedents interpreting the phrase "apparent" to mean an error ex facie and not open to argument or debate.
The Tribunal noted the RAP brought to the AO's attention that a mandatory provision (section 40A(3)) had been overlooked in the original assessment. The AO issued notices under section 154 and afforded opportunities; however, the assessee did not substantively respond and the AO passed the rectificatory order ex parte.
Applying the principle in ITO vs. Ashok Textiles Ltd. (and related authorities), the Tribunal held that overlooking a mandatory provision in the original assessment is an apparent mistake of law capable of correction by rectification under section 154. Consequently, the AO's assumption of power under section 154 was upheld.
The Tribunal distinguished the assessee's reliance on CIT vs. Lucas TVS Ltd., observing that Lucas TVS dealt with reopening under section 147(b) based on audit opinion and is therefore inapposite to rectification under section 154.

2. Merits of disallowance under section 40A(3):

The Tribunal examined the rectification order which disallowed payments aggregating Rs. 23,72,40,000 under section 40A(3) because such payments were made otherwise than by account-payee cheque/bank draft and thus exceeded the statutory limit for cash/non-account-payee payments.
The assessee contended that the AO had not doubted genuineness of transactions or existence of parties and that sales were accepted; the Tribunal observed that acceptance of sales or non-doubt on genuineness does not remove the statutory operation of the mandatory provision in section 40A(3).
The assessee also invoked Rule 6DD (the statutory proviso prescribes conditions under which the disallowance would not apply) but did not specify the precise sub-rule or bring material to substantiate that it fell within the prescribed exceptions.
Given the absence of specific evidential showing by the assessee as to how Rule 6DD applied, and because the assessee had not furnished material during rectification proceedings, the Tribunal found it just and fair to restore the matter to the file of the AO for fresh consideration.
The Tribunal directed the AO to give the assessee a reasonable opportunity to present its case, to produce all relevant material supporting its claim under Rule 6DD, and thereafter to pass a reasoned and speaking order in accordance with law.

Holding and Implications

PARTLY ALLOWED

Holding (direct outcome): The Tribunal upheld the AO's jurisdiction to rectify the original assessment under section 154 on the ground that overlooking a mandatory provision (section 40A(3)) in the original assessment amounted to an apparent mistake of law. However, on the merits of the disallowance under section 40A(3) the Tribunal did not finally decide the issue; instead it remitted the matter to the AO for fresh adjudication after affording the assessee a reasonable opportunity to prove applicability of Rule 6DD and to place relevant material on record.

Implications:

The rectification under section 154 was held to be within the AO’s power when a mandatory statutory provision had been overlooked in the original assessment (application of Ashok Textiles and related authorities).
The Tribunal did not make a final finding on whether the specific payments should be disallowed under section 40A(3); instead, it required the AO to re-examine the matter and to pass a reasoned order after allowing the assessee to present evidence and to specify under which part of Rule 6DD, if any, it seeks relief.
Direct consequence for the parties: the assessment file is to be returned to the AO for fresh decision; the assessee has an opportunity to substantiate its claim under Rule 6DD and to seek exclusion of the disallowance. No sweeping new precedent was laid down by the Tribunal beyond applying existing authorities on rectification and distinguishing Lucas TVS on its facts.

Order pronounced in open court on 15 March 2022. (DR. B.R.R. Kumar, Accountant Member & Astha Chandra, Judicial Member). Appeal partly allowed and matter restored to AO for fresh decision as directed.

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Shiv Shakti Traders, Ghaziabad v. ACIT, circle-2, Ghaziabad

INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH "G": NEW DELHI

BEFORE DR. B.R.R. KUMAR, ACCOUNTANT MEMBER

AND

MS. ASTHA CHANDRA, JUDICIAL MEMBER

ITA No.2877/Del/2019

Asstt. Year: 2013-14

Shiv Shakti Traders, 107, Model Town West, Nand ini Apartments, Ghaziabad Uttar Pradesh Pin 201001 PAN AAWFS7828J	Vs.	ACIT, Circle-2 Ghaziabad.
(Appellant)		(Respondent)
Assessee by:	None
Department by :	Shri Umesh Takyar, Sr. DR
Date of Hearing :	09/02/2022
Date of pronouncement:	15/03/2022

O R D E R PER ASTHA CHANDRA, JM

The appeal by the assessee is directed against the order dated 28.2.2019 of the Ld. Commissioner of Income Tax (Appeals), Ghaziabad ("CIT(A)") pertaining to the assessment year 2013-14.

2. The assessee is a firm engaged in the business of trading of iron and steel on wholesale basis. It filed its return of income electronically on

29.9.2013 declaring income of Rs. 12,98,577/- for the assessment year 2013-14. The case was selected for scrutiny. During the course of assessment proceedings, the assessee furnished written explanation of the queries raised, produced books of accounts which were examined by the Ld. Assessing Officer ("AO"). The assessee filed statutory audit report in Form No. 3CD along with balance sheet and other financial statements. The assessee disclosed sales at Rs. 1,48,23,24,579/- and gross profit of Rs. 69,42,835/- giving GP rate of 0.47%. Net profit was reported at Rs. 12,98,577/- @ 0.09%. On being asked, assessee produced complete books of accounts which were verified by the Ld. AO who completed the assessment on total income of Rs. 13,98,577/- on 17.12.2015 including therein adhoc addition of Rs. 1,00,000/- to the income of the assessee.

3. The said assessment was rectified vide order dated 6.8.2018 under section 154 of the Income Tax Act 1961 (the "Act") on the basis of the audit objection raised by the Revenue Audit Party ("RAP"). It was noticed by the RAP that the assessee had made payments for purchases of trading goods amounting to Rs. 23,72,40,000/- either after cash withdrawal or by bearer cheque in violation of the provisions of section 40A(3) of the Act. According to the Ld. AO, notice under section 154 of the Act issued by him remained uncomplied with. Neither the assessee nor its representatives filed any reply which led him to recompute the total income of the assessee at Rs. 23,86,38,577/- including therein disallowance of Rs. 23,72,40,000/- under section 40A(3) as per the audit objection raised by the RAP.

4. The assessee challenged the rectificatory order under section 154 of the Act before the Ld. CIT(A). In its grounds of appeal, the assessee stated that the order under section 154 was perse without jurisdiction and that the disallowance under section 40A(3) was not justified as the Ld. AO neither in the order under section 154 nor in the assessment order disputed the genuineness of the expenditure and accepted the sales made by the assessee based on said expenditure. It was also stated that the disallowance under

section 40A(3) was covered under Rule 6DD and that the disallowance made under section 40A(3) in order under section 154 was a debatable issue and not a patent mistake warranting action under section 154 of the Act.

4.1 During the course of appellate proceedings, the assessee submitted that the Ld. AO had not doubted the existence of the parties to whom the payments had been made and genuineness of the transactions. Therefore, the disallowance under section 40A(3) was not only outside the purview of that section but was also made in complete violation of the principle of natural justice. In its written submissions before the Ld. CIT(A) reliance was placed on numerous decisions.

4.2 It was emphasised that it was a case of changing the mood of the Ld. AO on the same set of facts and provisions of law which is not warranted under section 154 of the Act. Ld. AO had allowed the claim of expenditure in the original assessment and impugned disallowance subsequently in order under section 154 is in excess of jurisdiction. The assessee brought to the notice of the Ld. CIT(A) the judgment of the Hon'ble Supreme Court in CIT vs. Lucas T.V.S. Ltd. 249 ITR 306 (SC) wherein the Hon'ble Supreme Court held that opinion of audit party cannot confer jurisdiction for reimbursement under section 154 of the Act.

5. Ld. CIT(A) upheld the order of the Ld. AO by observing, inter alia that section 40A(3) is mandatory provision of law which had been overlooked in the original assessment under section 143(3) of the Act and that it was a mistake rectifiable under section 154 as held by Hon'ble Supreme Court in ITO vs. Ashok Textile Ltd. 41 ITR 732 (SC).

6. This has brought the assessee before us by reiterating the same grounds which were taken before the Ld. CIT(A).

7. On request of the assesee the appeal was fixed on out of turn basis to which the Ld. AO had no objection. However, adjournment was sought thrice by the Counsel of the assessee which was granted. On 23.11.2021 the date fixed for hearing, the Counsel withdrew as authorised representative of the assessee. Hence, the hearing was adjourned to 9.2.2022. None appeared for the assessee on 9.2.2022. We therefore proceeded to dispose of the appeal after hearing the Ld. DR and perusal of the material on record. Section 154 of the Act empowers an assessing officer to amend any order passed by him under the provisions of the Act with a view to rectify any mistake apparent from the record. The expression 'apparent' has been interpreted as something which appears to be ex facie and is incapable of arguments or debate in the following judgments:-

(i) T.S. Balaram ITO vs. Volkart Brothers 82 ITR 50 (SC)

(ii) CIT vs. Tata Engg. And Locomotive Co. Ltd. 108 ITR 869 (Bom)

(iii) CIT vs. Hero Cycles Pvt. Ltd. 228 ITR 463 (SC). It is well settled that mistake may be of fact or of law. The only condition precedent is that the mistake must be apparent from the record of the assessee and that it must be glaring, obvious or self evident mistake as held by the Delhi High Court in CIT vs. Delhi Cloth & General Mills Co. Ltd. 197 ITR 223 (Del). It has been held by the Hon'ble Supreme Court in the case of ITO vs. Ashok Textiles Ltd. 41 ITR 732 (SC) that overlooking of mandatory provision of law in the original assessment under section 143(3) can be remedied by order of rectification. This principle of law enunciated by the Hon'ble Supreme Court has been applied by the Kerala High Court in the case of CIT vs. Janatha Steel Mills Pvt. Ltd. 294 ITR 668 (Ker).

8. In the case before us it was brought to the notice of the Ld. AO by RAP that in the original assessment made by him, he overlooked the mandatory provision of section 40A(3) of the Act. Ld. AO, therefore, after giving

opportunity to the assessee passed the rectificatory order making the impugned disallowance. Assumption of power by the Ld. AO under section 154 was agitated by the assessee before the Ld. CIT(A) as also before us on the ground that the impugned disallowance is a debatable issue and hence outside the ambit of section 154 of the Act. We are unable to subscribe to this view. Overlooking the mandatory provision of law in the original assessment is apparent mistake of law which is rectifiable under section 154 as held in the case of the ITO vs. Ashok Textile Limited and Janatha Steel Mills Pvt. Ltd. (supra). The reliance placed by the assessee on the judgment of CIT vs. Lucas TVS Ltd. 249 ITR 306 (SC) is misplaced. In that case the issue was of reopening the assessment under section 147(b) on the opinion of the audit party. We accordingly, reject the ground of the assessee objecting to the assumption of jurisdiction by the AO under section 154 of the Act.

9. We now proceed to deal with the grounds of the assessee relating to challenge of the impugned disallowance under section 40A(3) on merits. Section 40A(3) and (3A) as substituted w.e.f. 1.4.2009 read as under:-

"(3). Where the assessee incurs any expenditure in respect of which payment or aggregate of payments made to a person in a day, otherwise than by an bank account payee cheque drawn on a bank or account payee bank draft exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.

(3A) xxxx

Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub- section (3) where a payment or aggregate of payments made to a person in a day, otherwise than an account payee cheque drawn on a bank or account payee bank draft exceeds twenty thousand rupees in such cases and under

such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, consideration of business expediency and other relevant factors."

9.1 The legislative intent behind the above provision may be seen from circular No. 1 dated 27.3.2009 reported in (2009) 310 ITR (St) 42 which states as below:-

"13.2 Sub-section (3) of section 40A is an anti tax evasion measure. By requiring payments to be made by an account payee instrument, it is possible to verify the genuineness of the transaction. Thereby the risk of evasion is substantially mitigated."

9.2 Rule 6DD prescribed by the Board has been substituted by the Income Tax (Seventh Amendment) Rules, 2008 w.e.f. assessment year 2009-10.

10. Perusal of the order under section 154 reveals that during the rectificatory proceedings the Ld. AO required the assessee to show cause as to why its income be not recomputed as payments amounting to Rs. 23,72,40,000/- for expenditure made in violation of section 40A(3) of the Act were liable to be disallowed. Notice under section 154 dated 5.7.2018 was duly received by the Ld. AR of the assesee who appeared on 16.7.2018 but did not provide any reply and requested for adjournment which was granted. The hearing was adjourned to 19.7.2018 but on that date also neither the assesee nor the Ld. AR filed any reply. Ld. AO, therefore, passed ex-parte order. In the appellate order the Ld. CIT(A) observed that without filing any application under Rule 46A the assessee furnished undated copies of letters addressed to ACIT-C2, Ghaziabad as part of submission. Before us the plea taken by the assessee in the grounds of appeal is that the Ld. AO has not disputed the genuineness of the impugned expenditure and accepted the sale made by the assessee based on such expenditure. We are of the view

that this is not enough to bring the case of the assessee out of the ambit of the mandatory provision of section 40A(3). The assessee also claimed that its case is covered under Rule 6DD without specifying under which sub-rule of Rule 6DD as amended by the Income Tax (Seventh Amendment) Rules, 2008 its case falls. In such scenario, in our opinion it would be just and fair if the matter is restored to the file of the Ld. AO for decision afresh. Ld. AO shall give reasonable opportunity to the assessee to present its case and to bring on record all the material in support of its claim that its case falls under Rule 6DD. Thereafter, Ld. AO shall pass reasoned and speaking order in accordance with law.

11. In the result, the appeal is partly allowed.

Order pronounced in the open court on 15^th March, 2022. Sd/- sd/-

(DR. B.R.R. KUMAR) (ASTHA CHANDRA)

ACCOUNTANT MEMBER JUDICIAL MEMEBR

Dated: 15/03/2022 Veena

Copy forwarded to-

1. Applicant

2. Respondent

3. CIT

4. CIT (A)

5. DR:ITAT

ASSISTANT REGISTRAR

ITAT, New Delhi

Shiv Shakti Traders, Ghaziabad v. ACIT, circle-2, Ghaziabad

Income Tax Appellate Tribunal (Delhi Bench "G") — Summary of Order (15/03/2022)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments (Appellant)

Revenue's Position (Respondent)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Shiv Shakti Traders, Ghaziabad v. ACIT, circle-2, Ghaziabad

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