2010 (6) TMI 809 - AT - Income Tax

Summary

Issues involved:
The issues in this case involve the disallowance of payments to subcontractors under section 40A(2)(b) of the Income Tax Act, 1961, and the disallowance under section 40A(3) of the same Act for cash payments exceeding the prescribed limit.

Issue 1: Disallowance of payments to subcontractors u/s 40A(2)(b):
The appeals were filed by the assessee against the orders of the CIT(Appeals)-IV, Baroda for Assessment Years 2003-04 & 2004-05. The Assessing Officer disallowed payments to subcontractors under section 40A(2)(b) totaling &8377; 2,50,000 for 2003-04 and &8377; 4,68,707 for 2004-05. The Assessing Officer found that payments made to related subcontractors lacked details and were split into smaller amounts. The CIT(A) affirmed the disallowance, stating the appellant failed to establish the reasonableness of the expenditure. However, the ITAT reversed the decision, emphasizing the absence of subjective perceptions and cogent material for the disallowance, thereby allowing the grounds for both years.

Issue 2: Disallowance u/s 40A(3) for cash payments exceeding limit:
The Assessing Officer disallowed cash payments exceeding &8377; 20,000 under section 40A(3), amounting to &8377; 1,91,800 for 2003-04 and &8377; 91,400 for 2004-05. The CIT(A) upheld the disallowance, noting no justification for cash payments when both parties had bank accounts. The ITAT disagreed, as no single cash entry exceeded the limit, thus directing deletion of the disallowance. The appellant's reliance on relevant case laws supported this decision, leading to the allowance of this ground for both years.

Issue 3: Telephone and petrol expenses disallowance:
For Assessment Year 2004-05, the appellant raised a ground regarding telephone and petrol expenses disallowance. However, during the hearing, this ground was not contested and deemed trivial by the appellant's representative, resulting in its dismissal.

In conclusion, the ITAT Ahmedabad allowed the appeals for Assessment Year 2003-04 and partly allowed the appeal for Assessment Year 2004-05, reversing the disallowances made under sections 40A(2)(b) and 40A(3) based on the lack of sufficient evidence and justification for the disallowances.