Reassessment Quashed for Being Change of Opinion: ITAT Sets Aside Section 40A(3) and Section 68 Additions in Contractor's Case
Background and Facts of the Case
The Amritsar Bench of the Income Tax Appellate Tribunal (ITAT) delivered a comprehensive ruling in favor of an assessee engaged in civil contracting business, completely overturning the reassessment proceedings for Assessment Year 2014-15. The case of Pankaj Jindal Contractor Vs DCIT (ITAT Amritsar) addresses critical issues regarding the validity of reopening assessments based on audit objections and the application of Section 40A(3) and Section 68 of the Income Tax Act, 1961.
The assessee operates as a partnership firm undertaking civil construction contracts. For the year under consideration, the firm had filed its return of income under Section 139(1) accompanied by complete audited financial statements. The case was initially taken up for detailed scrutiny assessment.
Original Assessment Proceedings
During the original scrutiny assessment completed under Section 143(3) on November 9, 2016, the Assessing Officer (AO) conducted an exhaustive examination of the assessee's books of accounts, vouchers, and ledger entries. The total income was determined at Rs. 27.63 lakhs, which incorporated ad hoc disallowances aggregating Rs. 6.20 lakhs covering:
- Rs. 3.50 lakhs on account of carriage of materials and machinery rent expenses
- Rs. 1.50 lakhs relating to interest account
- Rs. 1.20 lakhs for unvouched expenditure
The AO meticulously verified cash expenditure pertaining to machinery rental charges, transportation of construction materials, and unsecured loans obtained by the firm. After thorough examination of supporting documentation, ledger accounts, and vouchers, the AO made only nominal ad hoc additions to safeguard revenue interest while accepting the substantial portion of claimed expenses.
Reopening of Assessment After Four Years
Subsequent to the completion of the original assessment, the revenue audit department raised objections on January 16, 2019, questioning certain aspects of the completed assessment. Acting upon these audit observations, the AO issued a notice under Section 148 dated June 10, 2019, seeking to reopen the assessment beyond the initial four-year period from the end of the relevant assessment year.
Reassessment Order and Fresh Additions
Following proper representation by the assessee during reassessment proceedings, a fresh assessment order was passed on September 17, 2021, under Section 147 read with Section 144B. The reassessed total income was computed at Rs. 71.03 lakhs, incorporating two substantial additions:
First Addition - Disallowance under Section 40A(3): An amount of Rs. 26.63 lakhs was disallowed on the ground that the assessee allegedly made cash payments exceeding the prescribed threshold limits for:
- Machinery rental expenses: Rs. 5.31 lakhs
- Carriage of materials: Rs. 16.43 lakhs
- Purchase of materials: Rs. 4.89 lakhs
Second Addition - Under Section 68: A sum of Rs. 16.76 lakhs was added to income on account of an alleged discrepancy in the ledger account of M/s Ramesh Kumar & Co., representing the difference between the credit balance shown in the assessee's books and the corresponding debit balance in the creditor's books.
Proceedings Before CIT(A)
The assessee preferred an appeal before the Commissioner of Income Tax (Appeals), NFAC, Delhi, challenging both the validity of reopening and the additions made on merits. However, vide order dated October 17, 2024, passed under Section 250, the CIT(A) dismissed the appeal and upheld the reassessment order.
CIT(A)'s Findings on Section 40A(3)
The first appellate authority observed that the assessee made multiple cash payments on various dates exceeding Rs. 20,000 per person per day, as evidenced from the tabulated details for machinery rent, material purchases, and carriage expenses. The CIT(A) noted that provisions of Section 40A(3) mandate that where an assessee incurs expenditure involving payment or aggregate payments to any person in a single day exceeding Rs. 20,000 through modes other than account payee cheque or account payee bank draft, no deduction shall be permitted for such expenditure.
The CIT(A) rejected the assessee's contention that payments were made to multiple persons with individual payments below the threshold, primarily on the ground that no documentary evidence was furnished during appellate proceedings to substantiate this claim. Consequently, the disallowance of Rs. 26.63 lakhs was confirmed.
CIT(A)'s Findings on Section 68 Addition
Regarding the second issue, the CIT(A) noted a material variation between the closing credit balance of M/s Ramesh Kumar & Co. appearing in the assessee's books at Rs. 26.40 lakhs and the corresponding debit balance of Rs. 9.64 lakhs reflected in the books of the said creditor. This created a discrepancy of Rs. 16.76 lakhs.
The assessee had explained that Rs. 15 lakhs received from partner Mrs. Bindu Jindal on July 19, 2013, was erroneously credited to M/s Ramesh Kumar & Co.'s account due to a clerical mistake by the accountant, instead of being posted to the partner's capital account. The CIT(A) dismissed this explanation as an afterthought and held that even accepting the alleged mistake, the difference in balances remained unexplained. Treating this as unexplained cash credit, the addition of Rs. 16.76 lakhs was sustained under Section 68.
Grounds of Appeal Before ITAT
Aggrieved by the order of the CIT(A), the assessee approached the ITAT Amritsar raising multiple grounds of appeal. At the outset of tribunal proceedings, the assessee withdrew two grounds:
- Ground No. 2 disputing proper service of the reassessment notice
- Ground No. 4 alleging mechanical approval by the Principal Commissioner of Income Tax
The substantive grounds pressed before the Tribunal were:
- Invalidity of reassessment proceedings on the basis that initiation under
Section 147/148constituted impermissible change of opinion - Non-supply of recorded reasons for reopening despite repeated requests
- Reopening based solely on audit objections without fresh tangible material
- Merits of disallowance under Section 40A(3)
- Merits of addition under Section 68
Assessee's Contentions Before ITAT
Argument on Change of Opinion
The learned Authorized Representative (AR) of the assessee presented comprehensive submissions demonstrating that both issues forming the foundation of reopening had been thoroughly examined during original assessment proceedings. This was evident from the body of the original assessment order dated November 9, 2016, where the AO specifically recorded:
"During the course of assessment proceedings it was noticed that the assessee firm has debited an amount of Rs. 33,36,896 under the head labour, Carriage material amounting to Rs. 54,31,087, machinery rent amounting to Rs. 49,78,420 which could not subjected to complete verification as it was seen that some of the payments were made in cash and were supported by self prepared vouchers on which complete addresses of the receivers are not mentioned."
The AO had examined these very expenses involving cash payments for machinery rent aggregating Rs. 5.31 lakhs and carriage of materials totaling Rs. 16.43 lakhs - the identical items now sought to be disallowed under Section 40A(3) in reassessment proceedings. After detailed examination of vouchers, ledger accounts, and cash book entries, the AO had made an ad hoc addition of merely Rs. 3.50 lakhs to cover any potential revenue leakage, clearly indicating satisfaction that no individual cash payment exceeded statutory limits.