COMMISSIONER OF INCOME TAX Vs. C.V. SEBASTIAN

JUDGEMENT

(1.) THE substantial question of law framed for consideration in this appeal is as under :

(2.) ACCORDING to the learned standing counsel, Annex. A intimation issued under s. 143(1)(a) of the IT Act, clearly indicates that 20 per cent of Rs. 29,32,184 was disallowed under s. 40A(3) as per the audit report. Therefore, according to learned standing counsel, intimation under s. 143(1)(a) was given giving the details as indicated above. On perusal of s. 40A(3) r/w r. 6DD of the IT Rules, it is clear that the AO has to make such disallowance as required under s. 40A(3) only if there is proper material available either in the returns or the records accompanying the reports. Rule 6DD enumerates several circumstances where payment of cash could be made by the assessee even if it exceeds Rs. 10,000 at the relevant point of time. Admittedly, the respondent/assessee was dealing with a provision shop and as per r. 6DD certain clauses allows him to make payments in cash exceeding Rs. 10,000. Before arriving at a conclusion that 20 per cent of Rs. 29 lakhs and odd has to be disallowed in terms of s. 40A(3) of the Act, the AO ought to have called for further details from the assessee in order to understand whether such claim could be made under r. 6DD by the assessee. Apparently such exercise was not done by the AO which is mandatory as laid down in the two decisions relied upon by the respondent assessee, i.e., Parikh Engineering & Body Building Co. Ltd. & Anr. v. Union of India & Ors. : (2000) 158 CTR (Pat) 469 : (1999) 238 ITR 554 (Pat) and SRF Charitable Trust us. Union of India & Ors. : (1991) 100 CTR (Del) 160 : (1992) 193 ITR 95 (Del). These two decisions make it clear that the AO cannot unilaterally disallow the claim made by the assessee unless and until he calls upon the assessee to prove the claim made by him. Only after giving such opportunity, from the material placed on record, the AO can disallow the claim as required under s. 40A(3) r/w r. 6DD of the Act. In the present case, no such exercise was undertaken.