The case ITA No. 961/DEL/2020 involves an appeal by Iftakhar Danish against a disallowance under Section 40A(3) of the Income Tax Act, pronounced by the ITAT Delhi Bench ‘C’ on March 29, 2023. The dispute centers on a rectification made by the Income Tax Officer (ITO) from Ward-3(3), Bijnor, concerning the Assessment Year 2012-13.
Iftakhar Danish, engaged in civil construction, reported income of Rs.6,70,010 derived from receipts totaling Rs.2,69,66,703. A subsequent reassessment increased the reported income after a disallowance of Rs.65,42,800 was made for cash payments exceeding the limits specified in Section 40A(3) of the Act, ostensibly for the purchase of bricks. This disallowance was initially endorsed by the CIT(A), Moradabad.
During the original assessment, Danish provided explanations for the cash payments, noting they were made on holidays or Sundays, and thus permissible under Rule 6DD(J). Despite these explanations, an audit objection led to a rectification under Section 154 by the AO, challenging the validity of these cash payments.
At the tribunal, Danish’s representative argued that the rectification misapplied Section 154, which is intended only for clear-cut errors and not for issues requiring extensive interpretation or where opinions might diverge. They contended that the payments were made in compliance with business exigencies and existing tax rules.
The tribunal agreed with Danish, stating that the application of Section 154 was incorrect for rectifying transactions that were not straightforward errors but rather involved detailed scrutiny and interpretation. The tribunal highlighted that the narrow scope of Section 154 did not extend to reassessing the intent behind transactions documented as having occurred on holidays.
This ruling underscores the limits of Section 154 for rectifying past assessments, particularly in complex cases involving business judgments and tax interpretations. The decision favors a more careful approach to the application of rectification powers, aligning with legal precedents that protect taxpayers from retroactive adjustments without clear justification. The case sets a significant precedent for how ambiguities in tax payments on holidays are to be handled, promoting fairness and legal clarity.
Order pronounced in the open court on March 29, 2023.
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