RAKESH KUMAR GARG, J. - (1.) THE Revenue has filed the present appeal under s. 260A of the IT Act (for short "the Act") against the order dt. 22nd raising the following substantial questions of law for consideration of this Court : "(a) Whether on the facts and in the circumstances of the case, the Hon'ble Tribunal was right in law in deleting the disallowance of Rs. 19,31,000 made by the AO under s. 40A(3) of IT Act, 1961 particularly in view of the fact that auditor had himself pointed out in tax audit report filed with the return that assessee had made cash payments of Rs. 19.71 lacs in contravention of s. 40A(3) of IT Act ? (b) Whether on the facts and in the circumstances of the case, the Hon'ble Tribunal erred in law in confirming the finding of learned CIT(A) that onus was on the AO to prove that the entries originally made in the books were relating to payment on account of expenditure and not loans and advances ignoring the fact reported by the auditor in the tax audit report and the fact that the assessee contended first time before Tribunal only that these payments were of capital nature -
(2.) THE assessee is a company. It manufactures switches. In the assessment order passed for the asst. yr. 1990 -91 under s. 143(3) of the Act, the AO made an addition of Rs. 19,71,000 by invoking the provisions of s. 40A(3) of the Act. The assessee had made cash payments to M/s Asahi Alfa Ltd., M/s Niko Auto Ltd. and M/s Toyo Mirrors (P) Ltd. The disallowance made by the AO was confirmed by the CIT(A). On further appeal by the assessee to the Tribunal the issue was remanded to the AO for a fresh adjudication. Before the Tribunal the assessee took a plea that the payment of Rs. 19.71 lakhs made to three parties which were disallowed by invoking s. 40A(3) were expenditure of capital nature and therefore was not covered under the provisions of s. 40A(3) of the Act. On such submissions the Tribunal remanded the matter to the AO for fresh adjudication.
(3.) ON such remand by the Tribunal the AO again took up the issue of disallowance under s. 40A(3) of the Act for consideration. The assessee explained in the remand proceedings that the cash payments were made to the parties in question in respect of amounts standing as due and payable to them towards advances and that none of these payments was on account of revenue expenditure debited in the P&L a/c. The assessee also explained that the recipients of these payments had to make payment of dues to the Government, like excise duty, sales -tax and payment to workers. The necessary copies of the accounts of the recipient companies and the books of accounts of the assessee were produced before the AO. According to the AO there were several cuttings and overwritings and erasers in the accounts and vouchers. He therefore, concluded that the entries in the books of accounts were manipulated. He therefore, concluded that the assessee failed to establish that the cash payments were made for capital expenditure or for repayment of loans. He therefore upheld the disallowance which were made in the original assessment proceedings. On appeal by the assessee, the CIT(A) deleted the addition made by the AO for the reasons given in paras 2.2 to 2.4 of this order which reads as follows : "The issue has been examined and the stand of the AO cannot be accepted. The learned counsel for the assessee has relied upon the annual report for 1989 -90 and on p. 19 of the report under the head "Loans and Advances" balances as the details of 'loans and advances' as per P.B. 49. Reference has also been made to the application made to the Tribunal under r. 10 (P.B 10 -15) and a perusal of these documents clearly supports the claim of the appellant that these payments were not in the nature of any expenditure but were to square the outstanding balances on account of loan and advances. By pointing out to the various erasing and over -writings, the AO has not been able to show that the payments were indeed on account of any expenditure. The onus was entirely on the AO to bring concrete evidence on record to clearly show that the payments were indeed for an expenditure incurred by the assessee in relation to the three different concerns. By simply referring to the cuttings and over -writings the AO has not been able to prove that these payments were not in the nature of 'loans and advances' but were for expenditure. It was on the AO to establish that : (a) the entries originally made in the books and vouchers were relating to 'payment on account of expenditure' covered under s. 40A(3). (b) and then these entries were cut, erased over -written subsequently to make them appear as entries of 'loans and advances'. Thus taking them out of the purview of s. 40A(3). The AO, as is apparent from the order, failed to even address this crucial and relevant issue. On the contrary, the balance sheet, the annual report and the various documents clearly show the outstanding balances under the head 'Loans and advances' and this fact has not been negated by the AO. Under the circumstances, keeping in view the entire set of facts and circumstances, the disallowance of Rs. 19,31,000 of IT Act is deleted." ;