No disallowance u/s 40A(3) if ultimate payments made to labourers were below threshold limit: ITAT


Facts of the Case

Assessee filed a return of income, and his case was selected for scrutiny. During assessment proceedings, Assessing Officer (AO) found that assessee had made a payment of Rs. 18,00,000 to labourers in cash. Consequently, AO made disallowances under Section 40A(3).

Aggrieved by order of AO, assessee preferred an appeal before CIT(A). Assessee submitted that the payment was made for expenses incurred in project sites wherein many labour charges were paid to the number of labourers working at the project sites. It was not the payment made to a single person. It was a transfer entry for labour charges paid to various workers at the site. In support of his claim, assessee produced the site ledger details of labour payments. CIT(A) examined the attendance register and ledger copy of labour charges and observed that all the payments made were below Rs. 20,000 per transaction. However, CIT(A) could not find a valid reason for paying the sum of Rs. 18,00,000 on a single day. Therefore, CIT(A) confirmed the addition made by AO.


On further appeal, Vishakhapatnam ITAT held that AO did not disbelieve the genuineness of the expenditure. The grievance of AO was only for making the payment on a single day. Assessee stated that the entire payment was not made on the same day, and it was only the transfer entry of the payments made at the sites. Assessee had produced the attendance register and the acquaintance register, wherein it is seen that the payment was made to several labourers, which the recipient duly acknowledged on revenue stamp. All the payments were below Rs. 20,000 to each individual. Assessee stated that the cash payment was made at the agency area to labourers, where free mobility was unavailable.

Accordingly, ITAT held that disallowance under Section 40A(3) attracts if the assessee makes the payment in excess of Rs. 20,000 in a day to any person with regard to the expenditure incurred. Since each payment was less than Rs. 20,000, the question of application of section 40A(3) does not arise. Hence, the addition made by AO was deleted.

Judiciary and Counsel Details

  • N.K. Choudhary | Judicial Member and D.S. Sunder Singh | Accountant Member.
  • G.V.N. Hari, AR for the Appellant.
  • Smt. Suman Malik, DR for the Respondent.

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