Section 154 cannot be invoked for disallowing cash payments exceeding prescribed limits

Facts of the Case:

In this case, an order had already been passed u/s 143(3) of the Income Tax Act, 1961(“Act”). However, the Assessing Officer (AO) issued a notice under section 154 of the Act calling upon the Assessee to explain why the bonus of Rs. 2,47,380 paid in cash should not be disallowed under section 40A(3) of the Act. The Assessee claimed that no disallowance was applicable u/s 40A(3), however the AO rejecting the Assessee’s contention and passed the order under section 154 of the Act made such a disallowance to the income.
The Assessee carried the matter before the CIT(A). However, the CIT(A) confirmed the action of AO and upheld the order passed under section 154 of the Act. Aggrieved by the same the Assessee filed an appeal before the Tribunal.

Decision of the ITAT:

The Tribunal held that section 40A(3) of the Act contemplates disallowance of certain expenditure which is incurred by an Assessee in cash beyond the prescribed limit. Further, rule 6DD of the Income Tax Rules, 1962 carves out a set of exceptions wherein the payments despite having been made in cash beyond the aforesaid prescribed limit are not to be disallowed.
AO had invoked his powers under section 154 of the Act for making disallowance under section 40A(3) of the Act.
As held by the Hon’ble Supreme Court in the case of T.S. Balaram, ITO v. Volkart Brothers [1971] 82 ITR 50, it is only a mistake apparent from the record, i.e., one which is obvious and patent and not something that can be established by a long-drawn process of reasoning on points on which there may conceivably be two opinions that can be rectified within the meaning of section 154 of the Act.
The disallowance of an amount under section 40A(3) of the Act by no means can be brought within the scope of a mistake that could be held as being a mistake that is glaring, patent, apparent and obvious from record.
Thus, AO had grossly erred in invoking the provisions of section 154 of the Act to disallow the aforementioned amount under section 40A(3) of the Act. Thus, the order therein passed by AO couldn’t be sustained and was accordingly quashed

Case Law: Smt. Poonam Mittal v. ITO – [2022] 138 taxmann.com 380 (Amritsar-Trib.)

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