2021 (1) TMI 354 - AT - Income Tax

Disallowance u/s 40A(3) - payment to transporters - as pep AO the assessee had made payment of ₹ 5,52,455/- to 13 such transporters above ₹ 35,000/- in cash - assessee submitted that the assessee is a trader in onion and potato and as a matter of practice, the farmers used send the produce from villages through transporters arranged by them after giving advance - HELD THAT - Admittedly, in the present case, the revenue has not disputed the payments made to the transporters - assessee has explained the circumstances under which the questioned payments were made to the transporters. We notice that the AO made addition u/s 40A(3) of the Act rejecting the contention of the assessee that the payments were made on behalf of the farmers and subsequently deducted from sale proceeds given to the farmers, therefore the said expenditure is in the nature of payment made to the farmers for purchase of agriculture goods. As pointed out by the Ld. counsel for the assessee in the case of ITO vs. M/s Dhanshree Ispat, 2017 (6) TMI 170 - ITAT PUNE and the Tribunal has dismissed the appeal of the revenue and deleted the addition made u/s 40A(3) of the Act, holding that the assessee has explained the circumstances under which the payments were made. Hon ble Supreme Court in the case of Attar Singh Gurmukh Singh vs. ITO 1991 (8) TMI 5 - SUPREME COURT has held that the provisions of section 40A(3) read with rule 6DD(e) cannot be said to be intended to restrict business activities. The provisions of section 40A(3) apply for payments made for acquiring stock-in trade and other materials. In our considered view, the assessee has explained the circumstances under which the payments were made to the transporters. The assessee has demonstrated before the authorities below that the payments were made for purchase of agricultural produce. On the other hand, there is no evidence on record to conclude that the questioned payments do not come within the ambit of rule 6DD(e) of the Income Tax Rules. Even the AO did not examine the concerned farmers or sought their explanation to verify the contention of the assessee. Hence, we direct the AO to delete the addition made u/s 40A(3) - Decided in favour of assessee.

Summary

Issues:
Challenge to disallowance under section 40A(3) of the Income Tax Act, 1961.

Analysis:

Issue 1: Disallowance under section 40A(3)
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2014-15, where the disallowance under section 40A(3) was partly allowed. The Assessing Officer (AO) disallowed an amount paid to transporters, stating it should be disallowed under section 40A(3) of the Act. The assessee argued that the payments were made on behalf of farmers for agricultural produce, covered under rule 6DD(e). The AO rejected this contention, leading to the addition of the amount to the assessee's income. The Commissioner partly allowed the appeal but confirmed the disallowance under section 40A(3). The Tribunal noted that the revenue did not dispute the payments to transporters and the assessee explained the circumstances of these payments. Citing precedents and the Supreme Court's decision in Attar Singh Gurmukh Singh vs. ITO, the Tribunal held that genuine transactions made in cash under bonafide conditions, where payees are identifiable, should not be disallowed under section 40A(3). The Tribunal allowed the appeal, directing the AO to delete the addition made under section 40A(3).

Conclusion:
The Tribunal allowed the appeal, setting aside the decision of the Commissioner of Income Tax (Appeals) and directing the Assessing Officer to delete the addition made under section 40A(3) of the Income Tax Act, 1961 for the assessment year 2014-15.