2009 (5) TMI 619 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of disallowance under section 40A(3) by CIT(A).
2. Applicability of exceptions under rule 6DD(j) for cash payments exceeding Rs. 20,000.

Issue 1: Deletion of Disallowance under Section 40A(3) by CIT(A)

The Revenue challenged the CIT(A)'s decision to delete the disallowance of Rs. 19,52,252 made by the Assessing Officer (AO) under section 40A(3). The AO had disallowed 20% of cash payments exceeding Rs. 20,000 made by the assessee-company to its crew members, totaling Rs. 97,76,259. The AO argued that these payments were not covered by exceptions under rule 6DD(j). The CIT(A) found merit in the assessee's claim that the payments were covered by rule 6DD(j) exceptions and deleted the disallowance.

Issue 2: Applicability of Exceptions under Rule 6DD(j) for Cash Payments Exceeding Rs. 20,000

The assessee-company, engaged in supplying manpower to the Oil and Gas Industry, made cash payments to crew members who worked on offshore rigs for 28 days and returned to collect their wages. The company argued that these payments were covered by exceptions under rule 6DD(j), which allows cash payments exceeding Rs. 20,000 if certain conditions are met:
- Payment of salary after deducting income-tax.
- Employee posted temporarily for 15 days or more at a place other than their normal place of duty or on a ship.
- Employee does not maintain any bank account at such place or ship.

The AO rejected these claims, stating that the crew members were not temporarily posted for 15 days or more and that the rigs did not qualify as ships. The AO suggested that payments could be made through bank accounts to avoid disallowance under section 40A(3).

The CIT(A) accepted the assessee's arguments, relying on the Tribunal's decision in Sedco Forex International Drilling Inc. v. Asstt. CIT, which held that oil rigs are considered ships. The CIT(A) found that all conditions under rule 6DD(j) were satisfied and deleted the disallowance.

Tribunal's Analysis and Decision:

The Tribunal upheld the CIT(A)'s decision, confirming that the payments in question were covered by exceptions under rule 6DD(j). The Tribunal noted that:
- The payments were made after deducting income-tax.
- The crew members were posted on rigs for 28 days, satisfying the condition of being temporarily posted for 15 days or more.
- The rigs were considered ships, based on the Tribunal's earlier decision in Sedco Forex International Drilling Inc. v. Asstt. CIT.
- The employees did not maintain bank accounts on the rigs.

The Tribunal emphasized a pragmatic approach, as suggested by the Hon'ble Calcutta High Court in Giridharilal Goenka v. CIT, to balance legal requirements and practical hardships. Consequently, the Tribunal dismissed the Revenue's appeal and the assessee's cross-objection, which had become infructuous.

Conclusion:

The Tribunal confirmed that the cash payments made by the assessee-company were covered by exceptions under rule 6DD(j) and were not disallowable under section 40A(3). The appeal of the Revenue and the cross-objection of the assessee were both dismissed.