2009 (6) TMI 903 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance under section 40A(3) of the Income Tax Act.
2. Applicability of the amendment to section 40A(3) introduced by the Finance Act, 2008.
3. Validity of cash payments exceeding Rs. 20,000 on a single day to one party.

Detailed Analysis:

1. Disallowance under section 40A(3) of the Income Tax Act:
The core issue is the disallowance of Rs. 25.91 lakhs under section 40A(3) of the Act, which pertains to cash payments exceeding Rs. 20,000 on a single day to one party. The Assessing Officer (AO) contended that the assessee-firm split cash payments to circumvent section 40A(3). The AO relied on the Himachal Pradesh High Court's decision in CIT v. Dalip Chand and Sons [2008] 301 ITR 276, dismissing the assessee's reliance on other case laws. The Commissioner of Income-tax (Appeals) upheld the AO's view, emphasizing that the payments were split to avoid the section's rigour.

The assessee-firm argued that the payments were made under exceptional circumstances, such as the perishable nature of rice bran and the necessity for immediate cash transactions in rural areas. The firm cited several case laws, including CIT v. Aloo Supply Co. [1980] 121 ITR 680 (Orissa), which supported the view that multiple payments below Rs. 20,000 in a single day do not attract section 40A(3).

2. Applicability of the amendment to section 40A(3) introduced by the Finance Act, 2008:
The amendment to section 40A(3) by the Finance Act, 2008, effective from April 1, 2009, was debated. The AO and Commissioner of Income-tax (Appeals) interpreted the amendment as clarifying the legislative intent, even for periods before its enactment. However, the Tribunal disagreed, stating that the amendment is prospective and cannot be applied retrospectively. The Tribunal emphasized that if the legislature intended retrospective application, the effective date would not have been specified.

3. Validity of cash payments exceeding Rs. 20,000 on a single day to one party:
The Tribunal analyzed various case laws to determine the validity of cash payments exceeding Rs. 20,000. It considered cases like CIT v. K. K. S. K. Leather Processor P. Ltd. [2007] 292 ITR 669 and CIT v. Chrome Leather Co. P. Ltd. [1999] 235 ITR 708, which acknowledged that cash payments under exceptional circumstances do not attract disallowance under section 40A(3). The Tribunal noted that the assessee-firm's payments were made in remote areas with limited banking facilities and that the identity and genuineness of the payees were established.

The Tribunal concluded that the AO's sweeping allegation of intentional splitting of payments lacked documentary evidence. It reiterated that disallowance under section 40A(3) should not be made without proper application of mind and credible evidence. The Tribunal cited CIT v. Triveniprasad Pannalal [1997] 228 ITR 680, which held that multiple payments below Rs. 20,000 in a single day do not attract section 40A(3).

Conclusion:
The Tribunal allowed the assessee-firm's appeal, concluding that the disallowance under section 40A(3) was unjustified. It emphasized that the amendment to section 40A(3) is prospective, and the assessee-firm's cash payments were made under exceptional circumstances, with the identity and genuineness of the payees established. The Tribunal's decision was based on a thorough analysis of relevant case laws and the specific facts of the case.