2007 (11) TMI 599 - HC - Income Tax

Payments made in cash in excess - within the exception clause, rule 6DD(a) of the Income-tax Rules, 1962 or Not - Disallowance of addition u/s 40A(3) - CIT confirming the assessment revised u/s 154 - HELD THAT - The contention of the petitioner is that payments were made to the account of the suppliers maintained with State Bank of Mysore and Hassan District Co-op. Central Bank Ltd. Counsel for the petitioner contended that all these banks come under clause (ii) of sub-rule (a) of rule 6DD and, therefore these two payments are eligible for exemption from disallowance under section 40A(3) of the Act. I am in agreement with the contention of counsel for the respondents because the protection under clause (a) of rule 6DD is available only if the payments are made to any of the institutions referred to thereunder. Obviously in order to qualify for the benefit of rule 6DD(a) the beneficiary of the payee should be an institution referred to therein. Even though counsel for the petitioner contended that payments to any beneficiary in the account maintained in the banks referred to in rule 6DD(a) is also covered by the exception, I do not think the same can be accepted because, some of the institutions referred to in the rule, namely, Reserve Bank of India, State Financial Corporations, Industrial Development Corporation and other financial institutions are not engaged in banking operations. Therefore, rule 6DD(a) applies only for payments to institutions referred to therein and not for payment made to any party s account maintained in the institutions referred to therein. In the circumstances, I reject the contention of the petitioner and uphold Ext. P6 order of the CIT confirming the assessment revised u/s 154 of the Act. O.P. is dismissed as devoid of any merit.

Summary

Issues:
Challenge to Ext. P6 order under section 264 of the Income-tax Act confirming disallowance of addition made under section 40A(3) for cash payments exceeding Rs. 10,000. Interpretation of rule 6DD(a) of the Income-tax Rules, 1962 for exceptions to disallowance under section 40A(3).

Analysis:

1. The petitioner contested the Ext. P6 order issued by the Commissioner of Income-tax under section 264 of the Income-tax Act, which confirmed the disallowance of cash payments exceeding Rs. 10,000 under section 40A(3). The petitioner argued that the payments fell within the exception clause, rule 6DD(a) of the Income-tax Rules, 1962. The rule lists specific institutions to which payments exceeding Rs. 10,000 can be made in cash without disallowance. The petitioner claimed that payments were made to suppliers' bank accounts maintained with banks falling under clause (ii) of sub-rule (a) of rule 6DD. However, the court held that the protection under rule 6DD(a) is available only if payments are made to the institutions specified in the rule. The court emphasized that the beneficiary of the payment should be an institution referred to in the rule to qualify for the exemption. As some institutions listed in the rule were not engaged in banking operations, the court concluded that rule 6DD(a) applies only to payments made directly to the institutions specified, not to payments made to any party's account maintained in those institutions. Consequently, the court rejected the petitioner's contention and upheld the Ext. P6 order of the Commissioner.

2. The petitioner also argued that cash remittances in the suppliers' accounts were made by entrusting cash to truck drivers, which should be covered by clause (i) of rule 6DD. However, this argument was not pursued before the Commissioner. The court determined that the truck drivers who delivered the goods could not be considered as the petitioner's agents required to make cash payments to the suppliers. Therefore, this contention was also dismissed. Ultimately, the court found the O.P. to be devoid of merit and dismissed it accordingly.