2011 (7) TMI 1183 - AT - Income Tax

Disallowance of Cash Purchases u/s 40A(3) - Assessee made purchases against which payments were made in cash exceeding 20, 000 rupees at a time - CIT(A) confirmed the disallowance - Contention was assessee being old lady had made payments due to business expediency and on such ground disallowance should not be made - HELD THAT - In the relevant assessment year as per Rule 6DD there is no such exception provided to section 40A(3) of the Act that the assessee could make cash payment of 20, 000/- or more at a time due to business exigencies. The circumstances under which the provisions of section 40A(3) will not be applicable where payment in cash is more than 20, 000/- is provided in Rule 6DD and the ground of business expediency has been deleted by the Amendment made by the Finance Act 1995 w.e.f. 01.04.1996. In the case before us there is no dispute to the fact that assessee had made purchases against which the payments were made in cash exceeding 20, 000 rupees at a time - authorities are justified to make disallowance @ 20% of cash purchases. Therefore we uphold the order of CIT(A) - Decision against Assessee.

Summary

Issues involved:
- Interpretation of section 40A(3) of the Income Tax Act regarding cash purchases.

Detailed Analysis:

Issue 1: Interpretation of section 40A(3) of the Income Tax Act regarding cash purchases

The appeal revolved around whether the Assessing Officer's addition of 20% of total cash purchases amounting to Rs. 87,14,079 under section 40A(3) was justified. The assessee, an elderly proprietor of a liquor shop, argued that cash payments were necessary due to business exigencies and reliance was placed on previous cases. However, the CIT(A) upheld the addition, stating a violation of section 40A(3) and that the cited cases did not apply. During the Tribunal hearing, the assessee reiterated the business constraints justifying cash payments, while the Department Representative supported the CIT(A)'s decision. The Tribunal observed that the assessee did not dispute the cash payments exceeding Rs. 20,000 each time, and noted that exceptions under Rule 6DD did not apply for the relevant assessment year. The Tribunal analyzed the cited cases and found they were not applicable to the current situation. Ultimately, the Tribunal upheld the CIT(A)'s decision, confirming the 20% disallowance of cash purchases totaling Rs. 17,42,815. The appeal was dismissed.

In conclusion, the Tribunal's decision focused on the strict application of section 40A(3) concerning cash purchases exceeding Rs. 20,000, disregarding business justifications and previous case references. The Tribunal emphasized the absence of exceptions under Rule 6DD for the relevant assessment year, leading to the confirmation of the 20% disallowance.