2010 (3) TMI 1118 - AT - Income Tax

Addition u/s 40A(3) - deduction of payments exceeding permisiable limits - appellant-company avers that payments were made at villages which did not have banking facilities - as per revenue most of the receipts the place of payment has been mentioned as Tirunelveli which is a District headquarter in the State of Tamil Nadu - HELD THAT - Normally, illiterate poor farmers would insist on cash payments, especially when such payments involve huge amounts, at the place of their residence for the simple reason that they would like to avoid the risk of receiving cash at the town where the sale is to be registered and which may be far away from the village and such cash has to be carried back by them to the village. It is common knowledge that the seller has to confirm before the Sub-Registrar that full payment has been received by him. At the same time the Sub-Registrar satisfies himself about the identity of the seller to ensure that the payment has been made to the right person. For the sake of convenience, in the receipt the place is mentioned as the town where the document is registered. The AO has not made any effort to examine any of the sellers to verify as to whether the payments were received at the villages or at the town. Considering the entire facts we are inclined to accept the proposition that the payments were made at villages where banking facilities did not exist. In the present case, even if it is assumed that the payment was made at the District headquarter, the admitted position is that the sellers did not have any bank accounts at such town and they did not reside or carry on any business or farming activity at such town. The AO and the learned CIT(A) have observed that the appellant-company could have opened bank accounts at such town in the name of the sellers. In our view, it would be too much to expect that the appellant-company would be able to compel the villagers to open bank accounts at the town which ultimately they will not be able to operate as they do not reside at such town. If such a myopic view is taken regarding the interpretation of r. 6DD(h), in our view, the very object of the legislature would be frustrated. There is no dispute regarding the identity of the payees and the genuineness of the land transactions in respect of which payments have been made. Rule 6DD(h) must be interpreted keeping in view this object and purpose. It is further seen that cash payments to the extent of ₹ 20,19,208 in respect of 187 transactions are less than ₹ 20,000 per transaction and therefore such payments would be outside of the purview of s. 40A(3). Decided in favour of assessee.

Summary

Issues Involved:
1. Confirmation of disallowance under Section 40A(3) of the IT Act.
2. Disallowance of depreciation on assets costing below Rs. 5,000.

Issue-wise Detailed Analysis:

1. Confirmation of Disallowance under Section 40A(3) of the IT Act:

The appellant-company, engaged in the purchase and sale of agricultural lands, made cash payments amounting to Rs. 8,03,46,751 for land purchases. The AO disallowed 20% of these payments under Section 40A(3), totaling Rs. 1,60,69,350, on the grounds that the payments were made in cash in places with banking facilities, specifically mentioning Tirunelveli, a District headquarter in Tamil Nadu.

The appellant argued that the lands were in rural areas without banking facilities, and the sellers, being illiterate and poor farmers, insisted on cash payments. The appellant provided certificates from village administrative officers and other supporting documents to substantiate the lack of banking facilities and the necessity of cash payments.

The AO rejected these contentions, stating that the payments were made in towns with banking facilities and that the appellant could have facilitated the opening of bank accounts for the sellers. The CIT(A) upheld the AO's decision, emphasizing the importance of proving the absence of banking facilities and the impracticality of making payments by cheque or draft.

Upon appeal, the Tribunal considered the detailed submissions and various judicial pronouncements. It noted that the sellers were indeed from villages without banking facilities and that payments were made in the villages, despite the receipts mentioning the District headquarter for registration purposes. The Tribunal emphasized that the object of Section 40A(3) is not to disallow genuine payments and that Rule 6DD(h) should be interpreted liberally to avoid frustrating the legislative intent.

The Tribunal concluded that even if payments were made at the District headquarter, the sellers did not have bank accounts there, and it would be unreasonable to expect the appellant to compel the sellers to open bank accounts. The Tribunal found that the payments were genuine and covered under the exceptions of Rule 6DD(h) and the second proviso to Section 40A(3), which considers the nature and extent of banking facilities, business expediency, and other relevant factors.

The Tribunal directed the AO to delete the addition of Rs. 1,60,69,350, allowing the appeal on this ground.

2. Disallowance of Depreciation on Assets Costing Below Rs. 5,000:

The appellant did not press this ground during the appeal, and hence, it was rejected.

Conclusion:

The appeal was partly allowed, with the Tribunal setting aside the disallowance under Section 40A(3) and directing the AO to delete the addition of Rs. 1,60,69,350. The disallowance of depreciation on assets costing below Rs. 5,000 was not pressed and thus rejected. Grounds 7 and 8, being general in nature, were not required to be dealt with.