2007 (7) TMI 664 - HC - Income Tax

Delete the addition made cash payment to different person u/s. 40A(3) - various cash payments made to one party on one day were not required to be clubbed and treated as one cash payment? - several payments made on one day in small instalments and each instalment/payment has to be treated as an independent cash transaction? - HELD THAT - A perusal of the of section 40A(3), shows that no deduction concerning payments made by an assessee is to be allowed, if the payment exceeding ₹ 2,500 has been made otherwise than by a crossed-cheque. A perusal of the accounts submitted by the respondent-assessee as reproduced in the assessment order would show that an amount of ₹ 2,500 or even less than that amount has been paid by the respondent-assessee. Once this is the factual position, then the rigours of section 40A(3) of the Act as it stood in the assessment year 1986-87, would not be attracted to the facts of the present case. There are further findings that the payments have been found to be made after banking hours which have been found to be appropriate after looking into the exigencies of business. We are further of the view that the Tribunal has also correctly applied the view taken by Orissa High Court in the case of Aloo Supply Co. 1979 (12) TMI 60 - ORISSA HIGH COURT . Therefore, the question referred is answered against the revenue and in favour of the assessee.

Summary

Issues:
1. Interpretation of section 40A(3) of the Income-tax Act, 1961.
2. Application of section 40A(3) to cash payments exceeding Rs. 2,500 in a day to a party.
3. Treatment of multiple cash payments to one party on the same day as independent transactions.

Issue 1: Interpretation of section 40A(3) of the Income-tax Act, 1961

The case involved a dispute regarding the interpretation of section 40A(3) of the Income-tax Act, 1961, concerning the deductibility of expenses exceeding Rs. 2,500 if paid in cash. The Tribunal referred a question to the High Court to determine if the section applied to the cash payments made by the assessee. The Court analyzed the provision and concluded that no deduction would be allowed for payments exceeding Rs. 2,500 if not made by a crossed cheque. However, in this case, the respondent-assessee had made payments of Rs. 2,500 or less, which did not attract the provisions of section 40A(3) for disallowance.

Issue 2: Application of section 40A(3) to cash payments exceeding Rs. 2,500 in a day to a party

The Assessing Officer added an aggregated amount to the assessee's income based on cash payments exceeding Rs. 2,500 made to ten firms, alleging a violation of section 40A(3). However, the Commissioner of Income-tax (Appeals) accepted the assessee's argument that multiple payments made on one day in small instalments should be treated as independent transactions. The Appellate Authority also considered rule 6DD(j) of the Rules and relied on a judgment of the Orissa High Court. The Tribunal upheld the CIT(A)'s decision, emphasizing that payments below Rs. 2,500 each on a particular day were allowable, following the Orissa High Court's precedent. The Court concurred with the Tribunal's findings, dismissing the revenue's appeal and the assessee's cross-objection.

Issue 3: Treatment of multiple cash payments to one party on the same day as independent transactions

The Tribunal noted that payments made to payees' bank accounts were not considered cash payments and that payments made after banking hours were appropriate due to business exigencies. The Tribunal also found that payments made on a particular day in instalments below Rs. 2,500 each were allowable, aligning with the Orissa High Court's decision. The Court agreed with the Tribunal's reasoning, emphasizing that the payments in question were below the threshold specified in section 40A(3) and that the Tribunal correctly applied the legal principles established in previous judgments. Consequently, the Court ruled in favor of the assessee, affirming the Tribunal's decision and dismissing both the revenue's appeal and the assessee's cross-objection.

This comprehensive analysis of the judgment highlights the key legal issues, interpretations of relevant provisions, and the application of legal principles in resolving the dispute between the parties involved.