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Issues involved: Interpretation of Section 40A(3) of the Income Tax Act for the financial year 2004-05 regarding deduction of expenditure exceeding Rs. 20,000 not made by crossed cheque or bank draft.
Summary: The appellate, an assessee, sought exemption of payments made towards transportation of granites under Section 40A(3) of the Income Tax Act for the financial year 2004-05. The Assessing Authority initially disallowed more than 20% of the total expenditure, while the assessee contended that deduction should be allowed up to Rs. 20,000 and 80% of the excess payment made. The provision of sub-Section 3 was examined, which stated that 20% deduction shall not be allowed on expenditure exceeding Rs. 20,000 not made by crossed cheque or bank draft. The credibility of the payment was not in doubt, but the statutory deduction under sub-Section 3 needed to be considered. Upon close reading of sub-Section 3, it was concluded that deduction should not be allowed only on the amount exceeding Rs. 20,000 not made by crossed cheque or bank draft. Therefore, the assessee was entitled to seek deduction up to Rs. 20,000, and on the excess amount paid, a deduction of up to 80% was permissible. The Assessing authority, Commissioner of Income Tax, and the Tribunal had disallowed deduction on the total expenditure without excluding the permitted payment up to Rs. 20,000. The appellate Tribunal's view was deemed incorrect in law, and the appeal was allowed.
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