2013 (12) TMI 1605 - AT - Income Tax

Addition to be made under section 40A(3)- payments made on Sundays and Holidays - Held that - In the present case, there is no denying the fact that persons to whom payments were made in cash are villagers and may not be having bank accounts. It is also a fact that payment has to be made to them immediately to secure the lands in question which may require the payments to be made in cash on Holidays and Sundays, otherwise, they would have sold the lands to some other persons. In these circumstances, if the assessee would have insisted for payment by way of cheque or DD or have deferred it, it might have resulted in a loss of business opportunities as the land owners would not have agreed to sale the lands to the assessee. Therefore, the expression required to be made understood in this context and keeping the intention of legislature in mind can be construed to mean that payments required to be made for the purpose of the business of the assessee. In these circumstances, payments made on Sundays and Holidays have to be held to be coming within the ambit of Rule 6DD(j), hence provisions of section 40A(3) will not apply to such payments. Therefore, payments made in cash atleast to the extent made on Sundays and Holidays cannot be disallowed u/s.40A(3) of the Act. We, therefore, direct the AO to verify such payments made on Sundays and Holidays and delete the addition of these amounts. So far as addition of the rest of the amount sustained by the CIT(A) we do not find any infirmity in the impugned order to interfere with the same. It is not only a fact that assessee has paid the amount of ₹ 2,32,20,500/- to third parties but such payments have also been made through cheques. The assessee has also furnished back account copies, TDS particulars, PAN of the said parties. Therefore, the entire transactions having been made through proper banking channel is transparent. Only because third parties have withdrawn the amount and paid the same in cash to landlords, assessee cannot be brought within the mischief of section 40A(3) of the Act. Accordingly, we confirm the order of ld CIT(A) on this issue.

Summary

Issues Involved:
1. Validity of the assessment order under section 143(3) without issuing notice under section 143(2) within the statutory time period.
2. Disallowance under section 40A(3) for cash payments made towards the purchase of agricultural lands.
3. Deletion of additions based on PAN and TDS particulars without verifying the timing of PAN acquisition and TDS deduction.
4. Whether the CIT(A) should have afforded an opportunity to the AO as per Rule 46A of I.T. Rules.
5. Determination of agency or employer-employee relationship between the assessee firm and third parties.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the validity of the assessment order under section 143(3) due to the absence of a notice under section 143(2) within the statutory time period. The Tribunal did not specifically address this issue in the judgment, thus implying that it was either not pressed or not considered significant enough to affect the outcome of the case.

2. Disallowance under Section 40A(3):
The primary contention revolved around the disallowance of Rs. 5,02,60,550/- under section 40A(3) for cash payments made towards the purchase of agricultural lands. The assessee argued that these payments were made due to business expediency and were covered under exceptions provided in Rule 6DD(j) and (g) of the I.T. Rules.

- Payments through Partners: The CIT(A) upheld the disallowance of Rs. 2,70,40,050/- made through partners, rejecting the contention that these payments were covered under Rule 6DD(g) and (j). The CIT(A) noted that the areas where payments were made had banking facilities, and no exceptional circumstances were proven to justify cash payments on Sundays and holidays. The Tribunal partially accepted the assessee's argument, directing the AO to verify payments made on Sundays and holidays and delete the disallowance for such payments.

- Payments through Third Parties: The CIT(A) deleted the disallowance of Rs. 2,32,20,500/- made through third parties, noting that these payments were made via account payee cheques, and the third parties withdrew the amounts and paid the landlords in cash. The CIT(A) held that these third parties were independent entities, and their actions could not be equated with the assessee making cash payments directly. The Tribunal upheld this deletion, confirming that the payments were made through proper banking channels and were transparent.

3. Deletion of Additions Based on PAN and TDS Particulars:
The revenue contended that the CIT(A) erred in deleting additions based on PAN and TDS particulars without verifying the timing of PAN acquisition and TDS deduction. The Tribunal found no infirmity in the CIT(A)'s order, noting that the assessee had furnished bank account copies, TDS particulars, and PANs of the third parties, and the transactions were made through proper banking channels.

4. Opportunity to AO as per Rule 46A:
The revenue argued that the CIT(A) did not afford an opportunity to the AO as per Rule 46A of the I.T. Rules. The Tribunal dismissed this contention, observing that the CIT(A) had considered the bank account copies, TDS particulars, and PANs, which were also submitted before the AO. Therefore, the ground raised by the revenue was dismissed.

5. Agency or Employer-Employee Relationship:
The CIT(A) concluded that the third parties to whom payments were made were not employees or agents of the assessee firm. The Tribunal upheld this finding, noting that there was no evidence of an agency or employer-employee relationship, and the third parties were independent entities.

Conclusion:
The Tribunal partly allowed the assessee's appeal by directing the AO to verify and delete disallowance for payments made on Sundays and holidays. The revenue's appeal was dismissed, confirming the deletion of additions made through third parties and rejecting the contention regarding Rule 46A. The Tribunal emphasized the need for a liberal interpretation of Rule 6DD to avoid frustrating the legislative intent behind section 40A(3).