2011 (4) TMI 112 - HC - Income Tax

Cash payment - Disallowance - It is settled law that if a party wants to take defence, it is his choice and if he wants to do so, he should take defence at appropriate stage and it is not sufficient to take defence but it is his duty to produce evidence in support of his contention - In the course of hearing certain facts came into the notice of the Assessing Officer and thereafter by giving full details in the assessment order of the cash payment in large number or huge quantity of money, the Assessing Officer reached to a conclusion that the payment which have been made by the assessee were made to persons in short intervals just to defeat the provision of Section 40A(3) Regarding penalty - Section 271-D has specific provision for imposing penalty which contains penal Section within it and a specific provision was made by Section 273- B which provides that no penalty shall be imposed if there was a reasonable cause for said failure. - Obviously, it has a penal consequence under Section 271-D. Here in this case, the language of section is clear, which only says that the benefit is available to the assessee under specific provision of law shall not be available and it cannot be considered as penalty merely because one has to incur some loss due to the imposition of tax that will not make that loss as penal in nature. - ITAT has committed an error - order of AO and CIT(A) confirmed.

Summary

Issues:
1. Disallowance under Section 40A(3) of the Income Tax Act, 1961.

Analysis:
The primary issue in this case revolved around the disallowance of an addition of Rs.8,84,531 on account of disallowance under Section 40A(3) of the Income Tax Act, 1961. The Assessing Officer disallowed this amount as the assessee was found to have made cash payments of Rs.10,000 on various occasions, which were deemed to defeat the provisions of Section 40A(3). However, the Tribunal interpreted the section differently, emphasizing the phrase "in a day" to conclude that no disallowance should be made if the amount paid did not exceed Rs.10,000 in a day. The Tribunal criticized the mechanical interpretation of the Assessing Officer and the Appellate Authority, stating that the disallowance was unjustified.

The appellant argued that the relevant provision of Section 40A(3) in force during the relevant year did not include the phrase "in a day," making the Tribunal's interpretation erroneous. The appellant contended that the Assessing Officer and the Appellate Authority were justified in disallowing the expenditure claimed by the assessee. Additionally, the appellant highlighted the absence of a notice under Section 40A(3) read with Rule 6-DD, which could have provided the assessee with an opportunity to explain exceptions under the rule.

The respondent, on the other hand, argued that the disallowed expenditure was allowable under Section 37 of the Act, and the disallowance under Section 40A(3) amounted to a penalty due to the assessee's inadvertence. The respondent drew parallels with penalties under other sections of the Income Tax Act, emphasizing the need for the assessee to have the opportunity to justify the cash payments.

Upon careful consideration of the arguments presented, the Court noted that the Assessing Officer had given the assessee a full opportunity to be heard before passing the assessment order. The Court examined the details of the cash payments made by the assessee and concluded that they were in violation of Section 40A(3) as the payments were made in large numbers to individuals, circumventing the statutory provisions.

Regarding the respondent's contention that the Assessing Officer should have pointed out Rule 6-DD to the assessee, the Court held that it was not the Assessing Officer's duty to highlight every statutory provision for the assessee's defense. The Court emphasized that it was the assessee's responsibility to raise defenses and provide supporting evidence at the appropriate stage.

In analyzing a judgment cited by the appellant, the Court differentiated between penalties under Section 271-D and the disallowance under Section 40A(3), highlighting that the latter did not equate to a penalty. The Court concluded that the Tribunal erred in reversing the orders of the Assessing Officer and the Appellate Authority, ultimately setting aside the Tribunal's decision and confirming the orders of the lower authorities.