2011 (11) TMI 98 - AT - Income Tax

Applicability of 40A(3) - payment otherwise than by a/c. payee cheques - it is stated by him (the supplier) that the assessee had purchased dupattas and sarees through him and for the same he had obtained crossed cheques from the assessee to make cash payments to various suppliers after discounting the crossed cheques received from the assessee. Admittedly this contention was raised for the first time before Ld. CIT(A) and this aspect was never raised before the A.O. However this argument of the assessee was rejected by the Ld. CIT(A) - Held that - in the interest of justice one more opportunity should be provided to the assessee to bring the required evidence on record and hence we set aside the order of Ld. CIT(A) on both the issues i.e. regarding disallowance under Section 40A(3) for the expenses incurred during the present year and also of the expense incurred during earlier year or years to the file of the A.O. for a fresh decision. Opening balance of creditors for expenses - payment made by the assessee during the current year - disallowed by the AO u/s Section 40A(3) - Held That - The amended provisions are applicable in respect of those expenditure for which liability has been incurred in assessment year 2008-09 or in any subsequent year but it cannot be made applicable to the liability incurred up to the assessment year 2007-08. If the liability is incurred up to 2007-08 but the payment made is in a subsequent year i.e. in assessment year 2008-09 or any subsequent year the provisions of Section 40A(3) as applicable in that year in which liability was incurred should be so applied. The provisions of Section 154 for the purpose of reckoning the limitation period of four years shall be reckoned from the end of the assessment year following the previous year in which the payment was so made. - Decided in favor of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance under Section 40A(3)(a) of the Income Tax Act, 1961.
2. Disallowance under Section 40A(3)(b) of the Income Tax Act, 1961.
3. Applicability of Rule 6DD(k) in relation to the payments made.
4. Provisions of Section 40A(3) as applicable to different assessment years.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(3)(a) of the Income Tax Act, 1961:
The assessee, engaged in the export of sarees and dupattas, was found to have made payments to suppliers through non-account payee cheques, violating Section 40A(3) of the IT Act. The Assessing Officer (AO) disallowed Rs. 58,29,830/- under Section 40A(3)(a), as the payments exceeded Rs. 20,000/- and were not made via account payee cheques. The assessee argued that payments were made through an agent who required crossed cheques to make cash payments to suppliers. However, the CIT(A) confirmed the AO's disallowance, stating the assessee failed to provide sufficient evidence to support the claim of payments through an agent.

2. Disallowance under Section 40A(3)(b) of the Income Tax Act, 1961:
The AO also disallowed Rs. 2,68,66,115/- under Section 40A(3)(b) for payments made to creditors for goods outstanding as of 01.04.2007, through non-account payee cheques. The AO noted that the assessee did not provide evidence of exceptional and unavoidable circumstances necessitating such payments. The CIT(A) upheld this disallowance, emphasizing the lack of evidence provided by the assessee.

3. Applicability of Rule 6DD(k):
Before the CIT(A), the assessee introduced the argument that payments were made as per the directions of an agent, Shri Manoj Kumar Sharma, and thus Rule 6DD(k) should apply, which exempts certain payments from disallowance under Section 40A(3). The CIT(A) rejected this argument, citing insufficient evidence. However, the tribunal found that the assessee should be given another opportunity to provide evidence supporting the claim of payments through an agent. The tribunal remanded the matter back to the AO for a fresh decision on the applicability of Rule 6DD(k).

4. Provisions of Section 40A(3) as applicable to different assessment years:
The tribunal noted that the provisions of Section 40A(3) were amended from the assessment year 2008-09. Up to the assessment year 2007-08, the disallowance was to be made in the year the liability was incurred if payments were not made via account payee cheques. For liabilities incurred up to the assessment year 2007-08, any disallowance should be made in the year the liability was incurred, not in the year of payment. The tribunal directed the AO to first determine the applicability of Rule 6DD(k) and, if not applicable, to handle the disallowance in the respective year the liability was incurred.

Conclusion:
The tribunal set aside the CIT(A)'s order on both issues and remanded the case back to the AO for a fresh decision. The AO was instructed to consider the applicability of Rule 6DD(k) and, if not applicable, to apply the provisions of Section 40A(3) as they stood in the year the liability was incurred. The appeal of the assessee was allowed for statistical purposes, providing the assessee an opportunity to present additional evidence.