2012 (2) TMI 307 - HC - Income Tax

Payments above Rs.10, 000/- made in cash A.Y. 1992-93 1993-94 and 1994-95 dis-allowance u/s 40A(3) - Rule 6 DD (j) of the Income Tax Rules 1962 assessee contending exceptional/unavoidable circumstances for making payment in cash Held that - Assessee had furnished explanations on the basis of the bank statements as well as the ledger accounts of the payees to show that the assessee did not have sufficient cash balance. This position is clear and cannot be doubted. Further it would have missed out on the business opportunity if had failed to make cash payments. These were relevant and material aspects which were required to be considered and examined by the tribunal but have been overlooked. Therefore dis-allowance is deleted Decided in favor of assessee.

Summary

Issues:
1. Whether the cash payments made by the appellant-assessee violated Section 40A (3) of the Income Tax Act, 1961 read with Rule 6 DD (j) of the Income Tax Rules, 1962.

Detailed Analysis:
The appellant-assessee, a film distributor, made cash payments during assessment years 1992-93, 1993-94, and 1994-95. The primary issue was whether these cash payments violated the provisions of Section 40A (3) of the Income Tax Act, 1961, and Rule 6 DD (j) of the Income Tax Rules, 1962. The Tribunal framed the substantial question of law regarding the legality of these payments above Rs.10,000 each made in cash by the appellant-assessee. The Tribunal rejected the explanation provided by the appellant-assessee, emphasizing the necessity of payments through crossed cheques or bank drafts to comply with the law.

The Circular No.220 dated 31.05.1997 was applicable to Rule 6 DD (j) of the Income Tax Rules, providing exceptions where payments could not be made through crossed cheques or bank drafts due to exceptional or unavoidable circumstances. The Tribunal found the appellant's explanation vague and not supported by reliable evidence, questioning the availability of funds in the bank account and the justification for not issuing crossed bank drafts. The Tribunal concluded that the appellant's intention was to ultimately make cash payments despite the initial attempt to issue crossed cheques, leading to a violation of the law.

However, the appellant-assessee presented bank account statements and ledger accounts of the parties to whom payments were due, demonstrating financial difficulties and liquidity issues. The appellant argued that preparing bank instruments or issuing cheques would have jeopardized business deals with third parties. The appellant's explanation was supported by evidence showing a lack of sufficient cash balance and the necessity of cash payments to maintain business relationships and seize opportunities. The Tribunal failed to consider relevant aspects, such as the appellant's financial constraints and the practical difficulties faced in making payments through bank instruments.

Ultimately, the High Court ruled in favor of the appellant, concluding that the cash payments were justified due to exceptional circumstances and financial constraints. The Court accepted the appellant's contentions, emphasizing the importance of considering the practical challenges faced by businesses in making payments, especially when liquidity is a concern. The Court's decision favored the appellant, highlighting the necessity of a nuanced approach in assessing compliance with tax laws in real-world business scenarios.