2012 (3) TMI 119 - AT - Income Tax

Applicability of 40A(3)(cash payment exceeding of 20,000) - Assessee Co-operative Society - Order obtained from industry for carriage of cement, food grain and work allotted to truck owners - Bill from truck owners send to consignee, commission charged at 3% - Held That - In view of G.A. Road Carriers (2010 - TMI - 203699 - ITAT, HYDERABAD) transportation is not the business of the assessee company. It acts as a commission agent facilitating payment to the truck owners, who are its members. Therefore, the payments were not business expenses of the assessee, therefore no disallowances.

Summary

Issues:
Disallowance of cash payment under section 40A(3) of the Income Tax Act for the assessment year 2006-07.

Analysis:
1. The Assessing Officer (AO) disallowed 20% of cash payments made by the assessee cooperative society for plying and transportation of cement and food grains, amounting to Rs. 27,47,516,80, as they exceeded the limits prescribed under section 40A(3) of the Income Tax Act.

2. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed this disallowance, leading to the assessee's appeal before the Income Tax Appellate Tribunal (ITAT) Delhi.

3. The assessee argued that the payments made were not expenses incidental to the business but were on behalf of the truck owners, as the society charged a commission and did not earn profits from transportation charges. The society's resolution allowed cash payments due to practical reasons like lack of banking facilities and time constraints.

4. The ITAT noted that the society acted as a commission agent facilitating payments to truck owners, as per the resolutions and business model presented. Citing relevant case laws, including 'Sirmour Truck Operators Union' and 'G.A. Road Carriers,' the ITAT concluded that the disallowance under section 40A(3) was not justified as the payments were not business expenses of the assessee.

5. The ITAT found merit in the assessee's contentions and allowed the appeal, setting aside the disallowance of cash payments. The judgment highlighted the nature of the society's business model and the justifications provided for cash payments, in line with legal precedents.

6. The ITAT's decision emphasized the importance of considering the specific business operations and circumstances of the assessee while applying provisions like section 40A(3) of the Income Tax Act. The judgment provided clarity on the applicability of such provisions in cases where payments are made on behalf of others and not as direct business expenses.

7. Ultimately, the ITAT ruled in favor of the assessee, recognizing the unique nature of the cooperative society's operations and the reasons behind the cash payments, thereby allowing the appeal and overturning the earlier disallowance.