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2011 (6) TMI 502 - AT - Income TaxDis-allowance u/s 40A(3) - payments made by the assessee, a distributor of Reliance communication products, to its principal - assessee contended that there is no doubt with regard to the genuineness of the expenditure, which is sought to be disallowed with reference to the mode of payment, i.e., by deposit of cash in the bank account of the principal - Held that - The facts and circumstances of the assessee s business are identical to that in the case of S. Rahumathulla (2010 (4) TMI 905 - ITAT COCHIN), whereat the tribunal observed that it had found, with reference to the decisions of BSNL & Ors. v. Union of India & Ors. 2006 (3) TMI 1 - Supreme court that the relationship between the assessee (franchisee-distributor) and service-provider) (Reliance Communications Infrastructure Ltd.), both de facto and de jure, as one of principal and agent . The franchisee-distributor was, thus, at all times acting only for and on behalf of the service-provider, as a link in the service chain and, thus, the payments by it to the principal-service provider are only in terms of and in pursuance to the service arrangement. The SIM cards and other service products are not physical products or goods in that sense, but only service products , toward services for an access to the telephony services provided by the service-provider, who only activates the same. The payments made by the franchisee-distributor to the principal are only on his (the latter s behalf); it being only entitled to a commission for the services rendered. The question of no separate payment being made by the payee-principal to the payer-agent, i.e., toward the remuneration or commission. Thus the provision of s. 40A(3) was found as not applicable in the facts and circumstances of the case - Decided in favor of the assessee
Issues Involved
1. Validity of the disallowance under section 40A(3) of the Income Tax Act, 1961, for cash payments made by the assessee. Detailed Analysis Issue 1: Validity of the Disallowance under Section 40A(3) The central issue in this appeal is the validity of the disallowance of Rs. 46.39 lakhs under section 40A(3) of the Income Tax Act, 1961, due to the mode of payment. The assessee, a distributor of Reliance communication products, made these payments in cash by depositing them into the bank account of the principal, Reliance Communications Infrastructure Ltd. Assessee's Argument: The assessee argued that the genuineness of the expenditure is not in doubt, and the payments were made in cash due to business exigencies. The principal did not extend any credit and required advance payments. The cash collected from the business was deposited in the principal's bank account, which should be considered as payment through the banking channel. The assessee cited the Supreme Court's decision in Attar Singh Gurmukh Singh v. ITO, which upheld the constitutional validity of section 40A(3), emphasizing that genuine and bona fide transactions should not be disallowed. Revenue's Argument: The Revenue contended that the disallowance under section 40A(3) is based solely on the mode of payment, not the genuineness of the transaction. The assessee's case did not fall under any of the exceptions enumerated in Rule 6DD of the Income Tax Rules, 1962, and therefore, the disallowance was justified. Tribunal's Analysis: The Tribunal observed that the provision of section 40A(3) is clear and unambiguous, mandating disallowance based on the mode of payment. The genuineness of the expenditure is irrelevant for the applicability of this provision. The Tribunal referred to the standard rules and principles of statutory interpretation, emphasizing that the language of the statute should be given its plain meaning. The Tribunal also noted that the consideration of business expediency and other relevant factors, as mentioned by the Supreme Court, should be viewed in light of Rule 6DD, which lists the exceptional circumstances where cash payments are permissible. The Tribunal cited its earlier decision in S. Rahumathulla v. CIT(Asst.), which discussed similar arguments and upheld the disallowance under section 40A(3). Alternative Argument by Assessee: The assessee alternatively argued that the payments should be considered as book adjustments under Rule 6DD(d)(iii). The Tribunal rejected this argument, stating that depositing cash in the bank account of the payee does not qualify as a book adjustment. The payment was made in cash, and the identity of the person depositing the cash is irrelevant. Case Law Analysis: The Tribunal distinguished the assessee's reliance on the decisions in CIT v. Chrome Leather Co. Pvt. Ltd. and Shri Renukeswara Rice Mills v. ITO. The former was based on the now-omitted Rule 6DD(j), and the latter involved different facts where the transactions were found to be covered by Rule 6DD. Principal-Agent Relationship: The Tribunal found that the relationship between the assessee and Reliance Communications Infrastructure Ltd. was that of principal and agent. The payments made by the assessee were on behalf of the principal, and the assessee was entitled to a commission for the services rendered. The Tribunal referred to its earlier decision in S. Rahumathulla, where it was held that section 40A(3) was not applicable in such circumstances. Conclusion: The Tribunal concluded that the disallowance under section 40A(3) was not applicable in the present case. The relationship between the assessee and the principal was one of principal and agent, and the payments were made in pursuance of the service arrangement. The Tribunal directed the deletion of the disallowance and allowed the assessee's appeal. The assessee's Stay Petition was dismissed as unfructuous. Final Order: The assessee's appeal is allowed, and the Stay Petition is dismissed as unfructuous.
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