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2012 (11) TMI 55 - AT - Income TaxDisallowance of 20% of the payments made in cash exceeding Rs.20,000/- u/s 40A(3) of the IT Act Held that - AO needs to examine as to whether the transactions of the assessee with the sellers was for the first time, wherever it is found that a new transaction for the first time with the said party, then the assessee shall get the relief - if it is found that the assessee has been dealing with the said parties earlier also and has been making payments in cash and also by cheques, the AO is directed to verify the cash payments or the cheque payments followed by the cash payments and only if it is found that the cheque payments followed the cash payments, it can be presumed that the assessee has gained the confidence and the said parties started accepting the cheque payments by the assessee - payments made by the assessee in cash exceeding Rs.20.000/- ought to be accepted as having been made for the purpose of business expediency of the assessee firm - matter remanded to AO
Issues:
Disallowance under section 40A(3) of the IT Act, 1961 for cash payments exceeding Rs.20,000 made by the assessee in the trading of Gold & Silver Jewellery for the assessment year 2006-07. Analysis: 1. The Assessing Officer (AO) disallowed 20% of cash payments exceeding Rs.20,000 made by the assessee to certain parties, invoking section 40A(3) of the IT Act, 1961. The AO observed intentional splitting of bills to avoid the limit and concluded that the assessee failed to justify cash payments. The AO relied on partner's statement during survey and Rule 6DD exceptions, adding Rs.9,21,397 to the income. 2. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the disallowance, noting cash payments to parties exceeding Rs.20,000. The assessee claimed cash payments due to circumstances, but failed to provide evidence. CIT(A) found discrepancies in the explanation and balance sheet, rejecting the contention of sellers insisting on cash payments. 3. The assessee appealed to the Income Tax Appellate Tribunal (ITAT), arguing for exceptions under Rule 6DD and business expediency. The ITAT considered the previous year's order, directing verification of bank accounts and seller's insistence on cash payments. The ITAT remanded the issue to verify commercial expediency and directed a fair hearing for the assessee. 4. The ITAT emphasized the assessee's duty to prove commercial expediency, directing the AO to examine transactions with sellers. The ITAT set aside the CIT(A)'s order, remanding the issue with specific directions to consider new transactions and payment patterns. The ITAT allowed the assessee to contest the extent of disallowance and directed relief on interest levies. 5. The ITAT's decision on the disallowance under section 40A(3) was remanded to the AO for further examination based on commercial expediency and transaction history. The ITAT provided detailed directions for the AO's assessment, ensuring a fair opportunity for the assessee to present their case and consider legal precedents. The appeal was treated as allowed for statistical purposes, with relief on interest levies. This comprehensive analysis covers the issues related to the disallowance under section 40A(3) of the IT Act, 1961 for cash payments exceeding Rs.20,000 made by the assessee in the trading of Gold & Silver Jewellery for the assessment year 2006-07, highlighting the key arguments, findings, and directions provided by the ITAT.
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