2014 (2) TMI 30 - HC - Income Tax

Disallowance u/s 40A(3) - payment in case for purchase of recharge vouchers from Tata Teleservices Limited - Held that - The payments between the assessee and the Tata Teleservices Limited were genuine - The Tata Teleservices Limited had insisted that such payments be made in cash, which Tata Teleservices Limited in turn assured and deposited the amount in a bank account. In the facts of the present case, rigors of section 40A(3) of the Act must be lifted. - if the assessee had not made cash payment and relied on cheque payments alone, it would have received the recharge vouchers delayed by 4/5 days and thereby severely affecting its business operations. Relying upon the decision in Smt. Harshila Chordia vs. Income Tax Officer 2006 (11) TMI 117 - RAJASTHAN HIGH COURT - The exceptions contained in Rule 6DD are not exhaustive and that the said rule must be interpreted liberally - The guideline laid down in the aforesaid judgement should be applied only to cash payments made by the assessee to the Tata Teleservices Limited and not to the other two agencies viz., Rajvi Enterprise and R.D Infocom - Decided in favour of assessee.

Issues Involved:
1. Applicability of Section 40A(3) of the Income Tax Act, 1961 to cash payments exceeding Rs. 20,000.
2. Genuineness of transactions and identity of payees.
3. Business expediency and practical difficulties faced by the assessee.
4. Interpretation and application of Rule 6DD of the Income Tax Rules, 1962.

Detailed Analysis:

1. Applicability of Section 40A(3) of the Income Tax Act, 1961 to Cash Payments Exceeding Rs. 20,000:
The core issue was whether Section 40A(3) applies to the payment of Rs. 33,10,194 deposited by the appellant in the bank account of Tata Tele Services Limited. The Assessing Officer initially disallowed 20% of the cash payments exceeding Rs. 20,000, citing a violation of Section 40A(3), which mandates that such payments should be made via account payee cheques or drafts to prevent tax evasion and unaccounted money.

2. Genuineness of Transactions and Identity of Payees:
The appellant contended that the transactions were genuine and the identity of the payee, Tata Teleservices Limited, was well-established. The CIT (A) supported this view, noting that the payments were made as per the terms and conditions set by Tata Teleservices Limited. The transactions were recorded in the accounts of both the appellant and Tata Teleservices Limited, confirming their genuineness.

3. Business Expediency and Practical Difficulties Faced by the Assessee:
The appellant argued that the payments were made in cash due to the directives from Tata Teleservices Limited, which refused to accept payments via cheques or drafts from the appellant's cooperative bank due to delays in clearance. The appellant was instructed to deposit cash to avoid a 45-day delay in receiving recharge vouchers, which would have adversely affected their business. The CIT (A) acknowledged that the appellant took a practical step to stay competitive in the market.

4. Interpretation and Application of Rule 6DD of the Income Tax Rules, 1962:
The Tribunal overturned the CIT (A)'s decision, emphasizing that the appellant's case did not fall under any exceptions listed in Rule 6DD, particularly clause (j), which pertains to payments made on days when banks are closed. The Tribunal remanded the matter back to the Assessing Officer for fresh adjudication in light of the decision in Kenaram Saha & Subhas Saha, which requires the assessee to prove that their case falls within the exceptions of Rule 6DD.

Conclusion:
The High Court concluded that the paramount consideration of Section 40A(3) is to curb black money transactions. However, genuine and bona fide transactions are not excluded. The appellant was compelled to make cash payments due to the specific instructions from Tata Teleservices Limited, which were beyond their control. The payments were genuine, and the identity of the payee was clear. The Court held that the rigors of Section 40A(3) should be lifted in this case, reversing the Tribunal's decision and allowing the appeal in favor of the appellant. However, this relief was confined to payments made to Tata Teleservices Limited and did not extend to other entities like Rajvi Enterprise and R.D Infocom.

In summary, the High Court ruled that Section 40A(3) did not apply to the appellant's cash payments to Tata Teleservices Limited due to the genuine business expediency and practical difficulties faced, thereby reversing the Tribunal's decision and allowing the appeal.

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