2014 (6) TMI 245 - AT - Income Tax

Disallowance u/s 40A(3) of the Act Cash payment for business purpose Held that - Rule 6DD of the Rules clearly lays down the conditions or exceptions under which the rigor of the provisions of section 40A(3) of the Act may be relaxed and there is no discretion on either of the parties to extend the condition or relax the condition at will - Even the existence, demand or necessity or business expediency does not fall under the provisions of Rule 6DD of the Rules - it cannot be said that the assessee has immunity from the provisions of section 40A(3) of the act - the lower authorities have rightly invoked the provisions of section 40A(3) of the Act and made the disallowance Decided against Assessee. Disallowance of 50% of business expenses - Subscription & Donations Held that - The assessee has debited a sum under the head Subscription & Donations - the payment was made keeping in view the specific nature of business of the assessee, which involves buying and selling of land which is scattered over various areas there is different from other stock in trade which can safely be stored, according to assessee the said payment would constitute necessary expenditure u/s 37 of the Act the assessee has made the payment to different persons to safeguard its business assets, the payments are allowable - the AO has disallowed 50% of this expenditure and allowed 50% - The AO made disallowance on ad-hoc basis without any reasons - CIT(A) has also confirmed the same the expenditure is required keeping in view the specific nature of the business of assessee Decided in favour of Assessee.

Summary

Issues:
1. Disallowance under section 40A(3) of the Income-tax Act for cash payment regarding business purposes.
2. Disallowance of 50% of business expenditure under the head 'Subscription & Donations'.

Issue 1 - Disallowance under section 40A(3) of the Income-tax Act for cash payment regarding business purposes:
The appeal arose from the order of CIT(A) confirming the disallowance made by AO under section 40A(3) of the Act for cash payments exceeding limits prescribed for business purposes. The assessee contended that cash payments were made as per vendor's demand. However, both AO and CIT(A) upheld the disallowance citing the provisions of section 40A(3) of the Act. The ITAT Kolkata considered the nature of the assessee's business, which involved trading in land, and the payments made in cash exceeding Rs.20,000. The assessee argued for business expediency and exceptions under Rule 6DD of the Rules. The ITAT held that Rule 6DD of the Rules provides specific conditions or exceptions, and business expediency does not exempt the assessee from section 40A(3) provisions. Consequently, the ITAT confirmed the disallowance, dismissing the appeal.

Issue 2 - Disallowance of 50% of business expenditure under the head 'Subscription & Donations':
The second issue pertained to the disallowance of 50% of business expenditure of Rs.80,150 under 'Subscription & Donations'. The assessee argued that the payment was necessary for safeguarding business assets due to the scattered nature of land trading business. The AO and CIT(A) disallowed 50% of the expenditure without providing reasons. The ITAT Kolkata, after considering the specific nature of the business, allowed the entire expenditure, overturning the disallowance. Consequently, this issue of the assessee's appeal was allowed, and the overall appeal was partly allowed.

In conclusion, the ITAT Kolkata upheld the disallowance under section 40A(3) of the Act for cash payments but allowed the business expenditure under 'Subscription & Donations' in the appeal. The judgment highlighted the importance of adhering to statutory provisions and specific conditions under the law while considering business expediency and exceptions.