2017 (5) TMI 1658 - AT - Income Tax

Disallowance u/s.40A(3) - part payments as made by cheque and part payment in cash - assessee had purchased land from the parties and made payment exceeding ₹ 20,000/- in cash in violation of provisions of section 40A(3) - Held that - It is open to the assessee to furnish to the satisfaction of the assessing officer the circumstances under which the payment in the manner prescribed in Section 40-A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6-DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. As clear from the provisions of Section 40-A(3) and Rule 6-DD that they arc intended to regulate the business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. If the payment is made by a crossed cheque drawn on a bank or a crossed bank draft then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from disclosed sources. In interpreting a taxing statute the court cannot be oblivious of the proliferation of black money which is under circulation in our country. Any restraint intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of disallowance under Section 40A(3) of the Income Tax Act.

Detailed Analysis:

Issue: Deletion of Disallowance under Section 40A(3)
The sole issue in this appeal is whether the CIT(A) erred in deleting the disallowance of ?3,41,84,000 under Section 40A(3) of the Income Tax Act, which was made by the Assessing Officer (AO) on the grounds that part payments were made by cheque and part by cash.

Facts of the Case:
- The assessee purchased land from various parties and made payments exceeding ?20,000 in cash, violating Section 40A(3).
- The AO observed that the land was stock-in-trade, making the expenditure revenue in nature and applicable under Section 40A(3). Consequently, the AO disallowed ?3,41,84,000.

Assessee's Argument:
- The assessee argued that the sellers insisted on cash payments.
- The identity of the sellers was established through photos, addresses, and witnesses.
- The transactions were conducted in the presence of competent authority and were in compliance with the Transfer of Property Act.
- The payments were made out of business expediency and were covered under exceptions in Rule 6DD(j)(2).
- The assessee cited several judicial precedents supporting their case.

CIT(A)'s Decision:
- The CIT(A) deleted the disallowance, referencing a similar case involving R.P. Real Estate Pvt Ltd., where the addition was deleted due to commercial exigencies.
- The CIT(A) emphasized that the payments were genuine, supported by registered purchase deeds, and the identity of the payees was established beyond doubt.

Revenue's Argument:
- The Revenue argued that no evidence was provided to show that the payments were made out of business exigencies.
- The Revenue contended that the CIT(A) was not justified in deleting the addition based on business exigencies.

Tribunal's Analysis:
- The Tribunal noted that the assessee is in the real estate business and made cash payments exceeding ?20,000 to nine persons.
- The CIT(A) deleted the addition by following the decision in the case of R.P. Real Estate Pvt Ltd., which was upheld by the Tribunal and the Hon’ble High Court of Chhattisgarh.
- The Tribunal observed that the sellers were illiterate villagers who insisted on cash payments, and the identity and genuineness of the transactions were not in dispute.
- The Tribunal cited various judicial precedents, including the Supreme Court and High Court decisions, emphasizing that Section 40A(3) should not be read in isolation but along with Rule 6DD, which provides exceptions for genuine and bona fide transactions.

Conclusion:
- The Tribunal concluded that the AO applied Section 40A(3) mechanically without considering the business exigencies and the genuine nature of the transactions.
- The Tribunal upheld the CIT(A)’s decision to delete the disallowance, emphasizing that the payments were made under unavoidable business circumstances and the identity of the payees was established.
- The Tribunal dismissed the Revenue's appeal, affirming that the payments were made out of business compulsion and not as an option, thereby falling within the exceptions provided under Rule 6DD.

Final Judgment:
- The appeal filed by the Revenue was dismissed, and the order of the CIT(A) was confirmed.

Pronouncement:
- The order was pronounced in the open court on 11/05/2017.