2018 (7) TMI 2011 - AT - Income Tax

Addition u/s 40A - expenditure incurred in cash beyond the limits prescribed - whether assessee case did not fall in any of the exclusionary clauses specified in Rule 6DD of the Income Tax Rules,1962 ? - HELD THAT - Contention of the Revenue is unacceptable in view of the various judicial pronouncements on the issue reiterating time and again that despite the exclusion of Rule 6DD(j) from the Rules, the assessee can still escape the disallowance u/s 40A(3) by demonstrating business expediency. In fact, in the latest decision in the case of M/s A.K. Daga Royal Arts Vs. ITO 2018 (6) TMI 1240 - ITAT JAIPUR has after considering various judicial decisions on the issue, reiterated this view holding that Rule 6DD is not exhaustive and the mere fact that the transaction did not fall under Rule 6DD would not mean that the disallowance per force was to be made Contention of the Revenue that the assessee can derive no benefit from the decision of the Hon'ble Jurisdictional High Court in the case of Gurdas Garg 2015 (8) TMI 569 - PUNJAB HARYANA HIGH COURT in which stated that the order was rendered on reading pre-amended provisions of Rule 6DD which included sub clause(j), merits no consideration and the same is, therefore, dismissed. Even otherwise, we find, that despite the categorical observation of the jurisdictional high court that the parties are free to take appropriate action since the decision has not been rendered considering the exclusion of Rule 6DD(j),nothing was brought to our notice regarding any action taken by the Revenue against the said order by way of review petition filed or any other manner. It therefore stands to reason that the decision of the jurisdictional high court has been accepted as being applicable in the post amendment scenario of the Rules. We hold that the disallowance u/s 40A(3)( of the Act could not have been made for the reason that the business expediency was not covered in the circumstances enumerated in Rule 6DD of the Income Tax Rules, 1962. Alternate contention of the Revenue that the assessee was unable to prove business expediency, we are unable to agree with the same also. The assessee had contended that the land owners from whom land was purchased by the assessee and cash paid in lieu thereof, were all females and were in urgent need of funds and insisted the assessee to pay the consideration in cash and it was in these circumstances that the assessee made the payment in cash in excess of the limits specified u/s 40A(3) of the Act. The fact that the sellers of the land were females is confirmed by the copies of agreement to sell, which we find has not been controverted by the Revenue also. It is quite normal for females to insist on payment in cash considering the socio-economic background of the females in our country. Thus, we find no reason to doubt the business expediency for incurring the transaction in cash and this contention of the Revenue is also dismissed.

Summary

Issues Involved:
1. Disallowance of expenditure incurred in cash beyond the prescribed limits under section 40A(3) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Incurred in Cash Beyond Prescribed Limits:
The core issue in this appeal revolves around the disallowance of cash payments exceeding the limits prescribed under section 40A(3) of the Income Tax Act, 1961. The assessee, engaged in the real estate business, made cash payments for purchasing plots, which the Assessing Officer disallowed, amounting to ?38,98,380.

Arguments by the Assessee:
The assessee contended that the disallowance under section 40A(3) was unwarranted as the genuineness of the transactions was not questioned by the Assessing Officer. It was further argued that the payments were made in cash due to compelling reasons, such as the landowners being females in urgent need of funds and insisting on cash payments. The assessee cited the Supreme Court decision in Attar Singh Gurmukh Singh Vs. ITO and the Punjab & Haryana High Court decision in Gurdas Garg Vs. CIT to support their claim of business expediency.

Findings of the CIT(Appeals):
The CIT(Appeals) rejected the assessee's submissions, stating that the cited Supreme Court decision pertained to an assessment year where Rule 6DD(j) was applicable, which had since been amended and was not relevant for the impugned assessment year. The CIT(A) also distinguished the Punjab & Haryana High Court decision, noting that it failed to consider the exclusion of Rule 6DD(j). The CIT(A) concluded that the assessee's case did not fall under any exclusionary clauses specified in Rule 6DD of the Income Tax Rules, 1962, and upheld the disallowance, emphasizing that the assessee failed to establish business expediency with evidence.

Arguments before the ITAT:
During the hearing before the ITAT, the assessee reiterated their earlier contentions, emphasizing the genuineness of the transactions and the compelling circumstances for cash payments. The assessee also presented a General Power of Attorney as evidence of the transaction's genuineness.

Revenue's Position:
The Revenue argued that the assessee could not derive any benefit from the cited decisions as they were based on the pre-amended Rule 6DD(j), which was no longer applicable. The Revenue maintained that the assessee's explanation of business expediency was unsubstantiated and unacceptable.

ITAT's Analysis and Decision:
The ITAT examined the legislative history and various judicial pronouncements on section 40A(3) and Rule 6DD. It noted that despite the exclusion of Rule 6DD(j), business expediency could still be demonstrated to escape disallowance under section 40A(3). The ITAT referred to multiple decisions, including those of the Supreme Court and various High Courts, emphasizing that genuine and bona fide transactions should not be disallowed solely because they did not fall under Rule 6DD.

The ITAT found that the assessee had successfully demonstrated business expediency, given the socio-economic background of the female landowners who insisted on cash payments. The genuineness of the transactions was not doubted by the Revenue. Consequently, the ITAT held that no disallowance under section 40A(3) was warranted and directed the deletion of the disallowance.

Conclusion:
The ITAT allowed the appeal, concluding that the genuineness of the transactions and business expediency were established, making the disallowance under section 40A(3) unwarranted. The decision was pronounced in the open court.