2018 (11) TMI 1719 - AT - Income Tax

Disallowance u/s 40A(3) - assessee had purchased the lands from the local farmers and they have insisted for cash payment and the assessee had no option except to make the cash payments or otherwise farmers expressed their unwillingness for sale of the lands - HELD THAT - In the instant case, there is no dispute that the payments are genuine, duly accounted in the books of accounts and the recipients are identifiable, and the facts are similar to that of the case laws relied upon by the assessee cited supra. Therefore, we hold that the disallowance made u/s 40A(3) is not called for. Accordingly, we set aside the orders of the lower authorities and delete the addition. Appeal of the assessee is allowed.

Summary

Issues involved:
Appeal against order of Commissioner of Income Tax (Appeals) for assessment year 2007-08; Disallowance under section 40A(3) of the Income Tax Act, 1961; Genuine cash payments to farmers for purchase of agricultural lands.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2007-08. The assessee raised four grounds in the appeal, with ground No.1 and 4 being general in nature. Ground No.3 was dismissed as not pressed during the appeal hearing. Ground No.2 pertained to the disallowance under section 40A(3) of the Income Tax Act, 1961. The Assessing Officer found that the assessee made cash payments exceeding ?20,000 to farmers for the purchase of lands, violating section 40A(3). The AO disallowed the sum of ?2,62,928 as the payments were made in cash.

The CIT(A) remitted the issue back to the AO to examine each payment specifically and allow only those covered by Rule 6DD of IT Rules. The assessee contended that the cash payments were made due to the insistence of the sellers, who were farmers, and were genuine. The AO submitted a remand report stating the transactions appeared genuine and were made on the farmers' insistence. The Tribunal noted that the payments were genuine, identifiable, and duly accounted for. The intention of section 40A(3) was to curb black money flow, but in this case, the payments were made to identifiable farmers for genuine transactions.

Referring to precedents, the Tribunal held that if the purpose of section 40A(3) was satisfied, no disallowance was required. The Tribunal cited a case where cash payments were made due to business expediency and held that disallowance was not warranted if payments were genuine and made for business reasons. In this case, the Tribunal found the payments genuine, duly accounted for, and similar to cases where disallowance was not required. Therefore, the Tribunal allowed the appeal and deleted the addition made under section 40A(3).

In conclusion, the Tribunal found that the cash payments made to farmers for the purchase of agricultural lands were genuine, identifiable, and made due to business expediency. The Tribunal relied on precedents to support its decision and held that no disallowance under section 40A(3) was warranted in this case. The appeal of the assessee was allowed, and the addition was deleted.