2007 (7) TMI 698 - HC - Income Tax

Summary

Issues involved:
The judgment involves the interpretation of section 40A(3) of the Income-tax Act regarding the disallowance of payments made to Ludhiana Foundry Small Industries Association Regd. The main issue is whether the payments are to be disallowed under section 40A(3) when the identity of the party and genuineness of the transactions are established.

Summary:

Issue 1: Addition under section 40A(3) of the Income-tax Act

The Assessing Officer made an addition of Rs. 98,460 under section 40A(3) of the Income-tax Act. The Appellate Assistant Commissioner deleted the addition based on the evidence provided by the assessee, including a certificate from Ludhiana Foundry & Small Industries Association (Regd.) stating that cash payments were insisted by the Association. The Appellate Assistant Commissioner found that the appellant had produced sufficient evidence, including the identity of the payee, to support that the cash payments were necessary due to the Association's requirements. The Tribunal, however, set aside the Appellate Assistant Commissioner's decision, stating that the case did not fall within the exceptions provided in Rule 6DD(J) and a circular issued in this regard. The Tribunal accepted a reference under section 256(1) for the opinion of the High Court.

Issue 2: Interpretation of previous judgments

The High Court referred to previous judgments, including Aggarwal Steel Traders v. CIT and CIT v. Avtar Singh & Sons, which emphasized that if the assessee can provide confirmatory letters from concerned parties regarding cash payments, the case might be covered by exceptional circumstances as per Board Circular No. 220 dated 31-5-1977. In the present case, the High Court found that the evidence presented by the assessee, such as the certificate from Ludhiana Foundry and Small Industries Association (Regd.) and payment receipts, supported the claim that cash payments were necessary. The High Court concluded that the Tribunal had overlooked this evidence and that the question should be answered in favor of the assessee based on the precedents set by the Division Benches in the mentioned cases.

Conclusion:

The High Court ruled in favor of the assessee and against the revenue, stating that the evidence provided by the assessee, including the certificate and payment receipts, justified the cash payments made to Ludhiana Foundry Small Industries Association Regd. Consequently, the question was answered in favor of the assessee. The connected appeal, ITA No. 65 of 1999, was also dismissed.