2018 (3) TMI 1880 - AT - Income Tax

Disallowance u/s.40A(3) - whether the assessee is entitled for exemption under Rule 6DD in respect of all the payments or any of the payments made in cash? - HELD THAT - Genuineness of the payment and the identity of the payee are not disputed. The assessee pleads that it was compelled to pay cash owing to the insistence of its principal and if it had not abided by the direction, its business would have suffered involved in trying to revive the sick company in the role of Co-Promotor and in the process salvage the huge investment already made in M/s. Sitalakshmi Mills Ltd. In the best interest of the assessee to ensure that M/s. Sitalakshmi Mills Ltd was deregistered from BIFR. This was finally achieved when the Hon ble Madurai bench of the Madras High Court ordered so, also with a word of appreciation for your humble assessee. Cash payments were made with the whole objective and primarily to protect the business interests of the assessee whose funds were locked up and due from M/s. Sitalakshmi Mills Ltd. These actions clearly fall within the scope of considerations of business expediency and other relevant factors as mentioned in the provisions itself (in the second proviso). The assessee is also right in its pleading that these aspects are to be judged from the point of prudent businessman. Thus, on the facts and on relying the purposive interpretation of ATTAR SINGH GURMUKH SINGH 1991 (8) TMI 5 - SUPREME COURT the assessee has clearly made out a case in its favour and hence, we allow the assessee s appeal.

Summary

Issues Involved:
1. Applicability of Section 40A(3) regarding disallowance of expenditure due to cash payments.
2. Consideration of exemptions under Rule 6DD.
3. Business expediency and genuine difficulty in making payments through banking channels.

Issue-wise Detailed Analysis:

1. Applicability of Section 40A(3):
The core issue was whether the payments made by the assessee to M/s. Sitalakshmi Mills Ltd. in cash, exceeding ?20,000, should be disallowed under Section 40A(3). The Assessing Officer (AO) initially disallowed 20% of the payments amounting to ?61,32,476/- under this section. The AO's decision was based on the fact that banking facilities were available, and the assessee could not establish any commercial expediency for making cash payments. The CIT(A) upheld this disallowance, leading to the appeal.

2. Consideration of Exemptions under Rule 6DD:
The ITAT was directed to re-examine whether the assessee was entitled to exemptions under Rule 6DD, which provides certain circumstances under which cash payments exceeding ?20,000 are permissible. The assessee argued that M/s. Sitalakshmi Mills Ltd. was declared a sick unit by the BIFR, and its bank accounts were frozen, necessitating cash payments. The assessee cited the Supreme Court's decision in Attar Singh Gurumukh Singh, which allows for exemptions from Section 40A(3) under genuine and bona fide transactions and business expediency.

3. Business Expediency and Genuine Difficulty:
The assessee contended that the cash payments were made under business exigency and to protect its substantial business interests with M/s. Sitalakshmi Mills Ltd. The assessee argued that the payments were necessary to ensure the continuation of business operations and to salvage investments in the sick company. The ITAT noted that the genuineness of the payments and the identity of the payee were not in dispute. The Tribunal found that the assessee's actions were driven by business expediency and genuine difficulty, falling within the scope of the exceptions provided in Section 40A(3) and Rule 6DD.

Conclusion:
The ITAT concluded that the assessee had made a compelling case for the applicability of business expediency and genuine difficulty in making cash payments. The Tribunal allowed the assessee's appeal, emphasizing that the circumstances should be judged from the perspective of a prudent businessman. The ITAT's decision was based on a purposive interpretation of Section 40A(3) and Rule 6DD, aligning with the Supreme Court's observations in Attar Singh Gurumukh Singh.

Order:
The assessee's appeal was allowed, and the disallowance made under Section 40A(3) was overturned. The order was pronounced on March 16, 2018, at Chennai.