2011 (7) TMI 1386 - HC - Income Tax

Summary

Issues involved: Interpretation of Section 40A(3) of the Income Tax Act, 1961 regarding cash payments exceeding Rs. 2500, applicability of Rule 6DD(j) for exceptions to cash payment rule, genuineness of expenses incurred by the assessee.

The judgment by the High Court of Allahabad dealt with a case where the assessee had made cash payments exceeding Rs. 2500 for expenses incurred during the assessment year 1986-87. The assessing officer disallowed these payments citing a contravention of Section 40A(3) of the Income Tax Act, 1961, which mandated payments exceeding Rs. 2500 to be made only by cheques. The CIT (A) found that the payments made to truck drivers for transportation of concrete/cement pipes were fully verifiable and genuine, with details available before the Assessing Officer. The Tribunal further noted that the payments to truck drivers were covered under the exception provided in the second proviso to Section 40A(3) as the drivers did not have bank accounts and payments in cash were necessary due to the absence of banking facilities at the site.

Additionally, the Tribunal referred to the findings of the CIT(A) that the payments made at different destinations where neither the assessee nor the truck drivers had bank accounts were covered under Rule 6DD(j) of the Income Tax Rules, 1962, which allows for exceptions to cash payments in specific circumstances. The Tribunal upheld the deletion of Rs. 1,34,685 in cash payments made at the factory site, as the genuineness of these payments was not disputed, and they were found to be justified by the CIT(A).

The Supreme Court's interpretation in Attar Singh Gurmukh Singh Etc. vs. Income Tax Officer emphasized that Section 40A(3) should be read in conjunction with Rule 6DD to avoid restricting genuine business activities. The Court clarified that the provision was not intended to exclude bona fide transactions and that payments by cheque were insisted upon to verify the source of income, not to impede legitimate business transactions. The wide import of the term "expenditure" under Section 40A(3) was highlighted, encompassing all outgoings.

In conclusion, the High Court ruled in favor of the assessee, holding that the genuineness of the transactions was not in dispute, and the applicability of Section 40A(3) was not meant to deny basic expenditure. The disallowance of the cash payments was deemed justified by the CIT(A) and the Tribunal, leading to the dismissal of the Income Tax Appeal in favor of the assessee.