2016 (10) TMI 1355 - AT - Income Tax

Disallowance u/s 40A(3) for Freight Outward Expense and for freight Inward Expense - HELD THAT - It is an undisputed fact that the genuineness of the payments have not been doubted by the revenue authorities. It is also an admitted fact that the assessee has deducted tax at source from the applicable rates and the TDS has been deposited in the government account. It is also an admitted fact that the nature of business of the assessee is such that it has to hire transport operators for the movement of its goods, raw material as well as finished. We have no hesitation to hold that in the present case also neither the genuineness of the payment nor the identities of the payee were in any case doubted. Considering the totality of the facts qua the business of the assessee, we do not find any merit in the additions made u/s. 40A(3) of the Act. We, accordingly, set aside the findings of the ld. CIT(A) and direct the AO to delete the impugned additions. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 40A(3) for Freight Outward Expense.
2. Disallowance under Section 40A(3) for Freight Inward Expense.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(3) for Freight Outward Expense:
The assessee challenged the correctness of the order by the CIT(A) which upheld the disallowance of ?1,00,72,769/- under Section 40A(3) for Freight Outward Expense. The Assessing Officer (A.O.) observed that the assessee made cash payments exceeding ?20,000/- in contravention of Section 40A(3). The payments were made to various parties such as Asian Paints, AVI Addi, and others, aggregating to ?2,78,82,980/-.

The assessee explained that it is engaged in the business of manufacturing Micronised Mineral powder and had to make cash payments to transporters' drivers due to business exigencies. The payments were supported by bills and cash vouchers, and tax was deducted at source (TDS) and deposited in the government account. Despite this, the A.O. made additions relying on Section 40A(3).

The CIT(A) acknowledged the genuineness of the expenditure but upheld the disallowance, stating that it did not negate the applicability of Section 40A(3). The Tribunal, however, referred to the Gujarat High Court decision in Anupam Tele Services, which emphasized that Section 40A(3) aims to curb black money transactions but does not eliminate business expediencies. The Tribunal noted that the genuineness of the payments and the identity of the payees were not in doubt, and the business exigencies justified the cash payments. Consequently, the Tribunal directed the A.O. to delete the disallowance.

2. Disallowance under Section 40A(3) for Freight Inward Expense:
The assessee also contested the disallowance of ?27,18,197/- under Section 40A(3) for Freight Inward Expense. Similar to the Freight Outward Expense, the A.O. noted that cash payments exceeding ?20,000/- were made to various transporters, aggregating to ?24,84,763/-.

The assessee reiterated that the cash payments were necessitated by business requirements and were supported by proper documentation, with TDS deducted and deposited. Despite this, the A.O. made additions under Section 40A(3).

The CIT(A) upheld the disallowance, but the Tribunal, referring to the same Gujarat High Court decision, found that the genuineness of the payments and the identity of the payees were not in doubt. The Tribunal emphasized that Section 40A(3) should not restrict genuine business transactions and directed the A.O. to delete the disallowance for Freight Inward Expense as well.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, setting aside the findings of the CIT(A) and directing the A.O. to delete the disallowances made under Section 40A(3) for both Freight Outward and Freight Inward Expenses. The Tribunal's decision was based on the principles laid down by the Gujarat High Court, which stressed the importance of considering business exigencies and the genuineness of transactions while applying Section 40A(3).