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2016 (8) TMI 356 - AT - Income TaxDisallowance of purchases u/s 40(A)(3) - cash payment exceeding ₹ 20,000/- - Held that - It is pertinent to note that the primary object of enacting section 40A(3) were two folds, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequence, which were to be fallen on account of non-observation of Section 40A(3) must have nexus to the failure of such object. Therefore, the genuineness of the transactions being free from vice of any device of evasion of tax is relevant consideration. With regard to the purpose of bringing the provisions of section there is no doubt about the identity of the party. The ld. AR has directly deposited the cash in the account of the companies and has produced the sales bills of the company. The AO has also verified the transactions from the companies by issuing notice under Section 133(6) of the Act. So in the instant case there is no evasion of tax by claiming the bogus expenditure in cash. - Decided in favour of assessee.
Issues Involved:
1. Disallowance of purchases under Section 40A(3) of the Income Tax Act, 1961. 2. Application of exceptions under Rule 6DD of the Income Tax Rules, 1962. 3. Consideration of business expediency and other relevant factors. Issue-wise Detailed Analysis: 1. Disallowance of Purchases under Section 40A(3): The primary issue in this case was the disallowance of ?73,48,251/- by the Assessing Officer (AO) under Section 40A(3) of the Income Tax Act, 1961. The AO observed that the assessee made payments in cash exceeding ?20,000/-, violating Section 40A(3). The AO held that the case did not fall under the exceptions provided in Rule 6DD of the Income Tax Rules, 1962, leading to the disallowance of the sum and its addition to the total income of the assessee. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the AO's action, which led the assessee to file a second appeal before the ITAT. 2. Application of Exceptions under Rule 6DD: The assessee contended that the payments were made directly into the bank accounts of the wholesaler agents of the West Bengal Government, as mandated by the Calcutta Gazette notification. The assessee argued that the payments were made to the government through its authorized agents, thus falling under the exceptions of Rule 6DD(b), which exempts payments made to the government from the provisions of Section 40A(3). The assessee also provided evidence of the transactions, including bank deposit slips and confirmations from the suppliers. 3. Consideration of Business Expediency and Other Relevant Factors: The assessee argued that the payments were made in cash due to business expediency. The company did not accept account payee cheques as they took time to clear, and the assessee needed to maintain sufficient stock to avoid penalties from the Excise Department. The assessee cited various judicial precedents to support that genuine business transactions, even if made in cash, should not attract disallowance under Section 40A(3) if they meet the criteria of business expediency and other relevant factors. Judgment: The ITAT considered the provisions of Section 40A(3) and the exceptions under Rule 6DD. It noted that the primary objective of Section 40A(3) was to curb tax evasion and promote banking habits. The ITAT examined the facts and found that the assessee had made genuine payments directly to the bank accounts of the wholesalers, which were verified by the AO. The ITAT also considered the business expediency and the necessity for cash payments due to the specific requirements of the Excise Department and the suppliers. The ITAT referred to several judicial precedents, including: - Attar Singh Gurmukh Singh vs ITO: Emphasized that Section 40A(3) is not absolute and allows for exceptions based on business expediency and genuine transactions. - CIT vs CPL Tannery: Highlighted that genuine business transactions should not be disallowed under Section 40A(3) if made due to business exigencies. - Anupam Tele Services vs ITO: Supported the view that cash payments made due to business necessity should not attract disallowance. Based on these considerations, the ITAT concluded that the assessee's case met the exceptions provided under Rule 6DD and the business expediency criteria. Therefore, the disallowance under Section 40A(3) was not justified. The ITAT reversed the orders of the lower authorities and allowed the assessee's appeal. Conclusion: The ITAT allowed the assessee's appeal, holding that the cash payments made directly into the bank accounts of the wholesalers were genuine, met the business expediency criteria, and fell under the exceptions of Rule 6DD. The disallowance under Section 40A(3) was thus reversed.
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