2016 (9) TMI 453 - AT - Income Tax

Disallowance / addition u/s 40A(3) - AO has disallowed the purchases where the payment was exceeding more than ₹ 20,000/- in accordance with the provision of section 40A(3) - Held that - From the submission of the assessee we find that the assessee was the only authorized dealer in Asansol for the supply of country liquor to the authorized Excise Vendors. The assessee can take the delivery of the goods only after depositing the payment with the company. The assessee was to keep sufficient stock of country liquor as prescribed by the Excise Department and in case stock falls short of the prescribed limit then the Department used to impose penalty. Therefore the assessee avoided the process of depositing the cash in his bank account and thereafter getting the demand draft in the name of the company in order to keep the stock within the prescribed limit at all the times. It is also important to note that the company was also not accepting the account payee cheque of the assessee as it will take couple of days time in clearance. So in our considered view the exception provided in the provisions of section 40A(3) with regard of the business expediency then applicable for the assessment year 2008- 09 is met by the assessee. 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 nonobservation 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.

Summary

Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act, 1961.
2. Consideration of provisions under Sections 144 and 145 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(3):

The primary issue revolves around the disallowance of ?2,15,47,820/- under Section 40A(3) of the Income Tax Act, 1961. The assessee, engaged in the business of country liquor, made purchases from Asansol Bottling & Packaging Co. Pvt. Ltd. and IFB Agro Industries Ltd., with payments exceeding ?20,000/- made in cash directly to the bank accounts of these companies. The Assessing Officer (AO) held that these payments violated Section 40A(3) as they were not made by account payee cheque or bank draft and did not fall under the exceptions provided in Rule 6DD of the Income Tax Rules, 1962. Consequently, the AO disallowed the expenditure and added it to the total income of the assessee.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the AO's action. The assessee then appealed to the ITAT, arguing that the payments were made as per the requirements of the West Bengal Government under the Bengal Excise Act & Rules, which mandated cash deposits directly into the bank accounts of the authorized wholesaler agents.

The ITAT examined the provisions of Section 40A(3), which disallows deductions for expenditures exceeding ?20,000/- made otherwise than by account payee cheque or bank draft, except under prescribed circumstances. The assessee contended that the payments were made under business expediency and other relevant factors, satisfying the exceptions under Section 40A(3). The ITAT noted that the assessee was an authorized dealer of country liquor and had to maintain sufficient stock as prescribed by the Excise Department. The company did not accept account payee cheques due to clearance delays, necessitating cash deposits to avoid penalties for stock shortages.

The ITAT also referred to various judicial precedents, including:
- Attar Singh Gurmukh Singh vs ITO: The Supreme Court held that Section 40A(3) aims to counter tax evasion and is not absolute, allowing for business expediency considerations.
- CIT vs CPL Tannery and CIT vs Crescent Export Syndicate: The Calcutta High Court emphasized the genuineness of transactions and business expediency.
- Anupam Tele Services vs ITO: The Gujarat High Court allowed cash payments due to business exigencies.
- Sri Laxmi Satyanarayana Oil Mill vs CIT: The Andhra Pradesh High Court upheld cash payments due to seller insistence and business necessity.
- CIT vs Smt. Shelly Passi: The Punjab and Haryana High Court accepted cash payments deposited in the bank by the payee.

The ITAT concluded that the assessee's case met the exceptions under Section 40A(3) due to business expediency and the genuineness of transactions. The AO had verified the transactions with the companies, confirming no tax evasion. Therefore, the ITAT reversed the lower authorities' orders and allowed the assessee's appeal.

2. Consideration of Provisions under Sections 144 and 145:

The second issue raised by the assessee was the CIT(A)'s failure to properly consider the provisions of Sections 144 and 145 of the Income Tax Act. However, the ITAT's judgment primarily focused on the disallowance under Section 40A(3) and did not provide a detailed analysis of this issue. The favorable decision on the primary issue rendered this point moot.

Conclusion:

The ITAT allowed the assessee's appeal, reversing the disallowance under Section 40A(3) and confirming that the payments made in cash were justified under business expediency and other relevant factors. The decision highlighted the importance of genuine transactions and the practical difficulties faced by the assessee in complying with the prescribed payment methods.