2016 (9) TMI 1000 - AT - Income Tax

Disallowance u/s 40A(3) - Held that - In the present case, the following facts are not disputed. 1) The APPELLANT is a resident of CHAKDOLA village and he carries out his business of distribution of Kerosene Oil, from the said village, distributing the same to various M R shops in the region. 2) The said CHAKDOLA vii/age is located in a remote corner s of the District of Burdwan, nearest town being Jamuria s situated about 5 KM away , and the nearest bank located at Jamuria Town. 3) In the financial year 2005-06, there was no banking facility at Chakdola Village . Now in the year 2013, also there are no Banks at Chakdola Village. 4) Payments in CASH are made by the appellant for purchase of goods at Govt. fixed rates, at Chakdola village. 5) Kerosene Oil are transported in OIL TANKERS, to Chakdola Village, and stored in OIL DRUMS for further distribution, down the line, and tank are also paid by the appellant. 6) Even though the appellant has a bank Nc at Jamuria town , it is mostly inoperative, because it is practically not possible to pay by A/c payee cheques, because a single cheque will take 15 days time for clearance, and the entire chain of distribution will break down. Assessee would fall within clause (h) of Rule 6DD of the Rules and therefore no disallowance ought to have been made u/s.40A(3) of the Act. Though the Assessee made the above submissions before the CIT(A), the CIT(A) has not given any findings on the applicability of Rule 6DD(h) of the Rules. For the reasons given above, we hold that no disallowance u/s.40A(3) of the Act ought to have been made in the case of the Assessee as the case of the Assessee is covered by exceptions set out in Rule 6DD(h) of the Rules. The disallowance is directed to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Arbitrary and excessive order by CIT(A).
2. Disallowance of ?18,88,560/- under Section 40A(3) of the Income Tax Act.
3. Disallowance of ?13,050/- on account of tanker rent.

Issue-Wise Detailed Analysis:

1. Arbitrary and Excessive Order by CIT(A):
The first ground raised by the assessee was that the order passed by the CIT(A), Asansol was arbitrary and excessive. However, this ground was deemed to be general in nature and required no adjudication. Therefore, it was dismissed without further analysis.

2. Disallowance of ?18,88,560/- under Section 40A(3):
The primary issue in this appeal was the disallowance of ?18,88,560/- under Section 40A(3) of the Income Tax Act. The assessee, a firm engaged in the business of dealing in kerosene oil, made cash payments exceeding ?20,000/- to its distributors. The Assessing Officer (AO) found that these payments violated Section 40A(3) and disallowed 20% of the total cash payments amounting to ?94,42,806/-, resulting in an addition of ?18,88,560/- to the assessee's income.

The assessee argued that these payments were covered by exceptions under Rule 6DD of the Income Tax Rules, 1962. Specifically, the payments were made in a village (Chakdola) not served by any bank, and the payments were mandated to be in cash by the government authorities under the Essential Commodities Act, 1955. The CIT(A) considered these submissions but upheld the AO's disallowance, stating that the appellant did not meet the requirements of Rule 6DD and that the payments were not made to the government but to M.R. Dealers.

Upon appeal to the Tribunal, it was noted that the assessee's village, Chakdola, did not have banking facilities and that the payments were made as per government directives. The Tribunal referred to the case of "Sri Basudev Seth v. ITO," where similar circumstances were considered, and it was held that Section 40A(3) was not applicable due to the lack of banking facilities. The Tribunal concluded that the assessee's case fell within the exception provided in Rule 6DD(h) and directed the deletion of the disallowance.

3. Disallowance of ?13,050/- on Account of Tanker Rent:
The third ground pertained to the disallowance of ?13,050/- on account of tanker rent. However, during the hearing, the assessee's representative did not press this ground. Consequently, it was dismissed without further consideration.

Conclusion:
The Tribunal allowed the appeal of the assessee on the ground related to the disallowance under Section 40A(3), holding that the payments were covered by the exception in Rule 6DD(h) due to the lack of banking facilities in the village where the payments were made. The other grounds were either dismissed or not pressed by the assessee. The disallowance of ?18,88,560/- was directed to be deleted, and the appeal was allowed in favor of the assessee.