2016 (9) TMI 1154 - AT - Income Tax

Addition u/s 40A(3) r.w.r 6DD - payment in a sum exceeding 20,000 rupees - depositing cash into the Bank Account of Supplier Asansol Bottling and Packaging Co. Pvt. Ltd. (Warehouse) against issue / purchasers of Country Spirit - Held that - The primary object of enacting section 40A(3) were two folds, firstly, putting a check on trading transactions with the object to evade the liability of 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) of the Act 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. 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 for cash payments exceeding ?20,000.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(3) of the Income Tax Act, 1961:

The primary issue in this appeal is the disallowance of ?76,24,680/- under Section 40A(3) of the Income Tax Act, 1961. The assessee made cash payments exceeding ?20,000 for the purchase of country spirit, which the Assessing Officer (AO) disallowed, adding the amount to the total income of the assessee.

Arguments by the Assessee:

The assessee argued that the payments were made to Asansol Bottling and Packaging Co. Pvt. Ltd. (ABPCPL), a company granted exclusive privilege by the State Government for the manufacture and supply of country spirit. The assessee contended that the payments were made in compliance with the West Bengal Excise (Supply of Country Spirit on Payment of Duty) Rules, 2005, which mandates cash payments for such transactions. The assessee further argued that ABPCPL acts as an agent of the State Government, and therefore, the payments should be considered as payments to the government, falling under the exceptions provided in Rule 6DD of the Income Tax Rules, 1962.

Arguments by the Revenue:

The Revenue, represented by the Departmental Representative, maintained that the payments made in cash violated the provisions of Section 40A(3) and did not fall under any exceptions provided in Rule 6DD. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the assessee failed to prove that the payments were compulsory in cash or that ABPCPL was an agent of the government.

Tribunal's Observations and Decision:

The Tribunal noted that the issue had been decided in favor of the assessee in similar cases, such as Prabir Kumar Mullick Vs. ITO, where the Co-ordinate Bench held that payments made in cash to government agents for statutory obligations should not be disallowed under Section 40A(3). The Tribunal referenced various judicial precedents, including:

- Attar Singh Gurmukh Singh vs ITO: The Supreme Court held that Section 40A(3) is not arbitrary and is intended to prevent tax evasion. Genuine transactions where cash payments are necessary should not be disallowed.
- CIT vs CPL Tannery: The Calcutta High Court held that genuine cash payments made due to business exigencies should not be disallowed.
- Anupam Tele Services vs ITO: The Gujarat High Court held that cash payments made due to business necessities and accepted by the principal company should not be disallowed.

The Tribunal concluded that the payments made by the assessee were genuine, made under compulsion due to statutory requirements, and directly deposited into the bank account of ABPCPL. Therefore, the disallowance under Section 40A(3) was not justified.

Conclusion:

The Tribunal reversed the orders of the lower authorities and allowed the appeal, holding that the disallowance of ?76,24,680/- under Section 40A(3) should be deleted. The appeal was decided in favor of the assessee, with the Tribunal emphasizing the genuineness of the transactions and the statutory compulsion to make cash payments. The order was pronounced in open court on 12/08/2016.