2016 (10) TMI 845 - AT - Income Tax

Addition u/s 40A(3) - making expenditure in cash - Held that - The payment made by the assessee retail vendor to the Principal, Government of West Bengal through its wholesale agent. The relationship between the assessee (authorized retailer) and Government of West Bengal (the supplier) acting under West Bengal Excise Rules through its Authorised Wholesaler Licensee (Agent), both defacto and dejure, is one of Principal and Agent . We hold that the assessee retail vendor had made payment to the said agent (wholesale licensee) would fall under the exception provided in Rule 6DD(k) of the Rules - Decided in favour of assessee

Summary

Issues: Disallowance under section 40A(3) of the Income Tax Act, 1961

Detailed Analysis:

Issue 1: Disallowance under section 40A(3)
The appeal was against the disallowance of ?56,76,743 made by the Assessing Officer and confirmed by the ld. CIT(Appeals) under section 40A(3) of the Income Tax Act, 1961. The assessee, a partnership firm engaged in trading, had made purchases from a specific company and deposited cash exceeding ?20,000 directly into the supplier's bank account. The Assessing Officer contended that these payments violated section 40A(3) as the assessee failed to provide exceptional circumstances as per Rule 6DD of the Income Tax Rules, 1962. The ld. CIT(Appeals) upheld this disallowance citing the absence of proof of compulsion to pay in cash and failure to establish applicability of Rule 6DD sub-rules.

Issue 2: Application of precedents
In a similar case, M/s. Amrai Pachwai & C.S. Shop, the Tribunal had deleted a disallowance under section 40A(3) for cash payments exceeding ?20,000 to the same supplier. The Tribunal analyzed the nature of the supplier, Asansol Bottling & Packaging Co. Pvt. Ltd., as a warehouse established under State Excise Rules, controlled by the State Excise Commissioner, and acting as a State Government establishment. The Tribunal found that the cash payments by the assessee to the supplier were in compliance with Rule 6(2) of the Excise Rules 2005, thus falling under the exception provided in Rule 6DD(b) of the IT Rules. Additionally, the Tribunal determined that the wholesale licensee, the supplier, acted as an agent of the State Government, justifying the cash payments under Rule 6DD(k) of the IT Rules.

Conclusion
Given the similarity of facts between the present appeal and the precedent case, M/s. Amrai Pachwai & C.S. Shop, the Tribunal ruled in favor of the assessee, following the decision of the Coordinate Bench. Consequently, the disallowance under section 40A(3) made by the Assessing Officer and upheld by the ld. CIT(Appeals) was deleted, and the appeal of the assessee was allowed.