2016 (12) TMI 1240 - AT - Income Tax

Disallowance u/s 40A(3) - splitting the payments in excess of ₹ 20,000 - expenditure paid in cash - Held that - We are of the considered view that not only a bare perusal of the circular No. 1 of 2009, dt. 27th March, 2009 reveals that the same is an explanatory note as regards extension of the rigors of Sec. 40A(3) even to the cases where there is an attempt on the part of an assessee to circumvent the said statutory provision by splitting the payments in excess of ₹ 20,000/-(supra), into several cash payments, each below ₹ 20,000/-, and the interpretation arrived at by the Ld. A.R by digressing from the issue addressed by the aforesaid circular and rather divorcing certain terms from the text and reading the same in isolation, cannot be accepted. We are of the considered view that the interpretation pressed into service by the Ld. A.R to support his contention that genuine transactions would not fall within the gamut of Sec. 40A(3) not only fails for the aforesaid fallacious methodology of interpretation so adopted, but rather a perusal of the judgment of the Hon‟ble Supreme Court in the case of Attar Singh Gurmukh Singh (1991 (8) TMI 5 - SUPREME Court ) interpreting the scope of Sec. 40A(3), had held - Genuine and bona fide transactions are not taken out of the sweep of the section. , therefore the aforesaid contention of the assessee would thus fail on the said count too. Thus in light of our aforesaid observations, the ground no.1 of the appeal is dismissed and the order of the CIT(A) to the extent sustaining the addition/disallowance of ₹ 13,11,455/- is upheld. - Decided against assessee Disallowance of loss on sale of fenders - Held that - In the present case, now when the assessee had reflected the fenders as a capital asset in its books of accounts , but however had claimed that the same were purchased as a tradable commodity in the normal course of its business of supplier of stores to ships, therefore a very heavy onus was cast on the assessee to irrebutably substantiate his contention, all the more when the said claim was found to be in absolute contradiction of the facts as emerged from its books of accounts , and therein prove that the fenders were purchased as a tradable commodity in the course of its normal business as that of supplier of stores and were to be supplied pursuant to an order placed upon it by a customer, but by way of an inadvertent mistake had been reflected as a capital asset in the Books of account . We however find that the assessee except for repeatedly raising an unsubstantiated claim had however absolutely failed to place on record any material which could go to fortify its contention. The assessee had neither before the lower authorities, nor before us, placed on record copy of any such order or correspondence pertaining to placement of any such order for supply of fenders by the customer. Thus the state of affairs prevailing in the case do not inspire much confidence, as a result whereof we are unable to subscribe to the hollow claim so raised by the assessee.Thus we are of the considered view that the regular and systematic purchase of fenders by the assessee in itself goes to dislodge the claim of the assessee that the same were purchased in the course of its normal business and were to be supplied pursuant to orders placed upon it by a customer. - Decided against assessee

Summary

Issues involved:
1. Disallowance under section 40A(3) of the Income Tax Act, 1961.
2. Disallowance of loss on sale of fenders.

Detailed Analysis:

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

The assessee firm, engaged in the business of supplying stores to ships, filed its return of income for AY 2009-10. The A.O. disallowed ?13,11,455/- under section 40A(3) for cash payments exceeding ?20,000/-. The CIT(A) upheld this disallowance. The assessee contended that the payments were made in cash due to business exigencies and lack of RTGS/NEFT facilities at the time, arguing that the genuineness of the transactions and the identity of the suppliers were not in doubt. The assessee relied on several judgments and a CBDT Circular to support its claim.

The Tribunal, after considering the arguments, held that section 40A(3) is an overriding and mandatory provision, and the only exceptions are those specified in Rule 6DD. The assessee failed to demonstrate that its case fell under these exceptions. The Tribunal noted that the pre-amended provisions of Rule 6DD(j), which allowed for exceptions due to business exigencies, were omitted from the statute effective from AY 1996-97. Consequently, the Tribunal dismissed the assessee's reliance on the cited judgments and the CBDT Circular, which were based on the pre-amended provisions. The Tribunal upheld the CIT(A)'s order, sustaining the disallowance of ?13,11,455/- under section 40A(3).

Issue 2: Disallowance of loss on sale of fenders

The assessee claimed a loss of ?14,74,982/- on the sale of fenders, which were purchased in FY 2007-08 and reflected as fixed assets in the balance sheet. The A.O. disallowed this loss, treating it as a capital loss, and the CIT(A) upheld this view. The assessee argued that the fenders were purchased in the normal course of business and inadvertently reflected as fixed assets. The assessee claimed that the fenders were rented out due to failed delivery to a customer and subsequently sold.

The Tribunal found that the assessee failed to substantiate its claim with any documentary evidence, such as an order or correspondence from a customer. The Tribunal noted that the systematic and regular purchase of fenders over a period of three months and their immediate rental indicated a predetermined intent to commercially exploit the fenders. The Tribunal concluded that the fenders were not purchased for trading but for rental income, disallowing the claimed business loss. The Tribunal dismissed the assessee's reliance on the judgment in Universal Plast Ltd. vs. CIT, as it was not relevant to the issue at hand.

Conclusion:

The Tribunal dismissed the appeal, upholding the CIT(A)'s orders on both issues. The disallowance of ?13,11,455/- under section 40A(3) and the disallowance of ?14,74,982/- pertaining to the loss on sale of fenders were sustained.