2017 (2) TMI 74 - AT - Income Tax

Disallowance made by AO u/s.40A(3) - necessity of business exigencies - Held that - The payments in cash were necessitated due to business exigencies, to enable regular supplies from these vendors. The peculiarities of the business are such that certain brands are in greater demand as compared to others. To ensure regular supply of these high demand items, it is necessary that payments are made across the table to these parties and enable timely supply of stock of such items. The detailed submissions in respect of the necessity to make these payments were explained to the learned AO in the course of assessment proceedings and the same have been reproduced by the learned AO in his order. The transactions entered into by the assessee were also confirmed by the vendors respectively, as also by their respective AOs in the course of proceedings under section 133 (6) of the Act. Therefore, the bonafide nature of the transaction is already established by account confirmations from the respective parties. I also found that all these payments were made on Saturday and Sunday when the banks were closed. Merely because entry in the books were shown in the next date, fact of payment having been made on Saturday and Sunday when the banks remain closed, cannot be denied. The Allahabad High Court in the case of CIT vs Raja Pal Automobiles (2009 (6) TMI 565 - ALLAHABAD HIGH COURT) had held that in case the nature of business, which indicates that it cannot be done solely by crossed cheque or bank draft and the payment is proven from bills and cash memos, exceptional circumstances could be inferred, when it could be entertained under the Rules, where it is genuine and the payee is identified. The assessee has declared more than 10% of net profit of its gross turn over, therefore, there is no justification for coming to the conclusion that by purchasing in cash, assessee has earned extra profit. In view of the peculiarity of the business and the genuineness of the payments, as decided by various judicial authorities, the additions under Section 40A(3) of the Act, is directed to be deleted. - Decided n favour of assessee

Summary

Issues:
- Appeal against disallowance under Section 40A(3)
- Condonation of delay in filing appeal

Analysis:
1. Condonation of Delay: The appeal was filed 5 days late, but the delay was condoned in the interest of substantial justice after considering the facts and circumstances presented by the assessee for condonation of delay.

2. Disallowance under Section 40A(3): The assessee, a retail dealer in wines, faced disallowance under Section 40A(3) for cash payments made to vendors M/s Pinku Traders and M/s Kalani Marketing. The AO disallowed the payments, which were confirmed by the CIT(A). However, the ITAT found that the cash payments were necessitated by business exigencies to ensure regular supplies of high-demand items. The genuineness of the transactions was established through vendor confirmations and explanations provided to the AO during assessment proceedings.

3. Legal Precedents: The ITAT referred to various judicial decisions to support its findings. It cited cases such as CIT vs Raja Pal Automobiles, err vs Chaudhary & Co, George & Sons vs. ACIT, and others to emphasize that Section 40A(3) is not absolute and exceptions can be made in genuine cases where cash payments are justified by business requirements.

4. Business Peculiarities: The ITAT noted that the nature of the assessee's business, involving retail sales of wines, necessitated cash payments to certain vendors for timely supplies. The fact that payments were made on weekends when banks were closed further supported the genuineness of the transactions.

5. Profit Justification: The ITAT observed that the assessee had declared more than 10% of net profit of its gross turnover, indicating that there was no unjustified extra profit earned through the cash purchases. Therefore, the disallowance under Section 40A(3) was directed to be deleted, and the appeal of the assessee was allowed.

This judgment highlights the importance of considering business exigencies and practicalities while interpreting tax provisions like Section 40A(3) and emphasizes the need for assessing officers to take into account the specific circumstances of each case before making disallowances.