2017 (2) TMI 400 - AT - Income Tax

Disallowance made u/s 40A(3) - Held that - Assessee s case falls under the exceptions provided in Rule 6DD(b) and (k) of the Rules and accordingly, no disallowance u/s 40A(3) of the Act could be made in the facts and circumstances of the case to the tune of ₹ 29,73,086/-. Accordingly, the ground raised in this regard is allowed. However, with regard to another cash payment to the tune of ₹ 3,48,392/- made to M/s United Spirits Ltd towards purchase of beer, as fairly conceded by the ld AR , the same is in violation of section 40A(3) of the Act and hence the ground raised in this regard is dismissed.

Summary

Issues Involved:
1. Justification of disallowance under Section 40A(3) of the Income Tax Act.
2. Applicability of Rule 6DD exceptions to cash payments made to wholesale licensees and other suppliers.

Issue 1: Justification of Disallowance under Section 40A(3)
The primary issue in this appeal is whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in upholding the disallowance made under Section 40A(3) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed cash payments exceeding ?20,000 made by the assessee to the bank account of its supplier, M/s Asansol Bottling and Packaging Co. Pvt. Ltd., amounting to ?29,73,086. Additionally, cash payments of ?3,48,392 to M/s United Spirits Ltd for the purchase of beer were also disallowed.

Issue 2: Applicability of Rule 6DD Exceptions
The assessee argued that the cash payments made to the bank account of M/s Asansol Bottling and Packaging Co. Pvt. Ltd. should not be disallowed under Section 40A(3) due to the exemptions provided under Rule 6DD(a)(ii) and Rule 6DD(b) of the Income Tax Rules. The assessee contended that these payments were made as per the revised procedure mandated by the Excise Department of the Government of West Bengal, which required retail vendors to make payments directly to the wholesale licensee's bank account. The CIT(A) rejected this argument, stating that the case did not fall under the exceptions provided in Rule 6DD.

Detailed Analysis:

1. Justification of Disallowance under Section 40A(3):
The AO disallowed the cash payments made by the assessee on the grounds that they violated Section 40A(3) of the Income Tax Act, which prohibits cash payments exceeding ?20,000. The CIT(A) upheld this disallowance, leading to the appeal before the Income Tax Appellate Tribunal (ITAT).

2. Applicability of Rule 6DD Exceptions:
The ITAT examined the arguments and evidence presented by the assessee, including the notification from the Excise Department dated 29.08.2005, which mandated that retail vendors make payments directly to the bank account of the wholesale licensee. The ITAT referred to the decision of the Co-ordinate Bench in the assessee's own case for earlier assessment years, where it was held that such payments fall under the exceptions provided in Rule 6DD(b) and Rule 6DD(k) of the Income Tax Rules.

The ITAT noted that M/s Asansol Bottling and Packaging Co. Pvt. Ltd. operates as a wholesale licensee under the direct control and authority of the State Excise Commissioner, making it a State Government establishment. Therefore, payments made to this entity could be construed as payments made to the Government, falling under the exception provided in Rule 6DD(b). Additionally, since the wholesale licensee acted as an agent of the State Government, the payments also fell under the exception provided in Rule 6DD(k).

Conclusion:
The ITAT concluded that the assessee's case falls under the exceptions provided in Rule 6DD(b) and Rule 6DD(k) of the Income Tax Rules. Therefore, the disallowance of ?29,73,086 under Section 40A(3) was deleted. However, the cash payment of ?3,48,392 made to M/s United Spirits Ltd was upheld as it violated Section 40A(3).

Judgment:
The appeal of the assessee was partly allowed. The disallowance of ?29,73,086 was deleted, while the disallowance of ?3,48,392 was confirmed.

Order Pronounced:
The order was pronounced in the open court on 18.11.2016.