2017 (11) TMI 520 - HC - Income Tax

Addition on account of cash payment being made for an expenditure in violation of Section 40A (3) for purchasing stock in trade by the assessee - Held that - As decided in PACL India Ltd 2010 (3) TMI 1118 - ITAT JAIPUR the second proviso to s. 40A(3) refers to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors, which means that the object of the legislature is not to make disallowance of such cash payments which have to be compulsorily made by the assessee in view of absence of banking facilities at the place of payment. In the present case, even if it assumed that the payment was made at the District headquarter, the admitted position is that the sellers did not have any bank accounts at such town and they did not reside or carry on any business or farming activity at such town. It would be too much to expect that the appellant-company would be able to compel the villagers to open bank accounts at the town which ultimately they will not be able to operate as they do not reside at such town. If such a myopic view is taken regarding the interpretation of r.6DD(h), the very object of the legislature would be frustrated. There is no dispute regarding the identity of the payees and the genuineness of the land transactions in respect of which payments have been made. It is notable that r.6DD(k) provides an exception in respect of cash payment which is made on a day on which the banks were closed. This proves that the object of the legislature is to provide exception in respect of such payment which is required to be made in cash or absence of banking facilities. Rule 6DD(h) must be interpreted keeping in view this object and purpose. Therefore, the cash payments recovered under section proviso to s. 40A(3) and r.6DD(h). The AO is directed to delete the addition - Decided in favour of assessee.

Summary

Issues Involved:
1. Justification of the Tribunal in deleting the addition of ?1,89,21,509/- and ?53,85,000/- under Section 40A(3) for cash payments made for purchasing stock-in-trade.
2. Applicability of Section 40A(3) on expenditure for stock-in-trade, specifically land, in light of the Supreme Court's judgment in Attar Singh Gurmukh Singh vs. ITO.

Detailed Analysis:

Issue 1: Justification of the Tribunal in Deleting the Addition
The appellant challenged the Tribunal's decision to delete the addition of ?1,89,21,509/- and ?53,85,000/- under Section 40A(3) of the Income Tax Act, which was confirmed by the CIT(A). The Tribunal held that no disallowance could be made under Section 40A(3) as the assessee had not claimed any expenditure in the Profit & Loss account for the year under consideration. The Tribunal emphasized that the land purchase was shown in the stock-in-trade and not as an expenditure. The Tribunal also noted that the assessee had shown the land on the asset side and advances received on the liability side, indicating no trading activity during the year. Therefore, the provisions of Section 40A(3) were not applicable as no expenditure was claimed.

Issue 2: Applicability of Section 40A(3) on Expenditure for Stock-in-Trade
The Tribunal examined the applicability of Section 40A(3), which disallows deductions for cash payments exceeding ?20,000/-. The Tribunal clarified that the section applies only when expenditure is claimed. Since the assessee did not claim any expenditure for the purchase of land, the section was not applicable. The Tribunal further supported its decision by referring to various case laws, including the Hon'ble Supreme Court's ruling in Attar Singh Gurmukh Singh vs. ITO, which stated that the value of stock-in-trade must be considered while determining gross profits under Section 28 on commercial accounting principles. However, this principle was not applicable as the assessee had not claimed any expenditure.

Additional Considerations:
The Tribunal also addressed the assessee's alternate contention that payments were made to farmers in villages without banking facilities. The Tribunal agreed that provisions of Section 40A(3) could not be applied to payments made in villages lacking banking facilities, except for payments made to three parties residing in Jaipur. The Tribunal cited multiple precedents supporting this view, including the decisions in M/s Rishabhdev Township & Developers P. Ltd., PACL India Ltd., and others, which upheld that genuine transactions made in cash in areas without banking facilities should not be disallowed under Section 40A(3).

Conclusion:
The High Court upheld the Tribunal's decision, concluding that the assessee had not claimed any expenditure, and therefore, Section 40A(3) was not applicable. The Court also recognized the genuineness of the transactions and the practical difficulties faced by the assessee in making payments in cash in villages without banking facilities. Consequently, the appeal was dismissed, and the issue was decided in favor of the assessee.