2018 (6) TMI 404 - AT - Income Tax

Disallowance u/s. 40A(3) - making payments in cash against purchase of liquor for sale at the firm s allotted vends - commercial expediency - arguments of non practicality to make the payment through the banking channel on the basis of the dealership being temporary in nature in-as-much as the licence for the trade was issued to the appellant-firm only for a year, and that, as stated, not making the payment in cash would have caused unnecessary delay and additional financial burden. Held that - We cannot help wondering as to how in the days of electronic payments could discount be insisted upon for payment only in cash, which is both risky and time consuming. A nominal advance of the payment being made, per cheque, equal to the payment to be made on a single day, avowedly not exceeding ₹ 20,000/-, would imply that payment to that extent stands received, which could then be repeated each day, entitling thus the purchaser to the discount on its daily purchase. The argument is devoid of business rationale and sense, as is the plea of the cash payments being made before the banking hours, i.e., opening of the bank (in the morning). Why, the assessee has also pleaded absence of bank account at Bathinda as among the reasons, which is plainly frivolous in-as-much as it is the assessee, operating as many as 5 vends thereat, who has to open a bank account; having already a bank account with Punjab & Sind Bank at Muktsar - the location of the sixth vend. We, therefore, are hardly impressed with the said pleas, besides finding them irrelevant. We find some merit in the assessee s claim of each vend being managed separately, i.e., by one (or more) partner/s, with each vend maintaining separate accounts. If, therefore, each vend is maintaining separate books of account, having thus a separate account with the supplier, liable for payments thereto, i.e., against purchases made by it, and there is no interlacing of management, including purchase and sale; we discern a valid justification for not clubbing the payments made by each vend to the common supplier/s. This is as excise rules would be applicable vend-wise; each responsible for maintaining its stock, as well as the stock record - we find substantial basis for reckoning the payments for the purposes of u/s. 40A(3)/(3A) separately for each vend. Needless to add, this consideration would have no application where there is transfer of cash, stock, etc. from one vend to another, in which case there is a common link/management, including of cash, with the payments to the supplier being therefore monitored at the group level The matter, in view of the foregoing, is accordingly restored to the file of the Assessing Officer for factual verification and adjudication on the basis of the factual findings in light of our observations aforesaid - Decided partly in favour of revenue

Summary

Issues Involved:
1. Maintainability of disallowance under section 40A(3) read with section 40A(3A) of the Income Tax Act, 1961.
2. Applicability of Rule 6DD of the Income Tax Rules, 1962.
3. Genuineness and business expediency of cash payments.
4. Separate maintenance of accounts by different vends.
5. Impact of the jurisdictional High Court’s decision in Gurdas Garg v. CIT.

Issue-wise Detailed Analysis:

1. Maintainability of Disallowance under Section 40A(3)/(3A):
The core issue in the appeal was the legality of the disallowance under section 40A(3) read with section 40A(3A) of the Income Tax Act, 1961. The appellant firm had made substantial cash payments exceeding ?20,000 to suppliers, which were disallowed by the Assessing Officer (AO) in the reassessment. The AO's decision was based on the violation of the stipulated provisions that regulate cash payments to curb tax evasion.

2. Applicability of Rule 6DD:
The appellant argued that the disallowance was not applicable as the transactions were genuine and made out of business expediency. However, Rule 6DD, which lists exceptions to section 40A(3), does not include "genuineness or business expediency" as valid reasons for making cash payments. The Tribunal noted that the first proviso to section 40A(3A) clearly states that the exceptions are as prescribed under Rule 6DD, which does not account for the genuineness of the transaction or business expediency.

3. Genuineness and Business Expediency of Cash Payments:
The appellant firm contended that the cash payments were genuine and made due to business exigencies, such as avoiding delays and additional financial burdens. The Tribunal, however, emphasized that the genuineness of the expenditure is not a relevant consideration under section 40A(3)/(3A). The provision is intended to regulate the mode of payment, not to assess the genuineness of the expenditure, which should be evaluated under other sections like section 37(1).

4. Separate Maintenance of Accounts by Different Vends:
The appellant firm operated multiple vends, each maintaining separate accounts as required by excise regulations. The Tribunal acknowledged that if each vend maintained independent accounts and was responsible for its payments, then the cash payments should be considered separately for each vend. This separate accounting could justify not clubbing the payments for the purposes of section 40A(3)/(3A).

5. Impact of the Jurisdictional High Court’s Decision in Gurdas Garg v. CIT:
The CIT(A) had relied on the jurisdictional High Court's decision in Gurdas Garg v. CIT, which was later recalled. The Tribunal clarified that the recalled decision could not be relied upon. The Tribunal further noted that the exceptions under Rule 6DD are exhaustive and do not include considerations of genuineness or business expediency, as emphasized in the recalled decision.

Conclusion:
The Tribunal remanded the matter back to the AO for factual verification and adjudication based on its observations. The AO was instructed to verify if each vend maintained separate accounts and made independent payments. The onus was on the assessee to prove its claims. The appeal was partly allowed, with the Tribunal directing the AO to reassess the disallowance considering the separate accounting by each vend.