2018 (6) TMI 1273 - AT - Income Tax

Disallowance u/s.40A(3) - cash payment against purchase of old gold ornaments under auction - As per the assessee, identity of the person to whom he had made the payments were established and genuineness of the purchases were not doubted. - Held that - No doubt if an assessee is able to demonstrate a situation which compelled it to make payments in cash, then application of Section 40A(3) of the Act might be excused. However as mentioned by us, assessee before us has been unable to demonstrate any such situation, which could convince us to exempt him from application of rigours of Section 40A(3) of the Act. We therefore do not find any reason to interfere with the orders of the lower authorities. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act, 1961.
2. Applicability of Rule 6DD of the Income Tax Rules, 1962.
3. Business expediency and its impact on cash payments.

Detailed Analysis:

1. Disallowance under Section 40A(3) of the Income Tax Act, 1961:
The assessee filed an appeal against the order of the Commissioner of Income Tax (Appeals)-10, Chennai, concerning a disallowance of ?34,68,15,452/- made under Section 40A(3) of the Income Tax Act, 1961. The assessee, a commission agent, claimed to have participated in auctions of unredeemed old gold ornaments conducted by M/s. Manappuram Finance Limited. The assessee's revised return showed sales/gross receipts of ?34,74,81,586/- and corresponding purchases of ?34,68,15,452/-. The Assessing Officer questioned the large volume of purchases given the limited capital of ?22,67,797/- in the business. The assessee explained that he was part of a syndicate and collected money from prospective purchasers to make payments for successful bids. However, the Assessing Officer applied Section 40A(3) as the payments exceeded ?20,000/- in cash, leading to the disallowance.

2. Applicability of Rule 6DD of the Income Tax Rules, 1962:
The assessee argued that the payments made in cash were justified under Rule 6DD of the Income Tax Rules, 1962. Rule 6DD lists specific circumstances under which cash payments exceeding ?20,000/- are permissible. The assessee contended that the payments were made under business expediency, as he was a new customer to M/s. Manappuram Finance Limited, which insisted on cash dealings. The Assessing Officer, however, found that the payments did not fall under any of the clauses of Rule 6DD and thus upheld the disallowance.

3. Business Expediency and its Impact on Cash Payments:
The assessee further argued that the payments in cash were made due to compelling business circumstances, such as the immediate requirement to deposit part of the auctioned amount. The assessee cited various judicial precedents to support the claim that genuine transactions should not attract disallowance under Section 40A(3). However, the Commissioner of Income Tax (Appeals) rejected these arguments, stating that the genuineness of the payments was not a factor for consideration under Section 40A(3). The Commissioner emphasized that the assessee failed to demonstrate how the payments fell within the exceptions of Rule 6DD, and hence confirmed the disallowance.

Tribunal's Findings:
The Tribunal examined the rival contentions and the orders of the lower authorities. It was undisputed that the assessee made cash payments exceeding the threshold limit of ?20,000/-. The Tribunal noted that the assessee could not demonstrate that the auction terms required cash payments or that there were unavoidable circumstances necessitating such payments. The Tribunal also found no evidence of an agreement with syndicate members or any condition imposed by M/s. Manappuram Finance Limited mandating cash payments. The Tribunal referred to various cases cited by the assessee but found them factually different from the present case. The Tribunal concluded that the assessee failed to establish any compelling situation justifying cash payments and upheld the disallowance under Section 40A(3).

Conclusion:
The appeal of the assessee was dismissed, and the disallowance made by the Assessing Officer under Section 40A(3) was confirmed. The Tribunal emphasized the importance of adhering to the provisions of Section 40A(3) and Rule 6DD, and the necessity for the assessee to demonstrate any exceptional circumstances warranting cash payments.