2018 (9) TMI 777 - AT - Income Tax

Disallowance of electricity payment paid to Jodhpur Vidyut Vitran Nigam Limited u/s 40A(3) - payment in cash exceeding specified limits - business expediency of making cash payments - Held that - The assessee has entered into an agreement with a Government Hospital in Bikaner whereby it operates the MRI and CT Scan machines. The nature of such activities therefore demand a continuous supply of electricity and the assessee cannot risk the life of the patients especially those admitted in emergency cases by not operating these machines for want of electricity. Thus there was business expediency of making cash payments so that there is no disruption in supply of electricity required to operate the MRI and CT scan machines. It is not in all cases that the payments have been made in cash, rather the assessee has made cheque payments as well during the year. Therefore, it is in only those cases where the cheque payments couldn t be arranged nearing the due date of payment that the payments have been made in cash. Therefore, being a case of genuine business transaction and test of business expediency been satisfied, no disallowance is called for by invoking the provisions of section 40A(3) of the Act. In the result, we hereby direct the deletion of disallowance so sustained by the ld CIT(A) - Decided in favour of assessee Disallowance of Freight & labour expenses and shop expenses - AO observed that expenses are not fully supported by bills vouchers - Held that - The nature of these expenses are such that pakka bill is not possible. The expenses are reasonable considering the turnover of ₹ 1,98,00,164/-. The AO has not pointed out any specific expense which is not supported by vouchers. The shop expenses pertain to tea, refreshment, etc. which is reasonable. Hence, lump sum disallowance out of these expenses is uncalled for & be deleted. We find merit in the contention so raised by the ld AR and the adhoc disallowance so sustained by the ld CIT(A) is hereby deleted. - decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of ?12,31,292/- out of electricity payment under Section 40A(3) of the IT Act.
2. Disallowance of ?15,000/- out of shop, freight, and labor expenses.

Detailed Analysis:

Issue 1: Disallowance of ?12,31,292/- out of Electricity Payment

Facts and Background:
The assessee made a cash payment of ?14,09,082/- towards electricity bills to Jodhpur Vidyut Vitran Nigam Limited (JDVVNL). The Assessing Officer (AO) disallowed this payment under Section 40A(3) of the IT Act, which restricts cash payments exceeding ?20,000/-. The AO's rationale was that JDVVNL is a private entity and payments to such companies do not fall under the exemptions provided in Rule 6DD of the IT Rules, 1962.

CIT(A) Findings:
The CIT(A) confirmed the disallowance but noted that only ?12,31,292/- was actually paid in cash, with the remaining amount shown as a liability. Thus, the disallowance was reduced to ?12,31,292/-.

Assessee's Argument:
The assessee argued that the payment was made on behalf of a Government hospital under a bona fide belief that JDVVNL was a government entity. The payments were made in cash due to business expediency to avoid late fees or disconnection of electricity, which is crucial for operating MRI and CT scan machines at the hospital.

Tribunal's Analysis:
The Tribunal acknowledged the business expediency and genuine nature of the transactions. It noted that the assessee had made payments via cheque as well, and cash payments were made only when cheques couldn't be arranged nearing the due date. The Tribunal referred to various judgments, including the Supreme Court's decision in Attar Singh Gurmukh Singh v. ITO, which held that genuine and bona fide transactions should not be disallowed under Section 40A(3) if made under business expediency.

Tribunal's Decision:
The Tribunal found the assessee's transactions genuine, made under business expediency, and free from any tax evasion intent. Therefore, it directed the deletion of the disallowance of ?12,31,292/- under Section 40A(3).

Issue 2: Disallowance of ?15,000/- out of Shop, Freight, and Labor Expenses

Facts and Background:
The assessee debited ?2,26,399/- towards freight and labor expenses and ?16,871/- towards shop expenses. The AO made a lump sum disallowance of ?30,000/- citing insufficient supporting bills and vouchers.

CIT(A) Findings:
The CIT(A) reduced the disallowance to ?15,000/-, acknowledging that the expenses were of a nature where "pakka" bills might not be possible but still found the AO's disallowance excessive and without a specific basis.

Assessee's Argument:
The assessee contended that all expenses were incurred for business purposes and were supported by vouchers. The nature of expenses, such as tea and refreshment, justified the absence of formal invoices. The AO did not identify any specific unsupported expense.

Tribunal's Analysis:
The Tribunal found merit in the assessee's arguments, emphasizing that the expenses were reasonable considering the turnover and the nature of the business. It noted that the AO had not pinpointed any specific unsupported expense.

Tribunal's Decision:
The Tribunal deleted the adhoc disallowance of ?15,000/- made by the CIT(A), thereby allowing the assessee's appeal on this ground.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the deletion of the disallowances under both grounds. The order was pronounced in the open Court on 04/09/2018.