2020 (1) TMI 683 - AT - Income Tax

Disallowances u/s 40A(3) - payment in cash exceeding prescribed threshold - HELD THAT - Three cheque payments amounting to ₹ 21 lacs out of total disallowance of ₹ 2.38 crores are clearly outside the scope of section 40A(3) as the same have been transferred to respective payee s account as reflected in the bank statements and the addition so made is directed to be deleted. In respect of other payments we find that the identity of the persons from whom the purchases have been made has been established and the source of cash payments is clearly identifiable in form of the withdrawals from the assessee's bank accounts and the said details were submitted before the lower authorities and have not been disputed by them. It is not the case of the Revenue either that unaccounted or undisclosed income of the assessee has been utilised in making the cash payments. The genuineness of the transaction has been established as purchase of construction material for road construction and lastly, the test of business expediency has been met as it is the admitted position that the mining activities had been banned in the State of Haryana and the assessee had no other option but to buy construction material from State of Rajasthan where the suppliers and stone crushing units had insisted on cash payments at the time of delivery of material. Further, as held by the Hon'ble Rajasthan High Court in case of Smt. Harshila Chordia 2006 (11) TMI 117 - RAJASTHAN HIGH COURT the consequences, which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration for which section 40A(3) has been brought on the statute books and which has been satisfied in the instant case. Addition u/s 68 - addition for the reason that the creditworthiness of creditors have not been established and hence, he has confirmed the additions so made by the AO - HELD THAT - We find that these three persons have appeared before the Assessing officer and have confirmed the transaction of advancing the money to the assessee and during the appellate proceedings, their confirmations along with PAN details have also been filed. The transactions have happened through the banking channel and in support of creditworthiness, agricultural land ownerships records and the bank accounts reflect regular transactions of deposits and withdrawals have been submitted, the assessee has thus discharged the initial onus cast on it and in absence of any contrary findings and any material on record by the Revenue, no addition is called for by invoking provisions of section 68. In the result, the addition so made is directed to be deleted and ground of appeal is allowed.

Summary

Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act, 1961.
2. Addition under Section 68 of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Disallowance under Section 40A(3)
The assessee, engaged in civil construction, was subject to an addition of ?2,38,67,250/- for making cash payments exceeding the prescribed threshold, violating Section 40A(3) of the Income Tax Act. The Assessing Officer (AO) issued a show cause notice, and the assessee argued that the payments were made in rural areas lacking banking facilities, and suppliers insisted on cash payments due to the mining ban in Haryana. The AO rejected the explanation, noting that some payments were made via RTGS and that the cheques issued were self-cheques, not account payee cheques. The AO concluded that the assessee's case did not fall under Rule 6DD exceptions.

The assessee appealed to the CIT(A), presenting additional evidence from Gram Panchayat Sarpanchs certifying the lack of banking facilities. The AO's remand report confirmed the absence of banks within the Gram Panchayats but noted nearby banking facilities within 2-3 kilometers. The CIT(A) upheld the AO's decision, stating that the proximity of banking facilities negated the assessee's argument.

Upon further appeal, the ITAT considered the intent behind Section 40A(3), emphasizing the need to curb black money while recognizing business expediency and genuine hardship. The ITAT noted the AO's acceptance of the lack of banking facilities within the Gram Panchayats and ruled that the payments fell under the Rule 6DD(g) exception. The ITAT also referenced various judicial precedents supporting the assessee's position, including the Supreme Court's decision in Attar Singh Gurmukh Singh v. ITO and the Punjab and Haryana High Court's decision in Gurdas Garg v. CIT. The ITAT concluded that the payments were genuine, made out of business necessity, and directed the deletion of the disallowance.

Issue 2: Addition under Section 68
The assessee contested the addition of ?18,00,000/- under Section 68, arguing that the creditors had appeared before the AO and confirmed the loans through cheque payments. The CIT(A) sustained the addition, citing insufficient evidence of the creditors' creditworthiness.

The ITAT reviewed the evidence, including the creditors' confirmations, PAN details, ownership of agricultural land, and bank statements showing regular transactions. The ITAT found that the assessee had discharged the initial onus of proving the creditworthiness and genuineness of the transactions. In the absence of contrary findings or evidence from the Revenue, the ITAT ruled that the addition under Section 68 was unwarranted and directed its deletion.

Conclusion:
The ITAT allowed the appeal, deleting the disallowance under Section 40A(3) and the addition under Section 68, emphasizing the importance of genuine transactions, business expediency, and the assessee's compliance with procedural requirements.