2020 (2) TMI 775 - AT - Income Tax

Disallowance u/s 40A(3) - cash payment made for purchase of land to farmers situated in rural area exceeding the prescribed threshold - HELD THAT - In the instant case, where the assessee decided to pay token money to the sellers who are rural agriculturist to make them agree to sell their land, it is clearly a business decision taken by the assessee and the test of business expediency has been established. As held by the Hon ble Supreme Court in case of Attar Singh Gurmukh Singh 1991 (8) TMI 5 - SUPREME COURT that the terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bonafide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. As held 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 object for which the provisions have been enacted. Therefore the genuineness of the transaction 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 - no disallowance is called under section 40A(3) of the Act and the same is directed to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of cash payment for the purchase of land under Section 40A(3) of the Income Tax Act.
2. Applicability of Rule 6DD exceptions to the disallowance under Section 40A(3).

Detailed Analysis:

1. Disallowance of Cash Payment for Purchase of Land under Section 40A(3):
The primary issue revolves around the disallowance of ?22,00,000/- cash payment made by the assessee for the purchase of land, invoking Section 40A(3) of the Income Tax Act, which mandates that any payment exceeding ?20,000/- must be made through an account payee cheque or bank draft to be eligible for deduction. The Assessing Officer (AO) disallowed the expenditure, stating that the assessee failed to comply with this provision and did not fall within any exceptions under Rule 6DD of the IT Rules.

The assessee contended that the payments were made to agriculturists who insisted on cash due to lack of trust and banking familiarity, and the transactions were genuine, as evidenced by registered sale deeds. The assessee argued that business expediency justified the cash payments to secure the land deals.

2. Applicability of Rule 6DD Exceptions:
The assessee argued that the transactions should be considered under the exceptions provided by Rule 6DD, which allows for cash payments in specific circumstances. The assessee cited business expediency and the insistence of the sellers on cash payments as valid reasons. The AO and CIT(A) rejected this argument, stating that the assessee did not prove that banking facilities were unavailable or that the sellers insisted on cash payments under pressing circumstances.

The Tribunal examined the provisions of Section 40A(3) and Rule 6DD, along with relevant judicial precedents. It referred to the Supreme Court's decision in Attar Singh Gurmukh Singh, which emphasized that Section 40A(3) should not restrict genuine business activities and that considerations of business expediency and other relevant factors are not excluded. The Tribunal also considered various High Court decisions, including the Rajasthan High Court's ruling in Smt. Harshila Chordia, which highlighted that the genuineness of transactions and the absence of tax evasion are crucial factors.

The Tribunal noted that the assessee had established the identity of the sellers, the genuineness of the transactions, and the business necessity for cash payments. The Tribunal found that the payments were made from disclosed bank withdrawals, and there was no evidence of unaccounted money usage. The Tribunal concluded that the business expediency justified the cash payments and that the transactions were genuine and free from tax evasion motives.

Conclusion:
The Tribunal allowed the appeal, directing the deletion of the disallowance under Section 40A(3), as the assessee had demonstrated business expediency, genuine transactions, and compliance with the intent of the law to prevent tax evasion. The Tribunal emphasized that the provisions of Section 40A(3) are not absolute and should accommodate genuine business needs and practical difficulties.