2020 (3) TMI 873 - AT - Income Tax

Revision u/s 263 - Addition u/s 40A(3) - HELD THAT - We modify the impugned order of Pr. CIT and direct the AO to follow the propositions of law laid down by the Tribunal in the case of Binod Kumar Burnwal 2018 (12) TMI 1693 - ITAT KOLKATA and Haridas Som 2019 (9) TMI 685 - ITAT KOLKATA as held impugned disallowance provision does not apply in case of overwhelming evidence of genuineness of payments coupled with business exigencies which may go beyond the prescribed Rule 6DD of the Income Tax Rules, 1962 - thus not to disallow payments u/s 40A(3) if the same are genuine.

Summary

Issues Involved:
1. Whether the order passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961 was erroneous and prejudicial to the interests of the revenue.
2. Whether the provisions of Section 40A(3) of the Income Tax Act, 1961 regarding disallowance of cash expenditure apply to the payments made by the assessee.

Issue-wise Detailed Analysis:

1. Erroneous and Prejudicial Order by AO:
The Principal Commissioner of Income Tax (Pr. CIT) revised the AO's order under Section 263 of the Income Tax Act, 1961, concluding that the AO had passed the order without making necessary enquiries or verifications. This, according to the Pr. CIT, amounted to an incorrect assumption of facts and was therefore erroneous. The Pr. CIT cited the Hon'ble Supreme Court in Malabar Industrial Co. Ltd v. CIT and the Hon'ble Calcutta High Court in Dawjee Dadabhoy & Co. to substantiate that the AO's order led to a loss of tax, prejudicial to the interests of the revenue. Consequently, the Pr. CIT restored the case to the AO to re-examine the issue of expenditure incurred in cash violating the provisions of Section 40A(3).

2. Applicability of Section 40A(3) Disallowance:
The assessee’s counsel argued that the Tribunal should uphold the Pr. CIT's order but modify the directions to the AO to follow the propositions of law laid down in the cases of Binod Kumar Burnwal vs. ITO and Haridas Som vs. ITO, where the Tribunal had interpreted Section 40A(3) and held that genuine transactions should not be disallowed even if they involved cash payments. The Revenue’s representative opposed this, arguing that Section 40A(3) mandates payments to be made by crossed cheques and not in cash, and that direct cash deposits into the supplier's bank account do not fall within the exceptions provided in Rule 6DD of the Income Tax Rules.

After hearing both sides, the Tribunal found the assessee's request to modify the Pr. CIT’s order justified. The Tribunal cited the case of Binod Kumar Burnwal, where it was held that Section 40A(3) is preventive, aiming to check tax evasion and unaccounted money, and should not apply to genuine transactions. The Tribunal also referred to the case of Haridas Som, where it was ruled that disallowance under Section 40A(3) does not apply if there is overwhelming evidence of the genuineness of payments and business exigencies, even if they go beyond Rule 6DD exceptions.

The Tribunal noted several precedents:
- Attar Singh Gurmukh Singh vs ITO: Section 40A(3) is not absolute and genuine transactions can be exempted.
- CIT vs CPL Tannery: Disallowance under Section 40A(3) is not justified if the transactions are genuine and necessary for business.
- CIT vs Crescent Export Syndicate: Genuine purchases should not be disallowed even if payments are made by bearer cheques.
- Anuvam Tele Services vs ITO: Cash payments made due to business exigency should not be disallowed.
- Sri Laxmi Satvanaraxana Oil Mill vs CIT: Genuine cash payments acknowledged by the recipient should not be disallowed.
- CIT vs Smt. Shelly Passi: Cash payments ultimately deposited in the bank should not be disallowed.

The Tribunal concluded that the purpose of Section 40A(3) is to prevent tax evasion and unaccounted money, not to disallow genuine transactions. Therefore, it directed the AO to follow the propositions of law laid down in the cases of Binod Kumar Burnwal and Haridas Som and not to disallow genuine payments under Section 40A(3).

Conclusion:
The appeal of the assessee was allowed in part, with the Tribunal modifying the Pr. CIT’s order and directing the AO to consider the genuineness of the transactions while re-assessing the case. The AO was instructed to follow the legal propositions established in the cited cases and not to disallow genuine payments under Section 40A(3).