2020 (4) TMI 263 - AT - Income Tax

Disallowance u/s. 40A(3) - Proof of cash payment on specific request - assessee had failed to produce evidence from the payee , i.e., SPM Sons, Kollam that it insisted on cash payments - HELD THAT - The assessee has now produced a letter from SPM Sons, Kollam wherein it was stated that it had insisted for cash payments in view of the fact that the goods sold to them were mill goods, which is in high demand - as stated that the assessee s Bank account was located at Punalur and for encashing the cheque/draft would require time. It was further mentioned in the said letter of SPM Sons, Kollam that the purchases were effected in most of the days after the banking hours. Rule 6DD(j) of the I.T. Rules states that when payments are required to be made on dates on which the Banks are closed either on account of holiday or strike, such cash payments would not be liable for disallowance u/s. 40A(3) - assessee has to prove the circumstances under which the assessee was forced to make cash payments and such circumstance falls within one of the conditions enumerated under Rule 6DD of the I.T. Rules - one more opportunity should be granted to the assessee to prove his case that he was forced to make cash payments under the compelling circumstances and assessee s case falls in one of situation enumerated under Rule 6DD of the I.T. Rules. For the above purpose, this issue is restored to the file of the Assessing Officer. Accordingly, Ground Nos. 1 to 5 of the assessee are allowed for statistical purposes. Payments to persons covered u/s. 40A(2) in excess of market value - assessee had paid salary to his mother, his wife and his two brothers - HELD THAT - Having regard to the fact that the assessee s mother, wife and two brothers had experience in this line of trade, salary was paid to them as compensation for market value of services rendered by them - Disallowance of 50% of salary on facts and circumstances of the instant case is excessive. In order to meet the ends of justice, out of ₹ 5,40,000/- hold that assessee is to be granted further deduction of ₹ 2,70,000/- on account of salary paid to close relatives, for the reason that assessee s father was the previous owner of the business, on his passing away, all his children and his wife were entitled to business. Moreover, it is also a fact that assessee s mother, wife and his two brothers were assisting the assessee in running the day to day business affairs of the assessee. Accordingly,grant further deduction of ₹ 2,70,000/- and confirm the disallowance of ₹ 2,70,000/- out of the total disallowance of ₹ 5,40,000/- made by the Assessing Officer which was confirmed by the CIT(A). Disallowance of Car Expenses - AO disallowed 1/3rd of the expenses claimed on account of four cars owned by the Appellant - HELD THAT - It is an admitted fact that that the assessee has four relatives who were attending to business and each of them was given a car for business and for its utilization. The assessee has also to go to other places such as Tamil Nadu and Bangalore for making purchases. - 1/3rd disallowance of car expenses is excessive - restrict the disallowance to 1/4th of the car expenses claimed by the assessee. - Decided partly in favour of assessee.

Issues Involved:
1. Disallowance under Section 40A(3)
2. Disallowance under Section 40A(2)
3. Disallowance of Car Expenses

Detailed Analysis:

Disallowance under Section 40A(3) (Ground Nos. 1 to 5)
The assessee purchased textile goods from SPM & Sons, Kollam for ?20,44,371, entirely paid in cash. The Assessing Officer (AO) disallowed these payments under Section 40A(3) of the I.T. Act due to the cash payment exceeding the permissible limit. The assessee argued that the payments were made beyond banking hours and insisted upon by the seller, thus falling under the exemption provided in Rule 6DD. However, the CIT(A) upheld the AO's decision, stating the assessee failed to provide evidence that the payee insisted on cash payment and did not adequately explain how the payments were covered under Rule 6DD.

Upon appeal, the Tribunal noted the assessee produced a letter from SPM & Sons, Kollam, stating the insistence on cash payments due to high demand for mill goods and banking constraints. The Tribunal decided to grant the assessee another opportunity to substantiate the claim that the payments fell within the conditions of Rule 6DD. The issue was remanded back to the AO for reconsideration. Thus, Ground Nos. 1 to 5 were allowed for statistical purposes.

Disallowance under Section 40A(2) (Ground Nos. 6 & 7)
The assessee paid salaries totaling ?10.80 lakhs to his mother, wife, and two brothers. The AO disallowed 50% of these payments (?5.40 lakhs) under Section 40A(2), considering them excessive and unreasonable compared to the market value of the services rendered. The CIT(A) upheld this disallowance, stating the assessee failed to justify the reasonableness of the salaries.

The Tribunal, after reviewing the submissions, acknowledged the contributions of the assessee's family members in running the business and the circumstances following the death of the assessee's father. It deemed the 50% disallowance excessive and allowed a further deduction of ?2,70,000/-, confirming a disallowance of ?2,70,000/-. Thus, Ground Nos. 6 & 7 were partly allowed.

Disallowance of Car Expenses (Ground No. 8)
The AO disallowed 1/3rd of the expenses claimed for four cars, reasoning that the assessee, running a proprietary business with no branches, did not need four cars. The CIT(A) upheld this view, noting the lack of evidence proving the necessity of four cars for business purposes.

The Tribunal considered the assessee's argument that the cars were used by family members for business activities, including outstation purchases. It found the 1/3rd disallowance excessive and reduced it to 1/4th of the car expenses claimed. Thus, Ground No. 8 was partly allowed.

General Grounds (Ground No. 9)
Ground No. 9 was dismissed as it was general in nature and required no adjudication.

Conclusion
The appeal was partly allowed for statistical purposes, with specific issues remanded for further consideration and adjustments made to the disallowances under Sections 40A(2) and car expenses. The judgment emphasized the need for the assessee to provide adequate evidence to substantiate claims under the relevant exemptions and deductions.

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