2021 (9) TMI 577 - AT - Income Tax

Payment of expenses in Cash over the specified limit - Disallowance u/s 40A(3) in respect of deduction claimed by the assessee u/s 35DDA(1) read with section Rule 6DD of the Income Tax Rule, 1962 - genuine business expediency - prolonged labour strike - cash payment under the VSS scheme - HELD THAT - As per the submission of the assessee, since the labour was on strike and there was a settlement arrived between the assessee-company and the labourers under which the part payment of their VSS benefits were made in cash out of compulsion so that the operation of the factory may be resumed. Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh vs. Income Tax Officer Ludhiana Etc. 1991 (8) TMI 5 - SUPREME COURT has held that the Rule 6DD which provides for exceptions u/s 40A(3) of the Act against applicability of sec. 40A(3) of the Act, is not exhaustive enough to visualize all kinds of business expediency in all possible situations and it is for the appropriate authority to decide regarding genuine business expediency. As further held that rule must be interpreted in a manner so as to advance and not to frustrate the object of the legislature. That primary object of enacting Section 40A(3) of the Act was two folds. Firstly, putting a check on treating transactions with a mind to evade the liability to tax on income earned out of such transactions and secondly, to inculcate the banking habits amongst the business community. That the genuineness of the transaction and it being free from vice of any device of evasion of tax is relevant consideration which could be examined before invoking rigours of Section 40A(3) of the Act. The above stated legal position is fully applicable in the facts of the present case. There is no doubt about the genuineness of the transactions. Payments to the employees / labourers were made out of compulsions by the assessee. Therefore, we are of the view this is not a fit case of to apply rigours of section 40A(3) of the Act. The disallowance made by the lower authorities is, therefore, deleted. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance u/s 40A(3) of the Income Tax Act, 1961 in respect of deduction claimed by the assessee u/s 35DDA(1) read with section Rule 6DD of the Income Tax Rule, 1962.

Analysis:
The appellant contested the addition of &8377;29,63,309/- by the Assessing Officer under section 40A(3) of the Income Tax Act. The case revolved around the payment made by the assessee to its laborers under a Voluntary Separation Scheme (VSS) due to unavoidable circumstances, including a prolonged labor strike and financial losses. The appellant claimed a deduction of &8377;5,92,661/- under section 35DDA(1) of the Act, representing 1/5th of the total VSS expenditure. However, the Assessing Officer disallowed the entire VSS amount during the assessment proceedings.

The appellant, dissatisfied with the Assessing Officer's decision, appealed to the Commissioner of Income-tax (Appeals) but was unsuccessful. Subsequently, the appellant approached the Tribunal, arguing that the cash payments to laborers were made out of compulsion and commercial expediency to resume business operations. The appellant maintained that the recipients were identifiable, and the payments could be verified easily. The appellant contended that the disallowance should have been limited to the claimed deduction amount under section 35DDA(1).

Upon review, the Tribunal examined the circumstances leading to the cash payments, citing precedents to support its decision. Referring to the scope of disallowance under section 40A(3), the Tribunal emphasized the importance of genuine business expediency and the absence of tax evasion motives. The Tribunal highlighted that the primary objective of section 40A(3) was to prevent tax evasion and promote banking habits among businesses. In this case, the Tribunal found the payments to laborers were made due to unavoidable circumstances, indicating genuine business expediency. Consequently, the Tribunal ruled in favor of the appellant, concluding that the disallowance made by the lower authorities was unjustified and therefore deleted. The appeal of the assessee was allowed, and the order was pronounced on 11/02/2021.