2022 (4) TMI 741 - AT - Income Tax

Disallowance u/s. 40A(3) - cash expenses in excess of limit specified under the Act - AO rejected the assessee s plea by holding that assessee has not been able to substantiate why payments could not be made by account payee cheque - assessee submitted that the payments in cash were made since firstly, payments were made to newspapers for political advertisements and secondly, payments were made after banking hours at 7.00 P.M. At the relevant time, elections were going in the state of Gujarat and for this purpose, payments were made to newspaper companies for political advertisements and they refused to accept payment through any other mode than by way of cash payment - HELD THAT - We are of the considered view that in the facts of the instant case, no disallowance u/s 40A(3) is called for. The assessee has identified the parties to whom payments were made. The parties have confirmed receipt of payment in cash. The assessee has laid down the circumstances which necessitated payments in cash, being payment for advertisement for political parties on account of State elections, outside of banking hours. In a few instances, the assessee has obtained letter from the parties to the effect that it was at their insistence that cash payment was made. Exceptions contained in Rule 6DD are not exhaustive and that the said rule must be interpreted liberally, depending upon business necessities and facts and circumstances of the case. In the result, we are of the view that the Ld. CIT(A) erred in law and in facts in disallowing the sum u/s 40A(3) - Appeal of assessee allowed.

Summary

Issues:
- Disallowance of expenses under section 40A(3)
- Violation of principles of natural justice
- Non-speaking order by CIT(A)
- Confirmation of disallowance by CIT(A) without considering case laws

Analysis:
1. Disallowance of expenses under section 40A(3): The appeal was filed against the order of the Commissioner of Income Tax (Appeals) confirming the disallowance under section 40A(3) for the assessment year 2013-14. The assessee made payments in cash for printing advertisements to various publications, amounting to &8377; 32,65,805. The Assessing Officer (A.O.) rejected the plea that payments were made after banking hours and that newspapers accepted cash payments for political advertisements. The A.O. held that the cash payments were not covered by any exceptions provided under Rule 6DD, leading to the disallowance.

2. Violation of principles of natural justice: The assessee contended that the order confirming the disallowance was invalid and bad in law as it violated principles of natural justice. The CIT(A) was criticized for not dealing with written submissions, judgments relied upon, and for passing a non-speaking order. The lack of consideration for case laws and written submissions was highlighted as a flaw in the decision-making process.

3. Confirmation of disallowance by CIT(A) without considering case laws: The CIT(A) dismissed the appeal and upheld the addition of &8377; 32,65,805 made under section 40A(3). The CIT(A) observed that there were no extraordinary circumstances justifying cash payments to newspapers for political advertisements. The CIT(A) noted that no terms or conditions mandated cash payments, and the factual and legal analysis led to the confirmation of the disallowance.

4. Judgment by ITAT: The ITAT, in its judgment, considered the arguments presented by both parties. The counsel for the assessee emphasized the necessity of cash payments due to the timing of the transactions and the specific requirements of the newspaper companies during the state elections. The ITAT referred to various judicial precedents where exceptions under Rule 6DD were interpreted liberally based on business necessities and circumstances. Ultimately, the ITAT allowed the appeal, stating that in the given facts, no disallowance under section 40A(3) was warranted.

In conclusion, the ITAT allowed the appeal, overturning the CIT(A)'s decision and ruling in favor of the assessee based on the circumstances surrounding the cash payments for political advertisements during the state elections and the business exigencies involved.