2023 (3) TMI 32 - AT - Income Tax

Addition u/s 40A(3) - cash payment in excess of prescribed limit - HELD THAT - Assessee had admitted the fact that it has paid cash to sub-contractors for hiring lorries and such payment has been directly credited to bank account of sub-contractors. The only arguments of the assessee was that payment made to sub-contractors are genuine in nature which are required to be made in cash for business exigency. The assessee has explained the reasons for making cash payment and according to the assessee, the subcontractors were in need of money under urgent circumstances, for which, the assessee has deposited cash into their bank account. We find that although the assessee tries to make out a case of business exigency, but reasons given by the assessee to make cash payment does not come under any exception as provided u/r.6DD of IT Rules. Genuineness or otherwise of payment is not a criteria to exclude cash payment in excess of prescribed limit from the provisions of Sec.40A(3) of the Act. In this case, there is no dispute that the assessee has made cash payments in excess of prescribed limit and further reasons given by the assessee for making cash payment does not come under any exception as provided under u/r.6DD of IT Rules. The assessee had also failed to make out a case of business exigency in making cash payment, because, it was the claim of the assessee that cash has been directly credited into bank accounts of sub-contractors and said bank accounts are maintained in one bank Assessee could have made payment through one of the of the modes provided u/s.40A(3) of the Act. Since, the assessee has paid in cash in excess of prescribed limit, the AO has rightly disallowed cash payment u/s.40A(3) - Decided against assessee.

Summary

Issues:
1. Disallowance of cash payments to subcontractors exceeding prescribed limit under Sec.40A(3) of the Income Tax Act.
2. Interpretation of business exigency and exceptions under rule 6DD of Income Tax Rules, 1962.

Issue 1: Disallowance of Cash Payments under Sec.40A(3):
The appeal concerned disallowance of cash payments exceeding the prescribed limit under Sec.40A(3) of the Income Tax Act. The Assessing Officer (AO) disallowed total cash payments to subcontractors amounting to Rs.35,59,087, stating that the assessee had made payments on the same day exceeding Rs.35,000, which were categorized as lorry hire charges or advances. The AO found that the assessee had not produced vouchers for certain payments, leading to the disallowance under Sec.40A(3). The Commissioner of Income Tax (Appeals) upheld this disallowance, stating that the assessee failed to prove that the payments were within the exceptions provided under rule 6DD of the Income Tax Rules, 1962. The appellate tribunal concurred with the lower authorities, emphasizing that the genuineness of the payments does not exclude them from the purview of Sec.40A(3) and that the assessee did not establish a case of business exigency for making cash payments. As the payments were made in cash in excess of the prescribed limit, the tribunal upheld the disallowance, ultimately dismissing the appeal.

Issue 2: Interpretation of Business Exigency and Exceptions under Rule 6DD:
The assessee argued that the cash payments were directly credited to subcontractors' bank accounts due to business exigency, as the subcontractors needed to pay loan EMIs promptly. The assessee contended that making cash payments was necessary to avoid inconvenience to the subcontractors. However, the tribunal held that the reasons provided by the assessee did not fall under any exceptions as per rule 6DD of the Income Tax Rules, 1962. The tribunal emphasized that the genuineness of the payments and the claimed business exigency did not exempt the cash payments made in excess of the prescribed limit from the provisions of Sec.40A(3). The tribunal noted that the assessee could have utilized the modes of payment specified under Sec.40A(3) instead of making cash payments exceeding the limit. Consequently, the tribunal upheld the lower authorities' decision to disallow the cash payments, as the assessee failed to establish a valid case for an exception under rule 6DD or a genuine business exigency for the cash payments.

In conclusion, the appellate tribunal affirmed the disallowance of cash payments exceeding the prescribed limit under Sec.40A(3) of the Income Tax Act, as the assessee could not prove that the payments fell within the exceptions provided under rule 6DD of the Income Tax Rules, 1962, or demonstrate a genuine business exigency for making cash payments to subcontractors.