2023 (6) TMI 771 - AT - Income Tax

Addition u/s 40A(3) - cash purchases of the liquor from suppliers - cash payment exceeding permissible limits - plea of the assessee towards existence of business expediency and reasonable cause associated for cash purchases - HELD THAT - In the light of nature of business, the assessee has sufficiently demonstrated that strict adherence to payment through banking channel is, at times, not practicable and has the potential to severally hamper the ongoing business. No mala fide, in our view, can be attributed to the action of the assessee where he is new entrant and the demand of liquor in such business is generally asymmetric. No evasion of tax through cash payment can be envisaged in the present case owing to such transactions. The circumstances narrated on behalf of the assessee provide reasonable ground to show-case considerations of business expediency and existence of relevant factors which warranted cash payments in the wisdom and perspective of a businessman. The cash transactions, in any case, have been subjected to TCS collections etc. and are thus duly made chargeable to tax in the hands of the recipient. No enquiries have been made on behalf of the Revenue to dislodge the bona fides of the cash purchases. Nonetheless, the suppliers and recipients of cash are identified parties and well regulated. Case made out on behalf of the assessee for exoneration from the clutches of Section 40A(3) in the peculiar facts of the present case - Decided in favour of assessee. Additions on account of capital introduced by proprietor - CIT(A) rejected the explanation of the assessee on the ground that withdrawal made from the bank could be utilized for household expenses and the onus towards availability of cash is not discharged in the present case - HElD THAT - As the assessee has failed to lead any cogent evidence to rebut the observations of the CIT(A). We thus are in no position to traverse the facts and decide independently. We thus see no reason to interfere with the approach of the CIT(A).

Summary

Issues Involved:
1. Addition under Section 40A(3) of the Income Tax Act.
2. Addition on account of capital introduced by the proprietor.

Summary:

Issue 1: Addition under Section 40A(3) of the Income Tax Act

The assessee challenged the addition of Rs. 56,51,900/- for AY 2014-15 and Rs. 98,41,000/- for AY 2015-16 under Section 40A(3) of the Income Tax Act, which disallows cash payments exceeding Rs. 20,000/-. The assessee, engaged in the liquor trading business, argued that cash payments were made due to business exigencies and regulatory constraints, as the business operates under strict government supervision. The assessee contended that the payments were made to licensed vendors and were subject to TCS (Tax Collected at Source), ensuring transparency and traceability. The CIT(A) upheld the AO's decision, stating that the assessee failed to prove that the case fell under Rule 6DD exceptions.

The Tribunal, however, found merit in the assessee's arguments, noting that the cash transactions were genuine, identifiable, and conducted under business necessity. The Tribunal emphasized that Section 40A(3) is not absolute and allows for consideration of business expediency. The Tribunal reversed the CIT(A)'s decision, allowing the assessee's appeal for both assessment years, thereby canceling the additions under Section 40A(3).

Issue 2: Addition on account of capital introduced by the proprietor

For AY 2014-15, the assessee contested the addition of Rs. 50,000/- made by the AO on account of capital introduced by the proprietor, arguing that the amount was withdrawn from the bank where the pension was credited. The CIT(A) rejected this explanation, suggesting the withdrawal could have been used for household expenses, and the assessee failed to prove the availability of cash.

The Tribunal upheld the CIT(A)'s decision, stating that the assessee did not provide sufficient evidence to counter the CIT(A)'s observations. Consequently, the addition of Rs. 50,000/- was sustained.

Conclusion:

The appeal for AY 2014-15 was partly allowed, reversing the addition under Section 40A(3) but sustaining the addition of Rs. 50,000/-. The appeal for AY 2015-16 was fully allowed, reversing the addition under Section 40A(3).