2023 (10) TMI 187 - AT - Income Tax

Addition u/s 40A(3) - cash payment in excess of Rs. 20,000/- - AO noted that these payments for purchase of rice is in excess of Rs. 20,000/- to a single person in a single day in violation of provisions of section 40A(3) and assessee does not fall under any of the exempted categories as per Rule 6DD - CIT(A) concluded that the assessee is a contractor and has purchased rice from rice mills who are the processor and not from the grower/purchaser/cultivator therefore, it is does not fall under any of the exceptions covered under Rule 6DD - HELD THAT - Admittedly, the assessee is a trader in rice purchasing rice from rice mills who are the processor and not the grower / producer / cultivator i.e., agriculturists directly. Admittedly, the assessee is also not an agent or the rice mill is not an agent as claimed by assessee, even the assessee could not show me any business expediency that required to be considered in the light of the exceptions as provided under Rule 6DD of the Rules. As considered the facts whether the assessee s case requires any estimation of profit. I noted that the assessee made a claim before us that the assessee has made 98% of purchases in account payee cheque or bank draft or through banking channel only as envisaged in the provisions of section 40A(3) - But due to compulsion imposed by some of the farmers who wanted their money back from the rice mill, clearly reveals that there was a business expediency to make cash payment that being a very minimal amount ranging from 6.92% to 0.28% in various years. The assessee also argued that there was fluctuating demand in the rice due to which there is price raise of rice commodity and due to that the farmers agreed to sell in cash to the rice mills. In turn, the rice mill asked the assessee to make part of payment during some months in cash. Considering the entirety of facts, I m of the view that on the disputed purchase, the AO can apply a higher profit rate instead of profit rate declared by assessee of 0.26%. Thus estimation of profit @ 10% of the disputed purchases disallowed by AO by invoking the provisions of section 40A(3) of the Act will meet the ends of justice because otherwise this will distort the profit and seeing commercial expediency in the given facts and circumstances - Assessee appeal are partly-allowed.

Summary

Issues Involved:
1. Reopening of assessment.
2. Disallowance of expenses made in cash exceeding Rs. 20,000/- under section 40A(3) of the Income Tax Act, 1961.

Summary:

Reopening of Assessment:
The first issue in ITA Nos. 117 & 118/CHNY/2023 pertains to the reopening of assessment. The counsel for the assessee did not argue this issue, and it was dismissed as 'not-pressed'.

Disallowance of Cash Expenses:
The primary issue on merits concerns the disallowance of expenses made in cash exceeding Rs. 20,000/- by invoking section 40A(3) of the Income Tax Act. The assessee, a firm engaged in the business of trading rice, made cash payments exceeding Rs. 20,000/- for the purchase of rice, which the AO disallowed, amounting to Rs. 34,76,920/-. The CIT(A) upheld this disallowance, noting that the assessee purchased rice from rice mills (processors) rather than directly from growers/producers/cultivators, and thus did not qualify for exemptions under Rule 6DD of the Income Tax Rules, 1962.

The CIT(A) also rejected the assessee's claim of being an agent and the argument of business expediency, stating that the assessee did not prove any business expediency that required consideration under Rule 6DD.

Tribunal's Decision:
The Tribunal considered the arguments from both sides. The counsel for the assessee argued that the cash payments were made due to commercial expediency and regular trade practices, asserting that the transactions were genuine and accounted for. The counsel also suggested an alternative of estimating the profit rate instead of outright disallowance.

The Tribunal noted that the assessee made most purchases through banking channels, with only a minimal percentage in cash due to business exigencies. It was observed that the assessee's profit rate was significantly low, and the disallowance of cash expenses would distort the financial results.

Conclusion:
The Tribunal directed the AO to estimate the profit on the disputed purchases at 10% instead of disallowing the entire amount, considering the commercial expediency and minimal cash transactions. Thus, the appeals were partly allowed.

Result:
The appeals filed by the assessee in ITA Nos. 117 to 122/CHNY/2023 were partly allowed. The order was pronounced in the open court on 16th June 2023 at Chennai.