2008 (1) TMI 205 - HC - Income Tax

Purchase of stock by making payments in cash exceeding specified limit mentioned in sec. 40A (3) AO has also found that many other dealers who were purchasing goods from same persons made payments by crossed drafts to the said stockist story of the assessee that he was asked by the stockists to pay in cash cannot be accepted two or more payments can t be split up in a single day transaction appears to be fraudulent, so benefit of circular220, dated May 31, 1977 disallowance upheld

Summary

Issues:
Interpretation of rule 6DD of the Income-tax Rules, 1962 in relation to disallowance under section 40A of the Income-tax Act, 1961.

Analysis:
The case involved a dispute regarding the disallowance of certain cash payments made by an assessee-firm for purchases exceeding Rs. 10,000 in a day. The Assessing Officer disallowed payments of Rs. 3,57,239, leading to an appeal by the assessee. The Commissioner of Income-tax (Appeals) partially accepted the contentions of the assessee, providing relief of Rs. 48,786, but confirmed the addition of Rs. 3,08,503 to the income. The main argument of the assessee was that payments were less than Rs. 10,000 individually, but the Revenue combined them to exceed the limit. The assessee also argued that due to the absence of bank accounts in the area, cash payments were necessary, citing Central Board of Director Taxes Circular No. 220, dated May 31, 1977, as a basis for exceptions to the rules.

The relevant provision under section 40A(3) of the Income-tax Act required payments exceeding Rs. 10,000 to be made by crossed cheque or draft. The assessee relied on a judgment from the Orissa High Court, which was not accepted by the court in this case. The court emphasized the importance of genuine transactions and the prevention of black money circulation in interpreting the law. It was noted that the assessee deliberately split payments to avoid the statutory limit, which was not considered acceptable. The court highlighted the necessity for payments to be traceable and genuine to prevent misuse of undisclosed income.

The court referred to a Supreme Court judgment affirming the validity of section 40A(3) and the importance of adhering to payment regulations to curb black money usage. In this case, the Assessing Officer found discrepancies in the assessee's explanations, including inconsistencies in payment records and lack of proper documentation for purchases. The court rejected the assessee's claims of ignorance regarding separate payments and emphasized the need for genuine and verifiable transactions. The court also distinguished other cases where genuine payments were permitted due to specific circumstances, which were not applicable in the present case.

In conclusion, the court ruled in favor of the Revenue, upholding the disallowance of the cash payments exceeding the prescribed limit. The judgment highlighted the importance of adherence to payment regulations, genuine transactions, and the prevention of fraudulent practices in financial dealings.