2023 (9) TMI 1620 - AT - Income Tax

Disallowance u/s 40A(3) - assessee failed to prove exceptional or unavoidable circumstances necessitating payment in cash - CIT(A) deleted addition - HELD THAT - Firstly, we find that it is a case of purchase of land duly supported by registered deeds. The consideration for purchase and the mode of payment, namely cheque and cash, are clearly mentioned in registered-deeds. The identity of the payee is also mentioned in registered-deeds. Therefore, the genuineness of transaction is not having any question. In fact, the AO has not disputed the genuineness and the DR for revenue is also not having dispute on genuineness point. This way, the genuineness part is proved. In so far as circumstance/commercial expediency is concerned, we find that the assessee has claimed before AO that the sellers of lands were farmers and new to assessee. The sellers required the assessee to make cash-payments and to lock the deals, the assessee had to make part- payment in cash. Before CIT(A), the assessee has submitted a detailed chart in a tabular format giving explanation of circumstance/commercial expediency of all six transactions. The assessee s claim is such that apart from seller, there were 4 other persons interested in the land (joint owner and other relatives/family persons) and the assessee had to make cash payment so that the joint owner and relatives/family persons could give their consent, as each one had interest in land. They demanded cash payment to settle and clear their family consent. There is a clear contradiction in the submission of assessee. While the assessee claims that the sellers insisted for cash payment in order to make payment for clearing consent from joint owner/family members; the joint owner/family members have mentioned a recital in the registered-deed that they have signed as consenting party without charging any money. This is certainly a contradiction as claimed by Ld. DR. Being so, we do not find credence in assessee s explanation of commercial expediency with respect to this particular transaction involving cash-payment of Rs. 1,14,55,500/-. Therefore, the disallowance to that extent is sustainable. We are inclined to uphold disallowance to the extent of Rs. 1,14,55,500/- out of total disallowance of Rs. 2,63,60,750/- made by AO. For remaining disallowance, we uphold the deletion made by CIT(A) in first-appeal. Consequently, the revenue succeeds partly in this appeal.

Issues Involved:

1. Disallowance under Section 40A(3) of the Income Tax Act, 1961.
2. Genuineness of cash payments and business expediency.
3. Applicability of exceptions under Rule 6DD.
4. Assessment of exceptional circumstances for cash payments.
5. Cross-Objection by the Assessee.

Detailed Analysis:

1. Disallowance under Section 40A(3):

The primary issue revolves around the disallowance made by the Assessing Officer (AO) under Section 40A(3) of the Income Tax Act, 1961, which mandates that payments exceeding a specified limit should be made through banking channels to ensure transparency and prevent tax evasion. The AO disallowed cash payments amounting to Rs. 2,63,60,750/- made by the assessee for land purchases, as these payments were not made through crossed cheques or bank drafts.

2. Genuineness of Cash Payments and Business Expediency:

The assessee argued that the genuineness of the transactions was not in question since the payments were documented in registered sale deeds. The assessee claimed that the cash payments were made due to the sellers' insistence, who were farmers unfamiliar with banking transactions, thus necessitating cash payments to lock the deals. The CIT(A) accepted this argument, noting that the transactions were genuine and aligned with business practices, thereby deleting the disallowance.

3. Applicability of Exceptions under Rule 6DD:

The CIT(A) relied on various judicial precedents, including the decisions of the Punjab and Haryana High Court and ITAT Indore, which emphasized that genuine transactions and identity of payees, when established, could fall under exceptions provided in Rule 6DD. The CIT(A) concluded that the assessee's case was covered under these exceptions, as the payments were genuine and made under business exigencies.

4. Assessment of Exceptional Circumstances for Cash Payments:

The Tribunal examined whether the assessee's circumstances justified cash payments. It was noted that the assessee provided detailed explanations for each transaction, citing reasons such as the sellers' demand for cash due to their unfamiliarity with banking, urgency to close deals, and business expediency. However, for one transaction involving a payment of Rs. 1,14,55,500/-, the Tribunal found contradictions in the assessee's claims and upheld the disallowance for that amount, while allowing relief for the remaining transactions.

5. Cross-Objection by the Assessee:

The assessee's cross-objection primarily supported the CIT(A)'s order and contested the AO's disallowance under Section 40A(3). However, since the Tribunal partly upheld the CIT(A)'s decision and found merit in the AO's disallowance for one transaction, the cross-objection was dismissed.

Conclusion:

The Tribunal's decision was nuanced, partially allowing the revenue's appeal by sustaining the disallowance for one transaction due to lack of credible explanation, while upholding the CIT(A)'s decision for the rest, acknowledging the genuineness and business necessity of the cash payments. The assessee's cross-objection was dismissed as it was supportive of the CIT(A)'s order, which was largely upheld.

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