2003 (5) TMI 188 - AT - Income Tax

Summary

Issues:
- Disallowance under section 40A(3) of the IT Act, 1961
- Applicability of rule 6DD(j) read with Circular No. 220

Analysis:
1. Disallowance under section 40A(3):
The case involved the disallowance of Rs. 5,34,323 made under section 40A(3) of the IT Act, 1961, due to cash payments made to contractors for services in the polishing and electroplating business. The AO found that payments exceeding Rs. 10,000 were made in contravention of the section, leading to the disallowance. The assessee contended that the payments were genuine and covered under rule 6DD(j) read with Circular No. 220, as the contractors were illiterate and did not have bank accounts. The CIT(A) agreed with the assessee, highlighting that the payments were for genuine business needs and not bogus, thus deleting the disallowance.

2. Applicability of rule 6DD(j) read with Circular No. 220:
The dispute revolved around whether the circumstances of the case warranted the applicability of rule 6DD(j) read with Circular No. 220, which provides exceptions for payments exceeding a specified amount to be made in cash. The assessee argued that the contractors' illiteracy and lack of bank accounts justified the cash payments. However, the Revenue contended that the contractors, being long-term associates of the assessee, could have been paid through crossed cheques or bank drafts. The Revenue emphasized the mandatory nature of section 40A(3) to prevent tax evasion. Ultimately, the Tribunal held that the facts did not establish exceptional circumstances necessitating cash payments, reversing the CIT(A)'s decision and upholding the AO's order.

In conclusion, the Tribunal allowed the Revenue's appeal, reinstating the disallowance under section 40A(3) due to the lack of exceptional circumstances justifying the cash payments made to contractors.