1983 (4) TMI 75 - AT - Income Tax

Summary

Issues:
1. Disallowance of cash payments exceeding Rs. 2,500 under section 40A(3) of the IT Act.
2. Interpretation of exceptional, impracticable, and unavoidable circumstances for cash payments.
3. Application of Rule 6DD of the IT Rules in allowing deductions for cash payments.

Analysis:
The appeals before the Appellate Tribunal ITAT BOMBAY-D involved common contentions regarding the disallowance of cash payments exceeding Rs. 2,500 under section 40A(3) of the IT Act. The assessee, engaged in purchasing second-hand drums from hawkers, argued that immediate cash payments to hawkers were necessary to maintain business operations efficiently. The Income Tax Officer (ITO) disallowed substantial amounts under section 40A(3) for the assessment years 1976-77 and 1977-78, leading to appeals before the CIT (A) and subsequently before the Tribunal.

The CIT (A) allowed the expenditure covered by section 40A(3) for the cash payments exceeding Rs. 2,500, citing exceptions under Rule 6DD of the IT Rules for the assessment years in question. The department contested these decisions, arguing that the assessee failed to establish exceptional circumstances for making cash payments beyond the specified limit. The department relied on the ITO's orders to support its position.

In response, the assessee referred to a ruling by the Delhi Bench of the Income-tax Appellate Tribunal, emphasizing the exceptions provided under Rule 6DD(j) for certain cash payments. The Tribunal considered various factors, including the genuineness of parties involved, compliance with income tax assessments, and the applicability of Circular No. 220 issued by the CBDT.

The Tribunal analyzed the provisions of section 40A(3) and Rule 6DD, concluding that the assessee had demonstrated exceptional and unavoidable circumstances for the cash payments made to hawkers and traders. It was highlighted that the illiterate nature of hawkers and the practical difficulties in issuing crossed cheques or bank drafts justified the cash payments. Additionally, the Tribunal noted that adhering to traditional payment methods could hinder business transactions with hawkers, impacting overall turnover and profitability.

Ultimately, the Tribunal dismissed the appeal, affirming the assessee's entitlement to deductions under section 40A(3) and Rule 6DD(j) of the IT Rules. The judgment emphasized the importance of considering practical business realities and the specific circumstances of transactions when interpreting tax provisions related to cash payments.