1988 (3) TMI 109 - AT - Income Tax

Summary

Issues: Disallowance under section 40A(3) of the IT Act for cash payments exceeding Rs. 2,500 towards purchases made from a government undertaking.

Analysis:
1. The appeals were filed by the assessee against disallowances made by the ITO under section 40A(3) of the IT Act for cash payments exceeding Rs. 2,500 towards purchases from a government undertaking.

2. The assessee, a dealer in hydrogenated oils, purchased goods from Ganesh Flour Mills Ltd., a government undertaking, and made cash payments for the supplies due to business exigencies and the immediate need for supplies to be delivered to customers. The ITO disallowed the amounts under section 40A(3) as payments were made in cash exceeding Rs. 2,500.

3. The Commissioner(A) upheld the disallowances, stating that the assessee did not show exceptional circumstances for making cash payments when bank drafts were an option. The Commissioner(A) emphasized that the provisions of section 40A(3) should not be violated without valid reasons.

4. In the appeal, the assessee argued that the nature of the business required immediate cash payments for swift deliveries, and making payments by bank drafts would result in financial losses due to minimal profit margins. The assessee also highlighted a previous year's deletion of a similar addition by the Commissioner(A) to support their case.

5. The Departmental Representative contended that the statutory requirement of making payments by crossed cheques or bank drafts should be adhered to, and exceptions could only be granted under specific conditions, which the assessee failed to satisfy in this case.

6. The Tribunal found that the genuineness of payments and the identity of the payee were established, and the circumstances explained by the assessee were exceptional, considering the nature of transactions and the need for quick settlements. The Tribunal noted the practical difficulties faced by the assessee in obtaining bank drafts and the preference for cash payments by the supplier.

7. The Tribunal opined that the Commissioner(A) erred in confirming the additions as the circumstances warranted cash payments, and failure to do so would result in unreasonable taxation of the assessee's income.

8. Ultimately, the Tribunal allowed the appeals, emphasizing the exceptional circumstances justifying the cash payments and rejecting the disallowances under section 40A(3) of the IT Act.