1979 (7) TMI 148 - AT - Income Tax

Summary

Issues: Disallowance under section 40A(3) of the Income Tax Act for cash payments exceeding Rs. 2,500 to parties in asst. yrs 1970-71 and 1971-72.

Analysis:
1. The appeals by the assessee challenged disallowances under section 40A(3) of the Income Tax Act for cash payments exceeding Rs. 2,500 to two parties in the assessment years 1970-71 and 1971-72.
2. For the assessment year 1970-71, the Revenue audit party identified cash payments exceeding Rs. 2,500, leading to the reopening of assessment under section 147(b) of the Act. The Assessing Officer added a sum of Rs. 5,56,199, but the Appellate Authority Commissioner (AAC) deleted a significant portion following Circular No.220 issued by the CBDT. However, a dispute arose regarding a payment of Rs. 3,902 to a party that did not file a confirmation letter.
3. In the assessment year 1971-72, the Assessing Officer disallowed cash payments of Rs. 1,36,802 to 11 parties under section 40A(3). The AAC excluded certain amounts based on confirmatory letters provided by the assessee but confirmed the disallowance of Rs. 4,500 to a party due to lack of a sales tax registration number.
4. The disallowances in both years were similar and addressed together. The Circular No. 220 provided exceptions under rule 6DD(j), including transactions in places without bank accounts for either party. The assessee, a hundy merchant at Tiruvannamalai, made purchases in Madras and Bangalore from parties without bank accounts in Tiruvannamalai. Despite the inability to provide confirmation letters, the genuineness of transactions was supported by various factors, such as the age of transactions and closure of businesses.
5. The Tribunal found the parties genuine and accepted the cash payments due to special circumstances where parties insisted on cash payments in locations where the assessee had no bank account. The Tribunal concluded that disallowances were unwarranted as the genuineness of transactions was established for most cash payments, except for the two disputed amounts. Consequently, both appeals by the assessee were allowed.