2006 (3) TMI 301 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 40A(3) of the Income-tax Act, 1961, to cash payments made by the assessee.
2. Validity of disallowance of 20% of cash payments under Section 40A(3) post-amendment by Finance Act, 1995.
3. Consideration of unavoidable circumstances under Rule 6DD(j) for cash payments made before its omission on 25-7-1995.

Detailed Analysis:

1. Applicability of Section 40A(3) to Cash Payments:
The primary issue is whether the provisions of Section 40A(3) of the Income-tax Act, 1961, as amended by the Finance Act, 1995, are applicable to cash payments amounting to Rs. 11,36,990 made by the assessee to M/s. Sanjeev Traders, Panvel. The Assessing Officer (AO) disallowed 20% of the cash payments, amounting to Rs. 4,33,336, stating that the payments were not justified even if the purchases were fully recorded and verifiable. The AO's findings emphasized that "the payment in cash is not justified in order to ward off competition and improve clientele."

2. Validity of Disallowance Post-Amendment:
The amendment to Section 40A(3) by the Finance Act, 1995, effective from 1-4-1996, changed the disallowance from total disallowance to 20% of the expenditure if payments were made in cash exceeding Rs. 10,000. The CIT(A) upheld the AO's decision, restricting the disallowance to 20% of the amount paid to M/s. Sanjeev Traders. The assessee argued that the disallowance should only apply to payments made after the amendment, but the CIT(A) concluded that the disallowance was justified since the dealer at Panvel had banking facilities.

3. Consideration of Unavoidable Circumstances Under Rule 6DD(j):
The assessee contended that payments made in cash were due to exceptional and unavoidable circumstances covered under Rule 6DD(j) of the Income-tax Rules, which was omitted on 25-7-1995. The CIT(A) did not accept this argument for payments made to M/s. Sanjeev Traders but accepted it for payments made to another party in a village without banking facilities. The Tribunal discussed the applicability of Rule 6DD(j) and concluded that the omission of Rule 6DD(j) on 25-7-1995 means it does not apply to the assessment year 1996-97. The Tribunal referenced the Hon'ble Supreme Court's decision in Attar Singh Gurmukh Singh v. ITO, which stated that "the provisions of section 40A(3) are not absolute" and genuine transactions must be considered, but in this case, the omission of Rule 6DD(j) meant the disallowance was applicable.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to disallow 20% of the cash payments made to M/s. Sanjeev Traders under Section 40A(3) for the assessment year 1996-97. The Tribunal clarified that the omission of Rule 6DD(j) effective from 25-7-1995 meant that the rule did not apply to the assessment year 1996-97, and thus, the disallowance was justified. The assessee's grounds were dismissed, affirming the applicability of the amended Section 40A(3) to the cash payments in question.