2006 (9) TMI 250 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition of Rs. 7,78,735.
2. Deletion of addition on account of payments of Rs. 38,93,684 exceeding Rs. 20,000 otherwise than by a cross Cheque or Demand Draft.
3. Treatment of payments made as covered by clause (l) of rule 6DD.
4. Violation of section 40A(3) due to cash payments deposited in bank accounts of payees.
5. Ignoring other payments made by cheques and DDs.
6. Vacating the order of CIT(A) and restoring the order of the Assessing Officer.

Summary:

Issue 1: Deletion of addition of Rs. 7,78,735
The CIT(A) deleted the addition of Rs. 7,78,735 made by the Assessing Officer, who had disallowed 20% of the expenses u/s 40A(3) of the Income-tax Act due to cash payments exceeding Rs. 20,000.

Issue 2: Deletion of addition on account of payments of Rs. 38,93,684 exceeding Rs. 20,000 otherwise than by a cross Cheque or Demand Draft
The CIT(A) deleted the addition on account of payments of Rs. 38,93,684 made in cash, which the Assessing Officer had disallowed as they were not made by a cross Cheque or Demand Draft.

Issue 3: Treatment of payments made as covered by clause (l) of rule 6DD
The CIT(A) treated the payments as covered by clause (l) of rule 6DD, which exempts payments made to an agent who is required to make payment in cash for goods or services on behalf of the principal. The CIT(A) considered the employee as an 'agent' of the assessee.

Issue 4: Violation of section 40A(3) due to cash payments deposited in bank accounts of payees
The Assessing Officer held that the payments were in violation of section 40A(3) as the employee deposited cash in the bank accounts of the payees. The CIT(A) disagreed, stating that the payments were made directly to the bank accounts of the suppliers, thus covered under rule 6DD.

Issue 5: Ignoring other payments made by cheques and DDs
The CIT(A) ignored the fact that the assessee had made other payments by cheques and DDs to the same parties, which the Assessing Officer argued undermined the theory of depositing cash directly into the parties' accounts.

Issue 6: Vacating the order of CIT(A) and restoring the order of the Assessing Officer
The Tribunal reversed the CIT(A)'s decision, stating that the employee cannot be considered an 'agent' u/s 40A(3) and rule 6DD. The Tribunal emphasized the distinction between an 'employee' and an 'agent', concluding that the scope of clause (l) of rule 6DD cannot be extended to cover an 'employee'. The appeal was allowed, and the order of the Assessing Officer was restored.