2025 (1) TMI 1115 - AT - Income Tax

Disallowance u/s. 40A(3) r.w. clause (f) of Rule 6DD - cash purchases exceeding Rs. 20, 000 - Auditor has identified 61 transactions attracting mischief of section 40A(3) - HELD THAT - Claim of assessee is that assessee has given cash to her employee who is the supervisor or the agent who in turn made payment to the sellers of the gold and therefore the same would not fall within the scope of section 40A(3). It was also the claim of assessee that part of jewellery and bullion is purchased by assessee was shown as stock in trade and the provisions of section 40A(3) were not applicable and assessee relied on the decision of Prosperous Buildcon Pvt. Ltd. 2023 (11) TMI 706 - DELHI HIGH COURT The assessee has further relied on the decision of Rajesh Kumar 2023 (10) TMI 1285 - DELHI HIGH COURT stating that if the assessee proves the genuineness of the transaction disallowance could not have been made u/s. 40A(3) of the Act. As all these issues have not been considered by the ld. lower authorities therefore we restore the whole issue back to the file of ld. AO with a direction to the assessee to substantiate that the payment made to 61 parties on bank holiday the payment was made by the agent and further the business exigency also demanded payment of cash - Appeal of the assessee is allowed for statistical purposes.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the disallowance of Rs. 1,09,13,444 under Section 40A(3) of the Income Tax Act, 1961, due to cash purchases exceeding Rs. 20,000, is justified.
Whether the transactions in question qualify for exceptions under Rule 6DD of the Income Tax Rules, thereby exempting them from the disallowance under Section 40A(3).
Whether the assessee provided sufficient evidence to substantiate claims that the transactions were made on bank holidays or through an agent, which could qualify them for exceptions under Rule 6DD.
Whether the disallowance should be reconsidered based on the genuineness of the transactions and business exigency.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance under Section 40A(3)

Relevant legal framework and precedents: Section 40A(3) of the Income Tax Act disallows deductions for cash payments exceeding Rs. 20,000, except under circumstances specified in Rule 6DD.
Court's interpretation and reasoning: The court noted that the assessee failed to provide documentary evidence to support claims that the transactions were covered by exceptions under Rule 6DD.
Key evidence and findings: The assessee self-disallowed the cash purchases in the tax return, indicating an acknowledgment of the violation.
Application of law to facts: The court upheld the disallowance as the assessee could not substantiate claims for exemptions under Rule 6DD.
Treatment of competing arguments: The assessee argued that the volatile nature of the bullion business necessitated cash transactions, but the court found no legal basis for this argument under Rule 6DD.
Conclusions: The court concluded that the disallowance was justified due to the lack of evidence supporting exceptions under Rule 6DD.

Issue 2: Exceptions under Rule 6DD

Relevant legal framework and precedents: Rule 6DD provides exceptions to Section 40A(3) for transactions made on bank holidays, through agents, or under other specified conditions.
Court's interpretation and reasoning: The court found that the assessee did not demonstrate that the transactions occurred on bank holidays or through an agent, as required by Rule 6DD.
Key evidence and findings: The assessee's claim of transactions on bank holidays was not substantiated with dates or proof.
Application of law to facts: The court required the assessee to prove the applicability of Rule 6DD exceptions, which was not done.
Treatment of competing arguments: The argument that cash payments were made through an agent was not examined by the lower authorities, necessitating further investigation.
Conclusions: The court remanded the issue to the Assessing Officer (AO) for further examination of the claims under Rule 6DD.

Issue 3: Genuineness of Transactions and Business Exigency

Relevant legal framework and precedents: Judicial precedents suggest that the genuineness of transactions and business exigency might influence the applicability of Section 40A(3).
Court's interpretation and reasoning: The court acknowledged the need to consider the genuineness of transactions and business exigency but found that these factors were not adequately addressed by the lower authorities.
Key evidence and findings: The assessee claimed that cash discounts and the volatile nature of the business justified cash payments.
Application of law to facts: The court directed the AO to examine the genuineness and business exigency in light of the evidence provided by the assessee.
Treatment of competing arguments: The court considered the assessee's arguments but required further substantiation.
Conclusions: The court remanded the issue for further examination by the AO, allowing the assessee to present evidence supporting the genuineness and necessity of cash transactions.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The claim of assessee is that assessee has given cash to her employee who is the supervisor or the agent who in turn made payment to the sellers of the gold and therefore the same would not fall within the scope of section 40A(3) of the Act."
Core principles established: The applicability of Section 40A(3) hinges on the ability to substantiate claims under Rule 6DD exceptions, and the genuineness of transactions and business exigency must be considered.
Final determinations on each issue: The court remanded the case to the AO for further examination of the claims under Rule 6DD and the genuineness and necessity of the transactions, thereby allowing the appeal for statistical purposes.

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