2012 (6) TMI 594 - AT - Income Tax

Disallowance u/s 40A(3)- trade creditors outstanding - revenue appeal amended provisions of section 40(A)(3) w.e.f. 01.4.2008 are to be considered for disallowance - assessee contested the purchases were made in year 2004, and as the transactions related to that year, only 20% of disallowance should be made of the amounts paid otherwise than by a/c. payee cheques or drafts, as per provisions of section 40A(3) - Held that - Considering the provisions applicable in assessment year 2004-05 and year 2008-09, there are three major differences - (i)as per the provisions of assessment year 2004-05, the assessee is required to make payment by way of crossed cheque/crossed bank draft whereas as per the provisions of assessment year 2008-09, the assessee is required to make payment by way of a/c payee cheque / a/c payee bank draft. (ii)as per the provisions applicable in assessment year 2004-05, the disallowance was to be made to the extent of 20% of payments made in contravention to the prescribed mode whereas, as per the provisions applicable in assessment year 2008-09, such disallowance is to the extent of 100% of such payment in contravention to the prescribed mode - disallowance made by the A.O. cannot be sustained (iii) As per the provisions applicable in assessment year 2004-05, the disallowance was to be made in the relevant year in which the expenditure was incurred whereas as per the provisions of assessment year 2008-09, addition is to be made in the year in which payment in contravention to prescribed mode was made by the assessee irrespective of the fact as to whether the expenditure was incurred in an earlier year. if we apply the provisions of Section 40A(3) as applicable in assessment year 2004-05, we find that no addition in the present year is justified and no disallowance can be made in assessment year 2004-05 also because as per the provision of Section 40A(3) as applicable in assessment year 2004-05, the payments are required to be made by a crossed cheque/crossed bank draft and the assessee has made the payment by way of crossed cheque and, therefore, no disallowance is called for in the present case as per the provisions of Section 40A(3) as applicable in the assessment year 2004-05 - in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Rs. 62,10,000 under Section 40A(3) of the Income Tax Act, 1961.

Detailed Analysis:

Background and Facts:
The appeal was directed against the order of the Ld. CIT(A) Surat dated 27.06.2011 for the assessment year 2008-09. The primary issue was the disallowance of Rs. 62,10,000 under Section 40A(3) of the Income Tax Act, 1961. The facts noted by the Ld. CIT(A) revealed that during the assessment proceedings, it was found that the assessee had shown trade creditors outstanding as on 31.3.2007. The Assessing Officer (A.O.) discovered that cheques issued to creditors were deposited in other persons' accounts, leading to the disallowance under Section 40A(3).

Arguments by Assessee:
The assessee contended that Section 40A(3) was introduced to disallow 100% of expenditure for payments exceeding Rs. 2,500 otherwise than by crossed cheque/crossed bank draft, with subsequent amendments increasing limits and changing the disallowance percentage. The assessee argued that since the expenses were incurred in the assessment year 2004-05, the provisions applicable during that year should be applied, which allowed for 20% disallowance instead of 100%. The assessee cited the Special Bench Tribunal decision in Dy. CIT v. Times Guaranty Ltd. and the Tribunal decision in Anand Kumar Rawat Ram Joshi v. ITO to support the claim that the provisions applicable in the year of incurring the expenditure should be applied.

Arguments by Revenue:
The revenue argued that the payment was made in the assessment year 2008-09, and hence, the provisions of Section 40A(3) as applicable in the assessment year 2008-09 should be applied. The revenue cited several judicial pronouncements to support the contention that the law applicable in the relevant assessment year should be applied.

Tribunal's Findings:
The Tribunal considered the rival submissions and the material on record. It noted that the expenses were incurred in the assessment year 2004-05 and the payment was made in the assessment year 2008-09 by crossed cheques. The Tribunal compared the provisions of Section 40A(3) applicable in the assessment year 2004-05 and 2008-09, identifying three major differences:
1. Mode of payment (crossed cheque vs. account payee cheque).
2. Disallowance percentage (20% vs. 100%).
3. Year of disallowance (year of expenditure vs. year of payment).

The Tribunal referred to its decision in Anand Kumar Rawat Ram Joshi, which held that the provisions applicable in the year of incurring the liability should be applied. As per the provisions applicable in the assessment year 2004-05, the payments were made by crossed cheques, and hence, no disallowance was called for.

Judgments Cited by Revenue:
The Tribunal reviewed several judgments cited by the revenue, including those of the Hon'ble Apex Court and various High Courts. It found that these judgments were not applicable to the present case due to differing facts and legal provisions.

Conclusion:
The Tribunal concluded that the disallowance made by the A.O. could not be sustained. It held that the provisions of Section 40A(3) as applicable in the year of incurring the expenditure (assessment year 2004-05) should be applied, and since the payments were made by crossed cheques, no disallowance was warranted. The appeal of the assessee was allowed, and the disallowance of Rs. 62,10,000 was deleted.