2012 (7) TMI 173 - AT - Income Tax

Applicability of provisions of sec. 40A(3) - cash payments exceeding Rs.20,000 - assessee claimed the exceptions provided under Rule 6DD (g) & (k) - Held that - Applicability of exceptions provided under Rule 6DD of ITR, the assessee has to establish the hardship or inconvenience that is caused to the payees if the payments are made by the account payee cheques - pleas of the assessee that the lands are purchased from the agriculturists who are suspicious of and are usually demanding payment in cash before parting with the possession of their lands is not acceptable as it is observed by the CIT(A) that there is no banking facility in the villages where lands have been purchased. However, we find that the payments are not by cash but are by bearer cheques which had to be encashed in the banks only and, therefore, the argument of the assessee that the payment had to be made in cash to the agriculturists is not acceptable.Thus, the applicability of sec. 40A(3) and its constitutional validity has been upheld irrespective of whether the transaction is genuine or otherwise. The assessee s reliance on clause (k) of Rule 6DD is also not acceptable for the reason that the payments were directly made to the agriculturists and not to its agents i.e the directors. Even if it is accepted that the payments are made by the assessee to its directors, it is the duty of the assessee to demonstrate that the directors were supposed to make the payment for the goods or services in cash. The onus still lies on the assessee to prove - against assessee. Disallowance u/s 40(a)(ia) - Held that - As decided in Merilyn Shipping & Transports Versus Assistant Commissioner of Income-tax, Range-1, Visakhapatnam 2012 (4) TMI 290 (Tri) that disallowance u/s 40a(ia) is to be made only in respect of the amount payable and not on the amount paid, therefore, as submitted that the disallowance made by the AO was with regard to the amount paid by the assessee and not on the amount payable by the assessee, therefore, the disallowance has to be deleted - in favour of assessee.

Summary

Issues:
1. Applicability of sec. 40A(3) to cash payments exceeding Rs.20,000/-.
2. Disallowance under sec. 40(a)(ia) for non-deduction of TDS on commission payments.
3. Disallowance under sec. 40(a)(ia) for non-deduction of TDS on interest on vehicle finance.

Issue 1: Applicability of sec. 40A(3) to cash payments exceeding Rs.20,000/-:
The assessee, engaged in land procurement and layout formation, made bearer cheque payments exceeding Rs.20,000/- for land purchase. The AO disallowed 20% of these payments under sec. 40A(3) due to non-compliance. The CIT(A) upheld the disallowance, stating that the genuineness of transactions doesn't exempt from sec. 40A(3) if payments aren't via account payee cheques. The ITAT found the payments contravened sec. 40A(3) and rejected the appeal. The assessee's argument of necessity for cash payments wasn't accepted as bearer cheques could be encashed in banks, showing no hardship for payees. The Rule 6DD clause cited by the assessee wasn't applicable as payments were directly to landowners, not agents. The ITAT affirmed the disallowance under sec. 40A(3) based on established legal principles.

Issue 2: Disallowance under sec. 40(a)(ia) for non-deduction of TDS on commission payments:
The AO disallowed commission payments under sec. 40(a)(ia) for non-TDS deduction. The CIT(A) upheld this disallowance, but the ITAT, citing a Special Bench decision, ruled that sec. 40(a)(ia) applies to amounts payable, not paid. Consequently, the ITAT deleted the disallowance made on the amounts paid by the assessee, aligning with the Special Bench's interpretation.

Issue 3: Disallowance under sec. 40(a)(ia) for non-deduction of TDS on interest on vehicle finance:
Similar to the commission payments, the disallowance on interest on vehicle finance under sec. 40(a)(ia) was challenged. The ITAT, following the Special Bench's decision, ruled that sec. 40(a)(ia) pertains to amounts payable, not paid. Therefore, the ITAT deleted the disallowance on the amounts paid by the assessee. This decision was based on the interpretation established by the Special Bench judgment.

In conclusion, the ITAT partially allowed the appeal, upholding the disallowance under sec. 40A(3) for cash payments exceeding Rs.20,000/- but deleting the disallowances made under sec. 40(a)(ia) for non-deduction of TDS on commission payments and interest on vehicle finance. The ITAT's decision was based on the specific legal interpretations provided by the Special Bench's judgment in similar cases.