2012 (7) TMI 557 - HC - Income Tax

Violation of provisions of Section 40A(3)- Tribunal allowed payment of cash amounting to Rs.3,80,083 by the assessee to the supplier s bank account - Held that - Unless there are exceptional and unavoidable circumstances, the payment made in excess of Rs.10,000/- by cash would not escape the rigour of Section 40A(3) - the mere circumstance that the amount had been remitted to the account of the payee, would not be a good ground to accept the case of the assessee that Section 40A(3)will not applied - the deposit of the amount to the bank does not make the case any shade better than a cash payment for the purpose of condoning the conduct of the assessee - Order of Tribunal is set aside - against assessee.

Summary

Issues:
1. Interpretation of Section 40A(3) of the Income Tax Act regarding cash payments exceeding Rs.10,000.
2. Application of exceptions under Rule 6DD of the Income Tax Rules to cash payments.
3. Assessment of whether remitting cash payments to the payee's bank account exempts them from disallowance under Section 40A(3).

Analysis:

Issue 1: Interpretation of Section 40A(3)
The case involved appeals against the Income Tax Appellate Tribunal's decision for assessment years 1993-94 and 1995-96 regarding cash payments exceeding Rs.10,000 by the assessee. The primary question was whether such payments violated Section 40A(3) of the Income Tax Act. The Tribunal upheld the assessee's case without providing independent reasoning, prompting the Revenue to appeal to the High Court.

Issue 2: Application of Rule 6DD Exceptions
Section 40A(3) prohibits deductions for cash payments exceeding Rs.10,000 unless exceptions under Rule 6DD apply. The Central Board of Direct Taxes issued Circular No.1, stating that payments made during cheque clearance suspensions are exempt from Section 40A(3) if the genuineness of payment and payee's identity are proven. In this case, the assessee failed to demonstrate any exceptional circumstances under Rule 6DD to justify the cash payments.

Issue 3: Assessment of Cash Remittance to Payee's Account
The assessee contended that cash payments remitted to the supplier's bank account should not fall under Section 40A(3). However, the High Court held that merely depositing cash into the payee's account does not exempt the payment from Section 40A(3) disallowance. Without exceptional circumstances justifying cash payments, the Court set aside the Tribunal's order, allowing the Revenue's appeals.

The Court emphasized that unless exceptional circumstances under Rule 6DD exist, cash payments exceeding Rs.10,000 are subject to Section 40A(3) disallowance. The judgment clarified that remitting cash to the payee's bank account does not absolve the payment from scrutiny under Section 40A(3). The decision highlighted the importance of demonstrating genuine reasons for cash payments to avoid disallowance under the Income Tax Act.