2012 (12) TMI 452 - HC - Income Tax

Disallowance u/s 40A(3) read with rule 6DD - payment of expenditure in cash - mobile railway catering contractor - held that - Apparently, that concern is also a small time one and insists on cash payments for ensuring continuity and timely supplies. Whilst, the Court is conscious and does not in any manner wish to comment adversely on the larger public interest element embedded in Section 40A and the underlying principle, at the same time, the Court also notes that the proviso seeks to relieve to a certain extent, the measure of hardship which might be imposed upon small businesses and professionals who are engaged in activities and are dependent entirely on timely cash flow. It is in such cases that Rule 6DD - which was formulated as a proviso to Section 40A (3) - steps in to aid such assessees and concerns. In this context, the statutory mandate in Section 6DD (k), at least in the circumstances of the case, has to be so construed as to mean that but for the cash payment, the assessee would have been deprived the benefit of supplies itself. This Court clarifies that the interpretation of the expression who is required to make payment in cash having regard to the circumstances of the case is fact dependent, at least in the present case. The consequence of instances of payment through account payee cheques in small business which are dependent on such supplies would be to completely stifle, if not stop, the business activities. It is in that sense that the expression required would have to be construed. Having regard to the peculiar facts and circumstances, the Tribunal and the lower authorities adopted an unduly narrow and technical interpretation of Rule 6DD(k), the benefit of which the assessee clearly was entitled to. - Decided in favor of assessee.

Summary

Issues:
- Interpretation of Section 40A (3) regarding disallowance of expenditure under specific circumstances.

Analysis:
1. Issue Notice and Final Hearing: The High Court issued a notice, and with the consent of both parties, the appeal was heard finally.

2. Question of Law: The primary issue was whether the ITAT erred in confirming the disallowance of expenditure under Section 40A (3) amounting to Rs.27,48,860/-.

3. Facts of the Case: The appellant, a railway catering contractor, purchased goods from a Mumbai-based supplier for trains it served. The purchases were necessary due to operational constraints. The supplier insisted on cash payments, leading to the disallowance of the amount by the AO.

4. Arguments by Assessee: The appellant argued that the nature of its business required cash payments for timely supplies, citing Rule 6DD (k) for business expediency.

5. Revenue's Argument: The Revenue contended that Section 40A (3) aimed at public interest, mandating payments exceeding Rs.20,000/- through banking channels, without exceptions.

6. Tribunal's Decision: The Tribunal rejected the appellant's contentions, emphasizing the need for account payee cheques for payments exceeding the threshold. It questioned the genuineness of the appointments submitted by the appellant.

7. Judicial Interpretation: The Court analyzed the provisions of Section 40A (3) and Rule 6DD (k) in detail. It acknowledged the public interest aspect but also considered the hardship faced by small businesses reliant on cash transactions for timely supplies.

8. Court's Ruling: The Court found the lower authorities' interpretation of Rule 6DD (k) narrow and technical. It held that the appellant was entitled to the benefit of the rule, ruling in favor of the assessee and against the Revenue.

9. Conclusion: The Court allowed the appeal, emphasizing the need to consider the peculiar circumstances of the case in interpreting tax laws and rules, ensuring a balance between public interest and the practical challenges faced by businesses.

This detailed analysis of the judgment showcases the thorough examination of legal provisions, factual circumstances, and the Court's reasoning leading to the final ruling in favor of the assessee.