2012 (12) TMI 715 - AT - Income Tax

Disallowance u/s 40A(3) Held that - AO has not exhaustively considered the mitigating circumstances as per the Proviso to section 40A(3) r.w.r. 6DD before making the disallowance of cash payments. CIT(A) has not addressed the issue in proper perspective and in providing the assessee adequate opportunity in the matter in accordance with the principles of natural justice, therefore remit the matter back to the file of the AO to consider the issue and also to consider and examine the judicial decisions relied upon by the assessee - appeal of assessee allowed for statistical purposes.

Summary

Issues Involved:
1. Adequate opportunity for the appellant to be heard.
2. Applicability of amended provisions of Section 40A(3) and Rule 6DD.
3. Business expediency and genuineness of cash payments exceeding Rs. 20,000.

Detailed Analysis:

Adequate Opportunity for the Appellant to be Heard:
The appellant argued that the Commissioner of Income Tax (Appeals) [CIT(A)] did not provide sufficient opportunity for the appellant to be heard before passing the appellate order dated 21.2.2011. The appellant's counsel appeared on 8.2.2011, submitted written submissions, and cited judicial decisions. The case was adjourned to call for a Remand Report, but the appellant was not informed about any subsequent hearings or the submission of the Remand Report. Consequently, the CIT(A) passed the order without giving the appellant a proper opportunity to make an effective representation. This was claimed to be in violation of the principles of natural justice.

Applicability of Amended Provisions of Section 40A(3) and Rule 6DD:
The appellant contended that the CIT(A) incorrectly held that the judicial decisions cited were not applicable due to the amendments in Section 40A(3) and Rule 6DD. The amendment altered the percentage of disallowance from 20% to 100% for cash payments exceeding Rs. 20,000. However, the appellant argued that the mitigating circumstances considered by the judicial decisions remained relevant. The CIT(A) failed to appreciate the genuineness of the transactions and the identity of the payees.

Business Expediency and Genuineness of Cash Payments:
The appellant, a small trader, made cash payments exceeding Rs. 20,000 due to business expediency and other relevant factors. The payments were made to specific concerns, and the appellant provided confirmatory letters from the recipients. The appellant cited various judicial decisions where courts held that genuine transactions and identifiable payees justified cash payments, even if they exceeded the prescribed limit. The CIT(A) confirmed the disallowance of Rs. 9,20,569 without adequately considering these factors.

Judicial Decisions Cited:
The appellant referenced multiple cases where courts allowed deductions for cash payments under exceptional circumstances, emphasizing the genuineness of transactions and the identity of payees. These cases included:
1. Smt. Harshila Chordia v. ITO (298 ITR 349) - Rule 6DD must be interpreted liberally.
2. CIT v. Rhydburg Pharmaceuticals Ltd (269 ITR 561) - Tribunal justified in allowing expenditure.
3. Goenka Agencies v. CIT (263 ITR 145) - Payments not disallowed under exceptional circumstances.
4. CIT v. Nikko Auto Ltd (256 ITR 476) - Payments justified due to business exigencies.
5. Ramaditya Investments v. CIT (262 ITR 491) - Genuineness of transactions not doubted.
6. CIT v. Eastern Condiments Pvt Ltd (261 ITR 76) - Payments allowed due to suppliers' insistence on cash.
7. Shri Mahabir Industries v. CIT (220 ITR 459) - Tribunal's conclusion without considering exceptional circumstances.
8. Aggarwal Steel Traders v. CIT (250 ITR 738) - Confirmatory letters supported cash payments.
9. CIT v. Suresh Kumar Agarwal (249 ITR 113) - Tribunal right in deleting disallowance.
10. Walford Transport (Eastern India) Ltd v. CIT (240 ITR 902) - Genuine transactions not disallowed.
11. CIT v. Chrome Leather Co. Pvt Ltd (235 ITR 708) - Identity of payee and genuineness established.
12. CIT v. Rajendra Rice Mill (232 ITR 217) - Cash payments allowed under exceptional circumstances.
13. CIT v. Mahavir Stores (232 ITR 300) - Justification for cash payments found.
14. Janambhumi v. CIT (225 ITR 517) - Deduction allowed due to exceptional circumstances.
15. Attar Singh Gurmukh Singh v. ITO (191 ITR 667) - Genuine transactions not excluded from deduction.

Tribunal's Decision:
The Tribunal found that the Assessing Officer did not exhaustively consider the mitigating circumstances under the Proviso to Section 40A(3) before making the disallowance. The CIT(A) also failed to address the issue properly and did not provide adequate opportunity to the appellant. The Tribunal remitted the matter back to the Assessing Officer to reconsider the disallowance of cash payments under Section 40A(3) in accordance with the Proviso, considering the judicial decisions cited by the appellant. The appellant was directed to produce necessary evidence to support the contentions.

Conclusion:
The appeal was allowed for statistical purposes, and the matter was remitted back to the Assessing Officer for reconsideration, ensuring the appellant is given adequate opportunity to present the case.