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2013 (12) TMI 1114 - AT - Income TaxDisallowance u/s 40A(3) Cash payment for purchase of land - Held that - The assessee has made payment to various villagers for purchase of agricultural land - Normally farmers would insist on cash payments, specially when such payments involve huge amounts for the simple reason that they would like to avoid the risk of receiving cash at the town where the sale deed is to be registered before sub-registrar and which may be far way from the sellers' village Perusal of the second proviso to s. 40A(3) shows that the object of the legislature is not to make disallowance of genuine cash payments which have to be compulsorily made by the assessee in view of absence of banking facilities at the place of payment - The assessee made cash payment to the agricultural land seller villagers which are covered under second proviso to section 40A(3) of Rule 6DD(h) of the Rules Decided in favour of assessee.
Issues Involved:
1. Disallowance of cash payments exceeding Rs. 20,000 under Section 40A(3) of the Income Tax Act. 2. Applicability of Rule 6DD exceptions to the disallowance under Section 40A(3). Detailed Analysis: Issue 1: Disallowance of Cash Payments Exceeding Rs. 20,000 under Section 40A(3) of the Income Tax Act The primary issue in this appeal is the disallowance of Rs. 3,27,488, which represents 20% of the total cash payments of Rs. 16,37,440 made by the assessee for the purchase of land. The Assessing Officer (AO) invoked the provisions of Section 40A(3) of the Income Tax Act, which mandates that any payment exceeding Rs. 20,000 made otherwise than by account payee cheque or bank draft shall not be allowed as a deduction. The AO also made a disallowance of Rs. 19,943 pertaining to cash payments to the Meerut Development Authority for external development, bringing the total disallowance to Rs. 3,47,431. The Commissioner of Income Tax (Appeals) [CIT(A)] partially allowed the assessee's appeal, deleting the disallowance related to payments made to the Meerut Development Authority but upholding the disallowance of Rs. 3,27,488 related to payments made to various landowners. Issue 2: Applicability of Rule 6DD Exceptions to the Disallowance under Section 40A(3) The assessee contended that the cash payments were made to landowners with agricultural backgrounds in the presence of a Sub-Registrar, a government authority, and thus should not attract disallowance under Section 40A(3). The assessee argued that these payments fell under the exceptions provided in Rule 6DD of the Income Tax Rules, 1962, specifically Rule 6DD(h), which allows exceptions for payments made in villages not served by any bank. The assessee relied on several judgments to support their claim, including: - PACL v. Asstt. CIT [2010] 38 DTR (JP) (Tribunal) - CIT v. KKSK Leather Processors (P.) Ltd. 292 ITR 669 (Mad.) - CIT v. Chowdhary & Company 217 ITR 431 (Alld.) - CIT v. P. Praveen & Company 274 ITR 534 (Guj.) The Tribunal considered the judgment of the Delhi High Court in R.C. Goel v. Commissioner of Income Tax, which emphasized that Rule 6DD(k) should be construed liberally to avoid hardship to small businesses and professionals dependent on timely cash flow. The Tribunal noted that the assessee made cash payments to landowners with agricultural backgrounds in the presence of a Sub-Registrar, and these payments were genuine and necessary due to the absence of banking facilities in the villages. The Tribunal also referred to the judgment in PACL India Ltd., where it was held that Rule 6DD(h) should be interpreted liberally to avoid frustrating the legislature's intent. The Tribunal emphasized that the object of Section 40A(3) is not to disallow genuine payments and that Rule 6DD provides exceptions for such cases. Conclusion: The Tribunal concluded that the authorities below were not justified in confirming the disallowance of Rs. 3,27,488. The Tribunal held that the cash payments made by the assessee to landowners with agricultural backgrounds were covered under the exceptions provided in Rule 6DD(h) of the Income Tax Rules, 1962. Therefore, the disallowance made under Section 40A(3) was found to be unjust and not sustainable. The Tribunal allowed the appeal of the assessee and deleted the disallowance and additions made under Section 40A(3). Order: The appeal of the assessee is allowed, and the disallowance of Rs. 3,27,488 under Section 40A(3) is deleted. The order was pronounced in the open court on 01/03/2013.
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