2014 (8) TMI 486 - HC - Income Tax

Interpretation of section 40A(3) - Cash payment Genuineness of purchases - Whether the Tribunal was justified in confirming the addition despite the evidence placed on record that the payments were made only at the instance of the vendor when the genuineness of purchases is proved and the identity of payee is also established Held that - The purpose of Section 40 of the Act fell for consideration and interpretation by the Supreme Court in Attar Singh Gurmukh Singh v. Income-tax Officer 1991 (8) TMI 5 - SUPREME Court - Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the rule - Genuine and bona fide transactions are not taken out of the sweep of the section - It is open to the assessee to furnish to the satisfaction of the AO the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee - It is also open to the assessee to identify the person who has received the cash payment - Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule - section 40A(3) and rule 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. There existed some justification for the traders, at least at the relevant point of time, in insisting the payment of amounts, in cash - The reason is that the banking activity was not that prominent and popular, and instances of cheques issued by agencies or persons, in the course of business being bounced, were not infrequent - The delay in receiving the consideration for any material supplied by a trader would have its own cascading effect on the business activities - It is only when both the parties to the contract are known to each other so intimately, and the seller is very confident not only of the solvency of the purchaser, but also his business ethics, that he would be inclined to receive the consideration through cheque. The Assessing Authority has taken a hyper-technical view and failed to discern the spirit underlying the relevant provisions - the Appellate Authority exhibited an element of objectivity, it was only in a limited aspect - The Tribunal has ignored the purport of the relevant provisions of law and refused to grant any relief to the assessee - once the assessee has placed the proof of payment in cash for its transaction to the seller, and the latter admitted the payment, there is no question of disallowing amount by the Assessing Authority Decided in favour of Assessee.

Summary

Issues Involved:
1. Justification of the addition under Section 40A(3) of the Income Tax Act.
2. Applicability of Rule 6DD exemptions.
3. Interpretation of Section 40A(3), Rule 6DD, and relevant CBDT circulars.
4. Assessment of genuine business transactions versus the use of black money.

Detailed Analysis:

1. Justification of the Addition under Section 40A(3):
The primary issue was whether the Tribunal was justified in confirming the addition despite evidence that payments were made at the vendor's instance, with the genuineness of purchases and the identity of the payee being established. The applicant, an oil mill, declared a loss of Rs. 69,400 but had made cash payments amounting to Rs. 9,33,720 for purchasing groundnut. The Assessing Officer disallowed this amount under Section 40A(3), which mandates payments over Rs. 2,500 to be made via crossed cheque or bank draft. The Appellate Authority granted partial relief, reducing the disallowed amount to Rs. 6,08,000, but the Tribunal upheld the disallowance.

2. Applicability of Rule 6DD Exemptions:
The applicant argued that their case fell under the exemptions provided in Rule 6DD, specifically clauses (f) and (j), which allow for exceptions to the cash payment rule under certain conditions. The applicant contended that the payments were made in cash due to the vendor's insistence and the necessity to accommodate commission agents and agriculturist-principals. The applicant provided a certificate from the vendor, M/s Satyanarayana Trading Company, confirming the necessity of cash payments.

3. Interpretation of Section 40A(3), Rule 6DD, and Relevant CBDT Circulars:
The judgment emphasized the need to interpret Section 40A(3) in conjunction with Rule 6DD and the CBDT circular dated 31-05-1977. The circular outlines circumstances under which cash payments might be justified, such as the seller's refusal to accept cheques, the necessity for expeditious settlement, and the impracticality of cheque payments due to business exigencies. The Supreme Court in Attar Singh Gurmukh Singh v. Income-tax Officer clarified that Section 40A(3) and Rule 6DD aim to regulate business transactions and prevent the use of unaccounted money, but genuine and bona fide transactions should not be unduly restricted.

4. Assessment of Genuine Business Transactions versus Use of Black Money:
The court noted that the applicant had provided sufficient evidence, including a certificate from the vendor, to demonstrate the necessity and genuineness of the cash payments. The judgment highlighted that the provisions of Section 40A(3) and Rule 6DD should not be interpreted in a manner that imposes undue rigor on genuine business transactions. The court observed that the Assessing Authority took a hyper-technical view, and the Tribunal failed to consider the spirit of the relevant provisions.

Conclusion:
The court concluded that the applicant had sufficiently justified the cash payments and that the disallowance under Section 40A(3) was not warranted. The question referred by the Tribunal was answered in favor of the assessee, emphasizing that genuine business transactions should not be penalized when adequate proof and justification are provided. The judgment underscores the importance of a liberal interpretation of tax provisions to facilitate genuine business activities while preventing the misuse of black money.