2014 (11) TMI 559 - HC - Income Tax

Applicability of section 40A(3) Payment made of bottling charges - Rule 14 of the Karnataka Licenses General Condition Rules, 1967 mandates cash payment or not - Held that - Where the assessee incurs any expenditure in respect of which a payment is made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure - Rule 6DD of the Income Tax Rules, 1962 is in the nature of exception to the said section - to fall within that exception, the assessee relies on Rule 14 of the Karnataka Excise Licences (General Conditions) Rules, 1967 - Section 2 of the said rules explicitly makes it clear that the said rules applies to all the licences issued under the Karnataka Excise Act, 1965 for sale of liquors and every such licence shall be deemed to include the conditions prescribed by these rules as general conditions. The rules applies to the sale effected by assessee who has a licence to sell the arrack under the provisions of the Karnataka Excise Act, 1965 - It has no application to the purchase made by such licences, that is the assessee - the provision do not apply to the purchase of liquor but it applies only to sale of liquor by the assessee to its customers and therefore, the said rule do not fall within Section 6DD(j) of the Income Tax Rules so as to get exemption from application of Section 40A(3) - Both the appellate authorities have not properly looked into the said provisions and erred in applying the said provision and in holding that the exemption applies to the assessee the order of the Tribunal is set aside Decided in favour of revenue.

Summary

Issues:
1. Interpretation of Rule 14 of the Karnataka Licenses General Condition Rules, 1967 and its relation to Section 40A(3) of the Income Tax Act, 1961.
2. Applicability of Rule 6DD(j) of the Income Tax Rules, 1962 in the context of cash payments exceeding twenty thousand rupees.
3. Conflict between the provisions of the Income Tax Act and the Karnataka Licenses General Condition Rules.

Analysis:

Issue 1:
The case revolves around the interpretation of Rule 14 of the Karnataka Licenses General Condition Rules, 1967 and its interplay with Section 40A(3) of the Income Tax Act, 1961. The appellate authorities initially held that the cash payment made by the assessee for bottling charges was not in contravention of Section 40A(3) due to the mandate of Rule 14. However, the High Court observed that Rule 14 applies to the sale of liquor by the assessee, not to purchases made by the licensee. Therefore, the exemption under Rule 6DD(j) cannot be extended to the assessee in this scenario.

Issue 2:
Regarding the applicability of Rule 6DD(j) of the Income Tax Rules, 1962, it was argued that the assessee's cash payments exceeding twenty thousand rupees were justified due to exceptional circumstances as per Rule 6DD(j). The High Court clarified that for such an exception to apply, the payment must genuinely fall under the circumstances outlined in the rule. In this case, the payment for bottling charges did not meet the criteria specified in Rule 6DD(j), thereby disallowing the exemption.

Issue 3:
The conflict between the provisions of the Income Tax Act and the Karnataka Licenses General Condition Rules was a key aspect of the dispute. The High Court emphasized that the specific rule mandating cash sales under Rule 14 does not override the general provisions of Section 40A(3) of the Income Tax Act. Therefore, the High Court set aside the orders of the appellate authorities and ruled in favor of the revenue, restoring the order passed by the Assessing Authority disallowing the cash payment as a deduction.

In conclusion, the High Court's judgment clarified the limitations of Rule 14 in the context of cash payments by the assessee and reinforced the importance of adhering to the provisions of the Income Tax Act, ultimately ruling in favor of the revenue and upholding the disallowance of the cash payment as a deduction.