2016 (4) TMI 856 - AT - Income Tax

Addition on account of disallowance of claim of purchases u/s 40A(3) - CIT(A) deleted the addition - Held that - Terms of Section 40A(3) of the Act are not absolute and that the genuine and bonafide transactions are not taken out of the sweep of the Section 40A(3) of the Act and it is open to the assessee to furnish to the satisfaction of the AO, the circumstances under which the payment in the manner prescribed u/s 40A(3) of the Act was not practicable or would have caused to the genuine difficulty to the payee. In the present case, the seller of the potatoes insisted for cash payments because he doubted the credibility of the assessee who required the purchases to be made for smooth running of its business. The purchases were made through the agent Sh. S.K. Tiwari who procured the potatoes from M/s R.A. Traders and this fact was not doubted by the AO that the purchases were made by the assessee through its agent Sh. S.K. Tiwari from M/s R.A. Traders, Moradabad in cash. In the instant case, the cash payments were made by the assessee to the agent Sh. S.K. Tiwari who in turn made the purchases in cash for the assessee and charged the commission for the said transaction which has been accepted as genuine and allowed to be set off against the income in the profits and loss accounts, by the AO. Therefore, the transaction relating to the purchases of potatoes was clearly covered by the exception laid down in Rule 6DD(k) of the I.T. Rules, 1962 and was outside the purview of the provisions of Section 40A(3) of the Act. We are of the view that the ld. CIT(A) rightly deleted the addition made by the AO . As regards to the remaining addition made by the AO and deleted by the ld. CIT(A) is concerned, the contention of the assessee was that those purchases were made directly from the small farmers, the said contention has not been doubted at any stage. Therefore, this transaction is covered under Rule 6DD(e) of the I.T. Rules, 1962 wherein cash payments made for purchase of agricultural produce is kept outside the purview of Section 40A(3) of the act. Therefore, we do not see any infirmity in the order of the ld. CIT(A) on this issue. - Decided against revenue

Issues Involved:
1. Disallowance of claim of purchases under Section 40A(3) of the Income Tax Act, 1961.
2. Applicability of Rule 6DD(k) of the Income Tax Rules, 1962.
3. Requirement and legality of cash payments.
4. Role and confirmation of the agent in the transaction.
5. Genuineness of the transaction and business expediency.
6. Purchases from farmers and applicability of Rule 6DD(e).

Detailed Analysis:

1. Disallowance of Claim of Purchases under Section 40A(3):
The primary issue in this appeal is the deletion of the addition of Rs. 1,20,00,000 made by the Assessing Officer (AO) on account of disallowance of claim of purchases under Section 40A(3) of the Income Tax Act, 1961. The AO observed that the assessee made substantial purchases in cash, which exceeded the limit specified under Section 40A(3), thereby attracting disallowance.

2. Applicability of Rule 6DD(k):
The assessee argued that the transaction was covered under Rule 6DD(k) of the Income Tax Rules, 1962, which provides exceptions to the cash payment rule. The AO, however, contended that the assessee failed to prove the necessity of cash payments and that the agent's involvement was merely technical. The CIT(A) found that the payments were indeed made through an agent, Sh. S.K. Tiwari, who confirmed his role and charged a commission, thus satisfying the conditions of Rule 6DD(k).

3. Requirement and Legality of Cash Payments:
The AO argued that there was no legal or factual requirement for the assessee or its agent to make payments in cash. The CIT(A) countered this by noting that the seller, M/s R.A. Traders, demanded cash payments due to doubts about the assessee's credibility, which constituted a valid business expediency under Rule 6DD(k).

4. Role and Confirmation of the Agent:
The CIT(A) emphasized that the agent, Sh. S.K. Tiwari, played a significant role in the transaction, as confirmed by both the agent and the seller. The agent's involvement and the commission charged were accepted by the department, validating the transaction under Rule 6DD(k).

5. Genuineness of the Transaction and Business Expediency:
The CIT(A) observed that the AO did not question the genuineness of the transaction or the source of funds. The Supreme Court's ruling in Attar Singh Gurmukh Singh vs. ITO was cited, which states that genuine and bona fide transactions are not excluded from the purview of Section 40A(3). The CIT(A) concluded that the transaction was genuine and driven by business needs, thus falling within the exceptions of Rule 6DD(k).

6. Purchases from Farmers and Applicability of Rule 6DD(e):
Regarding the balance amount of Rs. 2,88,000, the CIT(A) noted that these purchases were made directly from farmers. The AO did not dispute this fact, and the transaction was covered under Rule 6DD(e), which exempts cash payments for agricultural produce from the restrictions of Section 40A(3).

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the cash payments made through the agent for the purchase of potatoes were covered under Rule 6DD(k) and were genuine business transactions. The appeal by the department was dismissed, and the additions made by the AO were deleted. The judgment emphasized the importance of considering business expediency and the genuineness of transactions in applying Section 40A(3) and its exceptions under Rule 6DD.

← Previous Next →