2016 (5) TMI 590 - HC - Income Tax

Disallowance u/s 40A(3) - genuineness of the cash payments - consideration paid to agriculturists in respect of purchase of agricultural lands - Held that - All the three authorities have failed to appreciate that when a vast extent of agricultural lands is purchased from several persons, especially in villages, it is not possible to expect the villagers to accept the sale consideration by way of crossed account payee cheque or bank draft. Therefore, so long as the payees are identified and the genuineness of the transaction is not questioned and so long as the payments have been made at the time of registration in the presence of the Sub Registrar, the case would fall under the exceptions provided in Clause (j) of Rule 6DD. Therefore, we are of the considered view that the questions of law are to be answered in favour of the assessee

Issues Involved:

1. Confirmation of disallowance of 20% of total consideration paid in cash for the purchase of agricultural lands under Section 40A(3) of the Income Tax Act.
2. Justification of disallowance under Section 40A(3) despite the genuineness of cash payments and considerations of business expediency.

Issue-wise Detailed Analysis:

1. Confirmation of Disallowance of 20% of Total Consideration Paid in Cash for the Purchase of Agricultural Lands under Section 40A(3):

The core issue revolves around the applicability of Section 40A(3) of the Income Tax Act, 1961, which mandates that any payment exceeding ?10,000, if made otherwise than by crossed cheque or demand draft, will result in a disallowance of 20% of such expenditure. The appellant made cash payments totaling ?29,50,000/- for the purchase of agricultural lands, leading to a disallowance of ?5,90,000/- added to the total income.

The assessee contended that the payments were made before the Sub-Registrar and were necessitated by business expediency, arguing that Section 40A(3) should not apply. However, the Commissioner of Income Tax (Appeals) upheld the disallowance, and the Tribunal dismissed the appeal, stating that Rule 6DD(j) of the Income Tax Rules, which provides exceptions to Section 40A(3), was not applicable.

2. Justification of Disallowance under Section 40A(3) Despite the Genuineness of Cash Payments and Considerations of Business Expediency:

The Tribunal's decision was challenged on the grounds that the genuineness of the payments and the identity of the payees were established, fulfilling the fundamental requirements. The appellant argued that the payments were made under exceptional or unavoidable circumstances and that it was impractical to make payments via crossed cheques or demand drafts due to the nature of the transaction and the necessity for expeditious settlement.

The Court noted that neither the Commissioner of Income Tax (Appeals) nor the Tribunal adequately considered the scope of Rule 6DD(j), which lists circumstances under which cash payments exceeding ?10,000/- would not attract disallowance under Section 40A(3). The Court highlighted that the appellant's transactions involved purchasing agricultural lands from multiple sellers, often in villages where banking facilities were limited, making cash payments a practical necessity.

The Court emphasized that the payments were made in the presence of the Sub-Registrar during the registration of sale deeds, ensuring the genuineness and official recording of the transactions. The Court referred to Circular No.220 dated 31.5.1977, which clarifies that genuine and bonafide transactions should be considered exceptions under Rule 6DD(j).

The Court also referenced judgments from other High Courts, which supported a liberal interpretation of Rule 6DD(j) in cases where the transactions were genuine, and the identity of the payees was established. It was noted that the object of Section 40A(3) is to curb black money transactions, not to impede genuine business transactions.

Conclusion:

The Court concluded that the disallowance under Section 40A(3) was not justified in this case, as the payments were genuine, the identity of the payees was established, and the transactions were conducted in a manner necessitated by business expediency. The questions of law were answered in favor of the assessee, and the appeal was allowed.

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