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2016 (9) TMI 995 - AT - Income TaxAddition u/s 40A(3) - bogus expenditure in cash - Held that - The primary object of enacting Section 40A(3) were two folds- firstly, putting a check on trading transactions with the object to evade the liability of tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequence, which were to be fallen on account of non-observation of Section 40A(3) must have nexus to the failure of such object. Therefore, the genuineness of the transactions being free from vice of any device of evasion of tax is relevant consideration. With regard to the purpose of bringing the provisions of section there is no doubt about the identity of the party. The ld. AR has directly deposited the cash in the account of the companies and has produced the sales bills of the company. So in the instant case, there is no evasion of tax by claiming the bogus expenditure in cash. - Decided in favour of assessee
Issues Involved:
1. Confirmation of disallowance under Section 40A(3) of the Income Tax Act, 1961. 2. Applicability of Rule 6DD exemptions. 3. Genuineness of transactions and business expediency. Issue-wise Detailed Analysis: 1. Confirmation of Disallowance under Section 40A(3): The primary issue in both appeals is whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the disallowance of ?62,48,722/- under Section 40A(3) of the Income Tax Act, 1961. The assessee, an individual retail vendor of country spirit, made cash payments to Asansol Bottling Packaging Co. Ltd. (ABPCL) for the purchase of country spirit. The Assessing Officer (AO) disallowed these payments, citing a violation of Section 40A(3) and Rule 6DD of the Income Tax Rules, 1962. The CIT(A) upheld this disallowance, noting that the payments were not made by account payee cheque or demand draft, as mandated by Section 40A(3). 2. Applicability of Rule 6DD Exemptions: The assessee argued that the disallowance should not apply due to exemptions under Rule 6DD(b) and Rule 6DD(k), which pertain to payments made under certain conditions. The CIT(A) rejected this argument, stating that the assessee failed to prove any compulsion to pay in cash as required by these rules. The CIT(A) emphasized that the West Bengal Excise (Supply of Country Spirit on Payment of Duty) Rules, 2005, do not mandate cash payments to the bottling plant. 3. Genuineness of Transactions and Business Expediency: The assessee contended that the transactions were genuine and necessary for business operations. The CIT(A) acknowledged the genuineness of the transactions but maintained the disallowance due to non-compliance with Section 40A(3). The Tribunal, however, found that in similar cases, such as Prabir Kumar Mullick vs. CIT, Kolkata, and other cited judgments, the courts had ruled in favor of the assessee when genuine business transactions were involved, even if payments were made in cash. Tribunal's Judgment: The Tribunal referred to several precedents, including: - Attar Singh Gurmukh Singh vs. ITO: Section 40A(3) is designed to prevent tax evasion and ensure genuine transactions. - CIT vs. CPL Tannery: Business expediency and genuine transactions can justify cash payments. - Anupam Tele Services vs. ITO: Cash payments made due to business necessity should not be disallowed. - Sri Laxmi Satyanarayana Oil Mill vs. CIT: Genuine transactions with proof of payment should not be disallowed under Section 40A(3). The Tribunal concluded that the primary objective of Section 40A(3) is to curb tax evasion and promote banking habits. In this case, the transactions were genuine, and the payments were directly deposited in the supplier's account. Therefore, the disallowance under Section 40A(3) was not justified. Outcome: The Tribunal allowed the assessee's appeals for both assessment years, reversing the orders of the lower authorities and confirming that the cash payments made by the assessee were genuine and necessary for business operations, thereby not attracting disallowance under Section 40A(3). Final Order: The appeals were allowed, and the order was pronounced in open court on 12/08/2016.
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