2017 (3) TMI 183 - AT - Income Tax

Disallowance u/s 40A(3) - payments made in cash to land owners - Held that - Rule 6DD(g) excludes the payment, which is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town. In the above rule, with regard to the person who receives the payment, it prescribes two situations wherein first situation, rule allows the payer to pay in the place of residence and in the second situation, the payment made in the place of the dealing or place of registration in which the person carries the business, profession or vocation. In the given case, the assessee claims that the payment was made in the place of vocation and the revenue infers that the payment was made in the place of residence due to the fact that the banking facilities are available in the place of residence. The revenue has not substantiated its claim that the payments were actually made in the place of residence. In the absence of such evidence, we are inclined to accept the contention of the assessee that these payments were made in the place of vocation i.e., the payments were made in villages where the agricultural lands are situated. Thus we set aside the orders of CIT(A) and allow the appeals of the assessee in both the years under consideration. With regard to land development expenditure, these expenses were incurred in the villages to develop the land, where there is no banking facilities. Hence, we are inclined to accept the contention of the assessee that these payments were made directly to the employees of the company to carry out the development work. Accordingly, these expenses are also not hit by the provisions of section 40A(3). With regard to payment of commission, we have noticed that the AO has disallowed the payment to agents due to the fact that genuineness of the payments were not proved due to non-compliance to the notices of AO and mismatch of the signatures on the confirmation letters submitted by the assessee. The ld. AO had accepted the payments which are properly documented. Hence, we accept the findings of the AO and accordingly grounds raised by the assessee in this regard are dismissed.

Summary

Issues Involved:
1. Applicability of Section 40A(3) for cash payments exceeding ?20,000.
2. Disallowance of commission payments.
3. Disallowance of land development expenses.
4. Levy of interest under Sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Applicability of Section 40A(3) for Cash Payments Exceeding ?20,000:
The assessee argued that payments were made to poor agriculturists without bank accounts, directly to laborers, and for petty expenses. The Assessing Officer (AO) found multiple violations of Section 40A(3) and made corresponding additions. The CIT(A) upheld the AO's decision, stating the explanations were unsubstantiated and the onus was on the assessee to provide detailed evidence, which was not done. The Tribunal referred to a similar case, Sahitya Housing Pvt. Ltd. vs. DCIT, where it was held that payments made in villages without banking facilities fall under Rule 6DD(g) exceptions. The Tribunal accepted the assessee's claim that payments were made in villages where agricultural lands were situated, thus setting aside the CIT(A)'s order and allowing the assessee’s appeal on this issue.

2. Disallowance of Commission Payments:
The AO disallowed part of the commission payments, determining an allowable commission rate of 6.4% based on market rates, while the assessee claimed actual payments were higher. The CIT(A) confirmed the AO's disallowance, noting the assessee failed to provide sufficient details and evidence of the commission payments. The Tribunal upheld the AO's findings, agreeing that the genuineness of the payments was not proven due to non-compliance with notices and mismatched signatures on confirmation letters. Thus, the Tribunal dismissed the assessee's grounds related to commission payments.

3. Disallowance of Land Development Expenses:
The assessee claimed that payments for land development were made directly to employees in villages without banking facilities. The CIT(A) confirmed the AO's disallowance. However, the Tribunal, considering the lack of banking facilities in the villages, accepted the assessee's contention that these payments were necessary and not hit by Section 40A(3). The Tribunal set aside the CIT(A)'s order on this issue, allowing the assessee's appeal.

4. Levy of Interest Under Sections 234B and 234C:
The assessee contested the levy of interest under Sections 234B and 234C. The Tribunal did not provide a detailed analysis of this issue in the judgment, focusing primarily on the disallowances and applicability of Section 40A(3).

Revenue's Appeal:
The revenue appealed against the CIT(A)'s deletion of disallowances under Section 40A(3) for payments made to landowners and employees. The CIT(A) had held that Rule 6DD(g) exceptions applied since payments were made in villages without banking facilities. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal.

Conclusion:
The Tribunal partly allowed the assessee's appeals, setting aside disallowances under Section 40A(3) for cash payments and land development expenses, but upheld the disallowance of commission payments. The revenue's appeal was dismissed, affirming the CIT(A)'s deletion of disallowances under Section 40A(3).