2017 (10) TMI 1016 - AT - Income Tax

Disallowance made u/s 40A(3) - Held that - Assessee s case falls under the exceptions provided in Rule 6DD(b) and Rule 6DD(k) of the Rules. In view of the aforesaid facts and circumstances and respectfully following the judicial precedents relied upon hereinabove, we have no hesitation in deleting the disallowance made u/s 40A(3) of the Act in all the years under appeal. Accordingly, the grounds raised by the assessee for all the years under appeal are allowed. Appeal of the revenue is dismissed.

Issues Involved:
1. Whether the Commissioner of Income Tax (Appeals) erred in holding that cash payment to M/s IFB Agro Industries Ltd. is not a violation of Section 40A(3) of the Income Tax Act, 1961.
2. Whether the Commissioner of Income Tax (Appeals) erred by holding that the cash payment to M/s IFB Agro Industries Ltd. is considered payment to the Government for the purpose of Section 40A(3).
3. Whether the Commissioner of Income Tax (Appeals) erred by holding that cash payment made to M/s IFB Agro Industries Ltd. is exempted as per Rule 6DD(b) read with Section 40A(3).
4. Whether there was any binding obligation on the assessee to make cash purchases only.

Detailed Analysis:

Issue 1: Violation of Section 40A(3)
The primary issue is whether the cash payments made by the assessee to M/s IFB Agro Industries Ltd. violate Section 40A(3) of the Income Tax Act, which disallows deductions for cash payments exceeding ?20,000. The tribunal found that the transactions were genuine, the identity of the receiver was established, and the payments were made directly into the bank account of the seller. Since the genuineness of the payments was not doubted, the provisions of Section 40A(3) were deemed inapplicable.

Issue 2: Payment to Government
The tribunal examined whether the cash payments to M/s IFB Agro Industries Ltd. could be considered payments to the Government. The tribunal referred to the West Bengal Excise Rules, 2005, which mandate that payments for country spirit must be made directly into the bank account of the wholesale licensee. The tribunal concluded that since the wholesale licensee acted at the instance of the State Government, the payments could be construed as payments to the Government, thus falling under the exception provided in Rule 6DD(b).

Issue 3: Exemption Under Rule 6DD(b)
The tribunal analyzed whether the cash payments made to M/s IFB Agro Industries Ltd. were exempt under Rule 6DD(b). Rule 6DD(b) exempts payments made to the Government in legal tender. The tribunal found that the payments were made directly into the bank account of the wholesale licensee as mandated by the Excise Department's notification, which is a Government regulation. Therefore, the payments were considered exempt under Rule 6DD(b).

Issue 4: Binding Obligation to Make Cash Purchases
The tribunal also considered whether there was a binding obligation on the assessee to make cash purchases. The tribunal noted that the Excise Department's notification mandated payments to be made directly into the bank account of the wholesale licensee, thus implying a binding obligation on the assessee to comply with this procedure.

Conclusion:
The tribunal held that the Commissioner of Income Tax (Appeals) was justified in deleting the disallowance made under Section 40A(3). The tribunal found that the payments were genuine, made directly into the bank account of the wholesale licensee, and mandated by Government regulations. Therefore, the payments were exempt under Rule 6DD(b) and did not violate Section 40A(3). The appeal by the revenue was dismissed.

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