2017 (11) TMI 461 - HC - Income Tax

Addition u/s 40A(3) - Held that - The second proviso to s. 40A(3) refers to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors, which means that the object of the legislature is not to make disallowance of such cash payments which have to be compulsorily made by the assessee in view of absence of banking facilities at the place of payment. In the present case, even if it assumed that the payment was made at the District headquarter, the admitted position is that the sellers did not have any bank accounts at such town and they did not reside or carry on any business or farming activity at such town. It would be too much to expect that the appellant-company would be able to compel the villagers to open bank accounts at the town which ultimately they will not be able to operate as they do not reside at such town. If such a myopic view is taken regarding the interpretation of r.6DD(h), the very object of the legislature would be frustrated. There is no dispute regarding the identity of the payees and the genuineness of the land transactions in respect of which payments have been made. It is notable that r.6DD(k) provides an exception in respect of cash payment which is made on a day on which the banks were closed. This proves that the object of the legislature is to provide exception in respect of such payment which is required to be made in cash or absence of banking facilities. Rule 6DD(h) must be interpreted keeping in view this object and purpose. Therefore, the cash payments recovered under section proviso to s. 40A(3) and r.6DD(h). The AO is directed to delete the addition - Decided in favour of assessee.

Summary

Issues Involved:
1. Justification of the Tribunal's decision to delete the addition of ?1,65,50,000 and ?19,05,000 under Section 40A(3) of the Income Tax Act.
2. Applicability of Section 40A(3) on expenditure for stock-in-trade.
3. Consideration of exceptions under Rule 6DD of the Income Tax Rules for cash payments.

Detailed Analysis:

1. Justification of the Tribunal's Decision to Delete the Addition:

The Tribunal deleted the addition of ?1,65,50,000 and ?19,05,000, which was initially disallowed by the Assessing Officer under Section 40A(3) of the Income Tax Act. The Tribunal held that since no expenditure was claimed in the Profit & Loss account for the year under consideration, no disallowance could be made under Section 40A(3). The Tribunal emphasized that the assessee had shown the land purchase as stock-in-trade in the balance sheet and not as an expenditure in the Profit & Loss account.

2. Applicability of Section 40A(3) on Expenditure for Stock-in-Trade:

The Tribunal examined whether Section 40A(3) applies to the expenditure for stock-in-trade, specifically land in this case. The Tribunal referred to the provisions of Section 40A(3), which disallows deductions for expenditures exceeding ?20,000 if incurred in cash. However, it concluded that since the assessee did not claim any expenditure in the Profit & Loss account, the provision of Section 40A(3) was not applicable. The Tribunal also noted that the land purchase was shown on the asset side of the balance sheet, and advances received were shown on the liability side, indicating no trading activity during the year.

3. Consideration of Exceptions under Rule 6DD:

The Tribunal also addressed the exceptions under Rule 6DD of the Income Tax Rules, which allow for cash payments in certain circumstances. The Tribunal found that payments made to villagers where no banking facilities were available fell under these exceptions. It emphasized that the genuineness of the transactions and the identity of the payees were not in question. The Tribunal cited several precedents, including the Gujarat High Court's decision in Hasanand Pinjomal and the Karnataka High Court's decision in Balaji Engineering, which supported the view that genuine cash payments in the absence of banking facilities should not be disallowed under Section 40A(3).

Precedents and Supporting Judgments:

The Tribunal's decision was supported by various judgments, including:
- Attar Singh Gurmukh Singh vs. ITO: The Supreme Court held that genuine and bona fide transactions are not taken out of the sweep of Section 40A(3).
- Hotel Nagas Pvt. Ltd. vs. CIT: The Madras High Court noted that the purpose of Section 40A(3) is to discourage cash transactions leading to unaccounted money but allowed exceptions for genuine transactions.
- CIT vs. Chaudhary and Co.: The Allahabad High Court emphasized that the intention of Section 40A(3) was not to disallow genuine cash payments.
- CIT vs. Raja Pal Automobiles: The Tribunal was justified in deleting disallowance under Section 40A(3) when the assessee provided sufficient evidence for cash payments.
- Harshila Chordia vs. CIT: The Rajasthan High Court held that payments in cash could not be disallowed when the genuineness of the transaction and identity of the payee were established.
- Gurdas Garg vs. CIT: The Punjab & Haryana High Court ruled in favor of the assessee, stating that genuine transactions should not be disallowed under Section 40A(3).
- Anupam Tele Services vs. ITO: The Gujarat High Court allowed cash payments under business expediency.
- CIT vs. Balaji Engineering: The Karnataka High Court held that Section 40A(3) could not be applied to payments made to sub-contractors when not claimed as expenditure.

Conclusion:

The Tribunal's decision to delete the additions under Section 40A(3) was justified as the assessee did not claim the expenditure in the Profit & Loss account, and the transactions fell under the exceptions provided in Rule 6DD. The appeals were dismissed, and the issues were answered in favor of the assessee and against the department.