2018 (6) TMI 1240 - AT - Income Tax

Disallowing the claim of expenditure by applying section 40A(3) - Held that - The source of cash payments is clearly identifiable in form of the withdrawals from the assessee s bank accounts and the said details were submitted before the lower authorities and have not been disputed by them. It is not the case of the Revenue either that unaccounted or undisclosed income of the assessee has been utilised in making the cash payments. Identity of the persons from whom the various plots of land have been purchased and source of cash payments as withdrawals from the assessee s bank account has been established. The genuineness of the transaction has been established as evidenced by the registered sale deeds and lastly, the test of business expediency has been met in the instant case. In case of Harshila Chordia 2006 (11) TMI 117 - RAJASTHAN HIGH COURT , the consequences, which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration. The intent and the purpose for which section 40A(3) has been brought on the statute books has been clearly satisfied in the instant case. Therefore, being a case of genuine business transaction, no disallowance is called for by invoking the provisions of section 40A(3) - Decided in favour of assessee

Issues Involved:
1. Legitimacy of disallowance under Section 40A(3) of the Income Tax Act, 1961.
2. Applicability of Rule 6DD exceptions.
3. Genuineness and business expediency of cash payments.

Issue-Wise Detailed Analysis:

1. Legitimacy of Disallowance under Section 40A(3) of the Income Tax Act, 1961:
The core issue revolves around the disallowance of ?1,71,67,000/- by applying Section 40A(3), which mandates that any expenditure incurred in respect of which payment is made in cash exceeding ?20,000/- should be disallowed unless it falls under the exceptions provided in Rule 6DD. The assessee argued that the payments were made in cash due to the sellers' insistence and business exigencies. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this contention, stating that the payments did not fall under any specific clause of Rule 6DD and that there were no unavoidable circumstances justifying cash payments.

2. Applicability of Rule 6DD Exceptions:
The AO and CIT(A) held that the assessee's case did not qualify under any sub-clauses of Rule 6DD, which provides exceptions to Section 40A(3). The AO dismissed the reliance on the old CBDT Circular No. 220 (dated 31.05.1977), stating it was outdated. The CIT(A) further noted that the assessee failed to specify under which clause of Rule 6DD its case fell and that most of the judicial pronouncements relied upon by the assessee pertained to the pre-amended Rule 6DD. The CIT(A) emphasized that the amended Rule 6DD, effective from AY 2009-10, had deleted considerations of exceptional and unavoidable circumstances, making the previous case laws inapplicable.

3. Genuineness and Business Expediency of Cash Payments:
The assessee contended that the transactions were genuine, supported by registered sale deeds, and the identity of the sellers was established. The payments were made in cash due to the sellers' refusal to accept cheques, and the delay in cash payments could have resulted in losing the land deals. The assessee argued that the provisions of Section 40A(3) are intended to curb tax evasion and not to penalize genuine transactions. The assessee relied on various judicial pronouncements, including the Hon'ble Supreme Court's decision in Attar Singh Gurmukh Singh vs. ITO, which emphasized that genuine and bona fide transactions should not be disallowed under Section 40A(3).

Tribunal's Findings:
The Tribunal considered the facts and legal precedents, emphasizing the need to interpret Section 40A(3) in conjunction with Rule 6DD. It noted that the genuineness of the transactions and the identity of the sellers were not disputed. The Tribunal referred to the Hon'ble Supreme Court's decision in Attar Singh Gurmukh Singh, which highlighted that business expediency and other relevant factors should be considered, and genuine transactions should not be disallowed. The Tribunal also cited the Hon'ble Rajasthan High Court's decision in Smt. Harshila Chordia vs. ITO, which stated that the consequences of non-observance of Section 40A(3) must have a nexus to the failure of the provision's objective, and genuine transactions should be exempted from disallowance.

Conclusion:
The Tribunal concluded that the assessee's transactions were genuine, supported by registered sale deeds, and the payments were made out of disclosed sources. The Tribunal held that the business expediency justified the cash payments, and there was no intention of tax evasion. Therefore, the disallowance under Section 40A(3) was not warranted, and the appeal of the assessee was allowed.

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