2018 (12) TMI 814 - AT - Income Tax

Addition u/s 40A(3) - cash payment for freight charges paid to clearing and forwarding against for clearing our goods for exports - Held that - In the instant case the assessee has made payment to its clearing and forwarding agent mostly through banking channel except in few instances where the payment was made in cash. The payment made by the assessee through banking channel was accepted by the AO but the same payment made to the same party in cash was disallowed under the provision of section 40A(3) of the Act. From the above facts there remains no ambiguity that the payment/expenses were not doubtful and these were incurred exclusively for the purpose of the business. The party to whom the payment was made in cash was a genuine party. In such circumstances we note that the Hon ble ITAT, Ahmadabad in the case of M/s. Shiv Krupa Tin Containers v/s ITO 2016 (9) TMI 445 - ITAT AHMEDABAD allowed the deduction to the assessee - disallowances u/s 40A(3) of the Act, cannot be made if the genuineness of the transaction has not been doubted by the authorities below - we direct the AO to delete the addition made u/s 40A(3) - Decided in favour of assessee.

Summary

Issues involved:
1. Disallowance under section 40A(3) of the Income Tax Act, 1961.
2. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Analysis:

Issue 1: Disallowance under section 40A(3) of the Income Tax Act, 1961:
The assessee appealed against the addition of ?4,45,460 under section 40A(3) of the Act for cash payment of freight charges to a clearing and forwarding agent. The Commissioner of Income Tax (Appeals) upheld the disallowance, stating that the appellant failed to provide sufficient reasons for the cash payments and that the circumstances did not fall under Rule 6DD exemptions. The appellant argued that the payments were for reimbursement of expenses and fell under Rule 6DD. The Tribunal noted that most payments were made through banking channels, except for initial cash payments. Citing a previous case where deduction was allowed for cash payments related to business purposes, the Tribunal reversed the decision, stating that if the genuineness of the transaction is not in doubt, disallowance under section 40A(3) cannot be made. The Tribunal directed the Assessing Officer to delete the addition under section 40A(3), allowing the appeal.

Issue 2: Initiation of penalty proceedings under section 271(1)(c) of the Act:
The Tribunal noted that penalty proceedings under section 271(1)(c) are separate from the quantum proceedings. As the issue raised by the assessee regarding penalty proceedings was premature, the Tribunal deemed it unnecessary to adjudicate separately. The Tribunal also dismissed a general issue raised by the assessee, stating that it did not require separate adjudication.

In conclusion, the Appellate Tribunal ITAT Ahmedabad allowed the appeal of the assessee, reversing the disallowance under section 40A(3) of the Income Tax Act, 1961. The Tribunal emphasized that if the genuineness of the transaction is not in doubt, disallowance cannot be made under section 40A(3). The Tribunal directed the Assessing Officer to delete the addition, highlighting the importance of considering business expediencies in such cases.