2019 (1) TMI 397 - AT - Income Tax

Addition u/s 40A - expenses incurred in cash in excess of INR 20,000/- otherwise than by account payee cheques/ bank drafts - when the payments were made on bank holidays, when the payments were made to agent of the assessee namely M/s. Surya Marbles and other payments - Held that - So far as the payments made in cash in excess of ₹ 20,000/- on bank holidays/ national holidays are concerned, Assessing Officer in the remand report has admitted that such payments have been made on bank holidays. The provision of rule 6DD(J) provides that provisions of section 40A(3) shall not be applicable where the payment was required to be made on a day on which the banks were not open on account of holidays or strike. Since the assessee in the instant case has admittedly made the payments on a day on which the banks were not open on account of holidays and the Assessing Officer has also admitted that such payments were made on bank holidays therefore under the facts and circumstances of the case we are of the considered opinion that provision of section 40A(3) are not applicable to the payments made in excess of ₹ 20,000/- on bank holidays. Thus set aside the order of the CIT(A) and direct the Assessing Officer to remove the above expenses from the purview of provision of section 40A(3) as these expenses are covered under Rule 6DD(J) of the IT Rules. Payments made to the agent of the assessee M/s. Surya Marbles is concerned, we find from the copy of the agreement dated 01.04.2004 that there is an agreement between the assessee and Surya Marbles wherein Surya Marbles was appointed as agent for the assessee company. CIT(A) rejected the same on the basis of remand report of the AO who had stated that rule 6DD(K) is applicable in exceptional or unavoidable circumstances. Further he had reported that M/s. Surya Marbles was supplier of the assessee company and not an agent. At no point of time either the agreement dated 01.04.2004 or the certificate dated 19.02.2013 are found to be false or untrue. The assessee in the instant case has demonstrated by documentary evidence that M/s. Surya Marbles was the agent of the assessee company. Under these circumstances when the payment was made to the agent of the assessee for the purchases of materials on behalf of the assessee, therefore, we are of the considered opinion that the provisions of section 40A(3) are not applicable, in view of Rule 6DD(K) which provides that where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person, following payments are covered under rule 6DD (K) and the provisions of section 40A(3) will not be applicable. Balance expenses no merit in the arguments of assessee are that the provision of section 40A(3) are not applicable to such payments made in cash in excess of ₹ 20,000/-. Assessee could not satisfactorily substantiate as to why provision of section 40A(3)are not applicable to the above payments. Provision of section 40A(3) are applicable for the remaining payments. AO is accordingly directed to modify the order and recompute the disallowance to be made u/s 40A(3) on account of the remaining payments. - Decided partly in favour of assessee.

Issues Involved:
1. Application of Section 40A(3) of the Income Tax Act on cash payments exceeding ?20,000.
2. Applicability of Rule 6DD(j) for payments made on bank holidays.
3. Applicability of Rule 6DD(k) for payments made to agents.
4. Applicability of Section 40A(3) on unaccounted cash payments recorded in seized documents.

Detailed Analysis:

1. Application of Section 40A(3) of the Income Tax Act on Cash Payments Exceeding ?20,000
The primary issue involves the disallowance of cash payments exceeding ?20,000 under Section 40A(3) of the Income Tax Act. The assessee made substantial cash payments, which were disallowed by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal examined whether these payments fell under the exceptions provided by Rule 6DD of the Income Tax Rules.

2. Applicability of Rule 6DD(j) for Payments Made on Bank Holidays
The Tribunal considered whether cash payments made on bank holidays could be exempted under Rule 6DD(j). The assessee argued that payments were made on holidays to avoid disruption in construction activities. The AO, in his remand report, confirmed that payments were indeed made on bank holidays but contended that there was no compulsion for such payments. The Tribunal found merit in the assessee's argument, noting that construction activities continued on holidays and payments were made from unaccounted cash received on those days. Consequently, the Tribunal held that payments made on bank holidays were covered under Rule 6DD(j) and directed the AO to exclude these payments from the purview of Section 40A(3).

3. Applicability of Rule 6DD(k) for Payments Made to Agents
The second category involved payments made to an agent, M/s. Surya Marbles, for procuring marbles. The assessee provided an agreement and a certificate confirming the agent's role. The AO, however, considered the agent as a supplier. The Tribunal noted that the agreement and certificate were not found to be false and that the payments were made to the agent for further disbursement to suppliers. Thus, the Tribunal held that these payments were covered under Rule 6DD(k), which exempts payments made to agents from Section 40A(3). The AO was directed to exclude these payments from disallowance.

4. Applicability of Section 40A(3) on Unaccounted Cash Payments Recorded in Seized Documents
The assessee contended that Section 40A(3) should not apply to unaccounted cash payments recorded in seized documents. The Tribunal, however, found no merit in this argument. The assessee failed to substantiate why the provision should not apply to these payments. Therefore, the Tribunal upheld the applicability of Section 40A(3) for the remaining payments and directed the AO to recompute the disallowance accordingly.

Conclusion:
The Tribunal partially allowed the appeals, providing relief for cash payments made on bank holidays and to agents, while upholding the disallowance for other cash payments exceeding ?20,000 under Section 40A(3). The AO was directed to modify the assessment orders in line with these findings.

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