2019 (1) TMI 607 - HC - Income Tax

Addition of cash transactions u/s 40A(3) - assessee had purchased gold jewellery worth ₹ 34.68 Crores by way of cash in the auction - Held that - The nature of transaction as propounded by the assessee before the AO is that several persons joined together and formed a syndicate and on behalf of the syndicate, the assessee bids in the auction conducted by the Finance Company which sells the old gold ornaments. Case of the assessee that as soon as the auction is confirmed, the highest bidder has to remit part of the amount in cash and the amount which has to be paid is not known to the assessee earlier and therefore, the payments cannot be made through banking channel. In our considered view, the Assessing Officer rightly examined the nature of transaction done by the assessee and on facts was not convinced that the assessee would fall under any one of the exceptional clauses under Rule 6DD of the Rules. CIT-A examined the nature of transaction and found that Section 40A(3) applies with full force to the facts of the assessee s case. Once again before the Tribunal, the facts were re-examined and the Tribunal pointed out that the assessee failed to demonstrate that the conditions of the bid required the assessee to effect payments in cash then and there and payments could not have been made by cheque or Demand Draft or any other mode. The Tribunal pointed out that there is no explanation as to what stopped the assessee from effecting payments through banking channel. Tribunal found that the agreement with syndicate members, if any, was not produced by the assessee before the lower authorities or before the Tribunal. Further the Tribunal held that the assessee could not demonstrate that he was representing any syndicate nor he could demonstrate that he was collecting cash from such syndicate members for making payments to the Finance Company. The Tribunal correctly held that the assessee was unable to demonstrate a situation which compelled him to make payment in cash which would have exempted him from application of recourse of Section 40A(3) of the Act. - Decided against the assessee

Summary

Issues:
1. Interpretation of Section 40A(3) of the Income Tax Act, 1961 regarding cash transactions.
2. Application of Rule 6DD of the Income Tax Rules, 1962 to exempt cash payments.
3. Business expediency and genuine transactions in relation to disallowance of expenditure.

Analysis:
1. The appellant challenged the disallowance of cash transactions under Section 40A(3) of the Act. The appellant claimed that the cash payments made for purchasing gold ornaments were genuine and within the ambit of business expediency. The Assessing Officer disallowed the expenditure, citing the provisions of Section 40A(3) as the appellant had made cash payments exceeding ?20,000. The appellant argued that a syndicate of bidders was formed, and payments were made in cash due to the auction process's requirements. The Commissioner of Income Tax upheld the disallowance, stating that the appellant failed to establish exemption under Rule 6DD of the Rules. The Tribunal also dismissed the appeal, emphasizing that the appellant did not prove the necessity of cash payments and failed to provide essential documentation to support the claim.

2. The appellant contended that the auction's terms necessitated immediate cash payments upon winning bids, justifying the cash transactions. However, the Tribunal found no evidence supporting the appellant's claims of being part of a syndicate or the need for cash payments due to auction requirements. The Tribunal noted the absence of agreements with syndicate members or proof of cash collection for payments to the Finance Company. The Tribunal concluded that the appellant did not demonstrate circumstances compelling cash payments to warrant exemption from Section 40A(3) of the Act.

3. The High Court analyzed the factual findings of the lower authorities and the Tribunal, emphasizing that the dispute centered on factual aspects. The Court noted that the authorities thoroughly examined the nature of the transactions and the appellant's justifications for cash payments. The Court upheld the Tribunal's decision, stating that the appellant failed to provide substantial evidence to support the necessity of cash transactions or the existence of a syndicate. As the appellant could not establish a situation warranting cash payments, the Court found no legal questions, let alone substantial ones, justifying a different outcome. Consequently, the Court dismissed the tax case appeal, affirming the decisions of the lower authorities and the Tribunal.