2019 (12) TMI 436 - AT - Income Tax

Addition u/s 40A(3) - expenditure in excess of ₹ 20,000/- are paid in cash - HELD THAT - Considering Rule 6DD(e)(i) of the Income Tax Rules, 1962, and when the payment was made by cash exceeding ₹ 20,000/-, it was permissible if the same was paid for purchase of agricultural produces. If there are entries in the books of accounts and payment is shown to have been made to farmers and when receipts were also produced but the assessee could not produce the farmers/list of farmers for which a reasonable explanation was also given, no addition could be made u/s.40A(3) of the Act. Respectfully following the aforesaid decision, we hold that the disallowance made u/s.40A(3) of the Act deserves to be deleted and the same is hereby deleted. Disallowance of interest expenses u/s.36(1)(iii) - assessee submitted that he has utilised part of the loan amounts for speculative and share trading business but a major part is used for his other business particulars like maize trading, and liquor retails - HELD THAT - The issue raised by the Assessee with regard to borrowed funds not having been used for speculative business and the fact that there was income from speculative business and therefore even otherwise the deduction should have been allowed while computing income from speculation business, has not been considered by CIT(A) and since facts need to be examined in this regard, the matter should be remanded to the AO. We direct accordingly.

Issues Involved:

1. Disallowance of expenditure under Section 40A(3) of the Income Tax Act, 1961 for AY 2013-14 and 2014-15.
2. Disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act, 1961 for AY 2014-15.

Issue-wise Detailed Analysis:

1. Disallowance of expenditure under Section 40A(3) of the Income Tax Act, 1961 for AY 2013-14 and 2014-15:

The primary issue in these appeals concerns whether the revenue authorities were justified in disallowing sums of ?1,59,63,655 and ?1,38,75,714 by invoking the provisions of Section 40A(3) of the Income Tax Act, 1961 for AY 2013-14 and 2014-15, respectively. The Assessee, an individual engaged in the business of distributing alcoholic beverages and trading in Maize, made cash payments exceeding ?20,000 for purchasing Maize from unregistered dealers.

Under Section 40A(3), expenses exceeding ?20,000 paid in cash are not deductible. However, Rule 6DD of the Income Tax Rules, 1962 provides exceptions, including payments made for the purchase of agricultural produce to the cultivator, grower, or producer of such produce.

The Assessee argued that the payments were made to cultivators of Maize and provided names, villages, and bills evidencing the transactions. The Assessee also cited Section 65(2A) of the Karnataka APMC (Regulation) Act, 1966, which mandates the payment of market fees for moving agricultural produce, claiming it as evidence of transactions with producers.

The Assessing Officer (AO) disallowed the expenditure, citing insufficient details about the payees' identities and land holdings. The CIT(A) upheld the AO's decision. For AY 2014-15, the Assessee claimed that each payment was below ?20,000, but the AO rejected this as implausible and disallowed 25% of the total payments, suspecting that actual transactions exceeded the prescribed limit.

Before the Tribunal, the Assessee relied on the Gujarat High Court's decision in Prl. CIT Vs. Keshavala Mangaldas, where similar disallowances under Section 40A(3) were deleted, considering Rule 6DD(e)(i) exceptions for agricultural produce payments. The Tribunal found the facts of the Assessee's case identical to the Gujarat High Court case and held that disallowances under Section 40A(3) should be deleted, as the Assessee's transactions fell within the Rule 6DD(e) exception.

2. Disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act, 1961 for AY 2014-15:

The second issue pertains to the disallowance of interest expenses amounting to ?6,78,680 under Section 36(1)(iii) for AY 2014-15. The Assessee engaged in speculative transactions involving shares and commodities, funded by loans from Dhuc Bank, with interest expenses of ?27,14,720 debited to the Profit & Loss account.

The AO disallowed 25% of the interest expenses, attributing it to speculative business, which should not be deducted from non-speculative business income. The Assessee contended that the interest was primarily for non-speculative businesses like maize trading and liquor retail, and speculative income was taxable.

The CIT(A) upheld the AO's decision without considering the Assessee's detailed submissions. Both parties agreed that the issue required further examination of facts regarding the use of borrowed funds and speculative income. Consequently, the Tribunal remanded the matter to the AO for reconsideration.

Conclusion:

The Tribunal allowed the appeal for AY 2013-14, deleting the disallowance under Section 40A(3). For AY 2014-15, the Tribunal partly allowed the appeal, deleting the disallowance under Section 40A(3) and remanding the interest expense disallowance issue to the AO for further examination.

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