2020 (9) TMI 543 - HC - Income Tax

Disallowance u/s 40A - cash payment exceeding fixed limits - as per assessee there was no banking facility and it was a business expediency - whether the assessee is entitled for exemption under Rule 6DD in respect of payments made in cash? - HELD THAT - Banking facility was available but the bank account could not be operated by the very bank themselves because of an order of attachment passed by the ESI Department. M/s.SLM virtually came to the assessee with the begging bowl and requested to effect payment in cash. The assessee has entered into an agreement for conversion on job work basis. The assessee is required to act as a prudent businessman, so that the job work is completed to his satisfaction with optimum quality. This has led the assessee to effect payments in cash. Argument of the revenue that in order to avoid the attachment of the bank account the assessee has effected payment in cash - What is relevant to be seen insofar as Section 40A(3) is the conduct of the assessee and not the payee. The question would be did the assessee have a reasonable cause to effect payment in cash. If the assessee has a reasonable explanation, then the proviso under Section 3A would stand attracted and the assessee would be entitled to relief. It may be true that merely because the payee is identifiable, it will automatically exonerate the assessee. Payee was identifiable and not a fictitious person would go to show the bonafides of the transaction and this is what is required to be considered from the angle of a commercially expedient and prudent business house. - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 40A(3) of the Income Tax Act regarding disallowance of cash payments exceeding ?20,000.
2. Applicability of Rule 6DD of the Income Tax Rules in providing exemptions to the disallowance under Section 40A(3).
3. Relevance and applicability of the Supreme Court decision in Attar Singh Gurumukh Singh regarding genuine and bonafide business transactions.

Detailed Analysis:

1. Applicability of Section 40A(3):
The core issue revolves around whether the disallowance under Section 40A(3) of the Income Tax Act, 1961, as made by the Assessing Officer, is sustainable. Section 40A(3) stipulates that any expenditure incurred by an assessee, where payment or aggregate payments made to a person in a day exceed ?10,000 otherwise than by an account payee cheque or bank draft, shall not be allowed as a deduction. The assessee had made cash payments exceeding this limit, leading to the disallowance of ?61,32,476, which is 20% of the total cash payment of ?3,06,62,382.

2. Applicability of Rule 6DD:
Rule 6DD provides exemptions to the disallowance under Section 40A(3) in specific circumstances, such as payments made to the government, payments required to be made in legal tender, and payments made in villages with no banking facilities, among others. The revenue argued that none of the contingencies mentioned in Rule 6DD were applicable to the assessee’s case. The assessee contended that the payments were genuine and made under business expediency, which should be considered under the exemptions provided by Rule 6DD.

3. Relevance and Applicability of Attar Singh Gurumukh Singh:
The Tribunal had applied the Supreme Court’s decision in Attar Singh Gurumukh Singh, which held that genuine and bonafide transactions should not be denied deduction merely because the payments were not made by account payee cheques or drafts. The revenue argued that this decision was not applicable as it referenced Rule 6DD(j), omitted from 01.04.1996. The assessee argued that the principle laid down in the decision, emphasizing the genuineness of the transactions and business expediency, should still apply.

Tribunal’s Findings:
The Tribunal found that the payments made by the assessee were genuine and bonafide, and the circumstances necessitated cash payments due to the operational constraints faced by M/s. Sitalakshmi Mills Ltd. (M/s. SLM). The Tribunal directed the Assessing Officer to re-examine the issue of disallowance under Section 40A(3) and ascertain whether the assessee was entitled to exemptions under Rule 6DD.

High Court’s Analysis:
The High Court analyzed the facts and circumstances, considering the legal principles from previous judgments. The Court noted that the assessee was compelled to make cash payments due to M/s. SLM’s financial constraints and banking restrictions, which were beyond the assessee’s control. The Court emphasized that the genuineness of the transaction and the business expediency were critical factors in determining the applicability of Section 40A(3).

Conclusion:
The High Court concluded that the Tribunal rightly interfered with the order passed by the Assessing Officer and the CIT(A), granting relief to the assessee. The substantial question of law was answered in favor of the assessee, dismissing the revenue’s appeal. The Court held that the assessee had a reasonable cause for making cash payments, and the transactions were genuine and bonafide, thus qualifying for exemptions under Rule 6DD. The judgment underscores the importance of considering the factual matrix and business realities while applying tax provisions.